Financial
      Statements





(A
      Development Stage Company)


December
      31, 2006, 2005 and 2004











**Index**





Report
      of
      Independent Auditors


Balance
      Sheets


Statements
      of Operations and Deficit


Statements
      of Cash Flows


Notes
      to
      Financial Statements





1














**REPORT
      OF INDEPENDENT AUDITORS**











To
      the
      Shareholders of


**Canadian
      Zinc Corporation**





We
      have
      audited the balance sheets of **Canadian Zinc Corporation** as at
      December 31, 2006 and 2005, and the statements of operations and deficit and
      cash flows for the years then ended. These financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audits.





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.
      We
      were not engaged to perform an audit of the Company’s internal control over
      financial reporting. An audit includes consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion in the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. 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. We believe that our audit provides
      a
      reasonable basis for our opinion.





In
      our
      opinion, these financial statements present fairly, in all material respects,
      the financial position of the Company as at December 31, 2006 and 2005, and
      the
      results of its operations and its cash flows for the years then ended in
      conformity with Canadian generally accepted accounting principles.
















Chartered
      Accountants


Vancouver,
        Canada
 March
        22,
        2007





2








2006
            
            2005**ASSETS****Current
                assets**Cash
                and cash equivalents
            
            $
            13,608,364
            
            $
            16,063,876Short-term
                investments
            
            
            15,478,718
            
            
            -Marketable
                securities (Note 3)
            
            
            250,000
            
            
            -Accrued
                interest
            
            
            269,426
            
            
            24,17929,606,508
            
            
            16,088,055**Resource
                interests**(Note 4)
            
            
            26,700,256
            
            
            18,495,140**Plant
                and equipment**(Note 5)
            
            
            455,422
            
            
            111,385$
            56,762,186
            
            $
            34,694,580**LIABILITIES****Current
                liabilities**Accounts
                payable and accrued liabilities
            
            $
            464,347
            
            $
            48,409**Future
                income tax liabilities**(Note
                9)
            
            
            1,134,000
            
            
            -**Asset
                retirement obligations**(Note
                6)
            
            
            1,380,120
            
            
            1,302,2122,978,467
            
            
            1,350,621**SHAREHOLDERS'
                EQUITY****Share
                capital**(Note
                7)
            
            
            59,993,621
            
            
            43,066,867**Contributed
                surplus**(Note
                7)
            
            
            6,478,846
            
            
            1,479,424**Deficit**
            
            
            (12,688,748
            )
            
            (11,202,332
            )53,783,719
            
            
            33,343,959$
            56,762,186
            
            $
            34,694,580See
                accompanying notes





**Approved
      by the Directors:**


*“John
                F. Kearney”*
            
            *“Robert
                Gayton”*John
                F. Kearney
            
            Robert
                Gayton







3





2006
              
              2005
              
              2004**Income**
                
                Interest
                  Income
              
              $
              948,148
              
              $
              329,115
              
              $
              330,076**Expenses**Amortization
                  of office furniture and equipment
              
              
              4,403
              
              
              3,117
              
              
              3,794Write-off
                  of mining equipment
              
              
              26,680
              
              
              -
              
              
              -Listing
                  and regulatory fees
              
              
              40,409
              
              
              58,381
              
              
              33,447Management
                  and directors fees
              
              
              317,600
              
              
              203,283
              
              
              152,313Office
                  and general
              
              
              492,549
              
              
              273,533
              
              
              165,648Professional
                  fees
              
              
              255,783
              
              
              215,112
              
              
              328,773Project
                  evaluation
              
              
              30,256
              
              
              72,921
              
              
              -Shareholder and investor communications
              
              
              243,884
              
              
              156,080
              
              
              325,228Stock
                  based compensation
              
              
              1,023,000
              
              
              1,314,000
              
              
              -2,434,564
              
              
              2,296,427
              
              
              1,009,203**Net
                  loss for the year**
              
              
              (1,486,416
              )
              
              (1,967,312
              )
              
              (679,127
              )**Deficit,**beginning of year
              
              
              (11,202,332
              )
              
              (9,235,020
              )
              
              (8,555,893
              )**Deficit,**end of year
              
              $
              (12,688,748
              )
              $
              (11,202,332
              )
              $
              (9,235,020
              )**Loss
                  per share**-
                  basic and diluted
              
              $
              (0.02
              )
              $
              (0.03
              )
              $
              (0.01
              )**Weighted
                  average number of common**
                **Shares
                  outstanding -**basic
                  and diluted
              
              
              94,734,979
              
              
              71,378,444
              
              
              67,174,891


See
        accompanying notes


4










2006
            
            2005
            
            2004**Cash
                flows from (used in) operating activities**Loss
                for the year
            
            $
            (1,486,416
            )
            $
            (1,967,312
            )
            $
            (679,127
            )Adjustment
                for items not involving cash:-
                amortization of office furniture and equipment
            
            
            4,403
            
            
            3,117
            
            
            3,794-
                write-off of mining equipment
            
            
            26,680
            
            
            -
            
            
            --
                stock based compensation
            
            
            1,023,000
            
            
            1,314,000
            
            
            -(432,333
            )
            
            (650,195
            )
            
            (675,333
            )Change
                in non-cash working capital items:-
                accrued interest
            
            
            (245,247
            )
            
            532
            
            
            29,744-
                accounts payable and accrued liabilities
            
            
            415,938
            
            
            (126,671
            )
            
            (34,161
            )(261,642
            )
            
            (776,334
            )
            
            (679,750
            )**Cash
                flows from financing activities**Proceeds
                from shares issued and subscribed, net ofissuance
                costs and broker warrants
            
            
            22,037,177
            
            
            5,406,368
            
            
            2,444,625**Cash
                flows used in investing activities**Purchase
                of equipment
            
            
            (425,835
            )
            
            (17,943
            )
            
            (45,657
            )Term
                deposits
            
            
            (15,478,718
            )
            
            -
            
            
            -Marketable
                securities
            
            
            (250,000
            )
            
            -
            
            
            -Lease
                and property abandonment deposit
            
            
            (205,000
            )
            
            (30,000
            )
            
            (30,000
            )Deferred
                exploration and development costs, excludingamortization
                and accretion
            
            
            (7,871,494
            )
            
            (1,426,212
            )
            
            (2,120,663
            )(24,231,047
            )
            
            (1,474,155
            )
            
            (2,196,320
            )**Increase
                (decrease) in cash and cash equivalents**
            
            
            (2,455,512
            )
            
            3,155,879
            
            
            (431,445
            )**Cash
                and cash equivalents,**beginning
                of year
            
            
            16,063,876
            
            
            12,907,997
            
            
            13,339,442**Cash
                and cash equivalents**,
                end of year
            
            $
            13,608,364
            
            $
            16,063,876
            
            $
            12,907,997**Supplementary
                cash flow information:**Interest
                paid in cash
            
            $
            -
            
            $
            -
            
            $
            -Income
                taxes paid in cash
            
            $
            -
            
            $
            -
            
            $
            -**Non-cash
                transactions:**Shares
                issued pursuant to royalty acquisition agreement
            
            $
            -
            
            $
            -
            
            $
            408,000









5






**1.**
            **Nature
                of
                Operations**







The
      Company is primarily engaged in the exploration and development of its Prairie
      Creek property and related activities. The Company is considered to be in the
      exploration and development stage and to date has not earned any significant
      revenues. The recoverability of amounts shown for resources interests is
      dependent on the existence of economically recoverable reserves, obtaining
      the
      necessary permits to operate a mine, obtaining the financing to complete
      development and future profitable production (see Note 4).




**2.**
            **Significant
                Accounting
                Policies**




The
      financial statements of the Company have been prepared in accordance with
      Canadian generally accepted accounting principles and reflect the following
      significant accounting policies:




*Basis
      of Presentation*




The
      Company follows Canadian generally accepted accounting principles in the
      preparation of its financial statements. All dollar amounts are reported in
      Canadian funds. The significant differences between these principles and those
      that would be applied under U.S. GAAP are set out in Note 13.




*Use
      of Estimates*




The
      preparation of financial statements in conformity with Canadian generally
      accepted accounting principles requires management to make estimates and
      assumptions about future events that affect the reported amounts in the
      financial statements and the notes thereto. Actual results may differ from
      those
      estimates.




*Cash
      and Cash Equivalents*




Cash
      and
      cash equivalents consist of cash and liquid investments which are readily
      convertible into cash with maturities of three months or less when purchased.
      As
      of December 31, 2006, cash equivalents consist of $13,455,625 (2005 -
      $15,435,000).




*Short-term
      investments*




Short-term
      investments, which consist primarily of investments in Bankers Acceptances
      and
      Guaranteed Investment Contracts (GIC’s) are investments with maturities of three
      months or more when purchased. As at December 31, 2006, short-term investments
      consist of $15,478,718, earning income at rates ranging from 3.25% to
      6.8%.  All the investments mature between March 5, 2007 and April 7,
      2008.






*Marketable
      Securities*




Marketable
      securities are valued at the lesser of cost and quoted market value. As at
      December 31, 2006, marketable securities consisted of equity securities listed
      on the CNQ.










6




**2.**  **Significant
      Accounting Policies** (continued)




*Plant
      and Equipment*






Plant
      and
      equipment is recorded at cost, net of accumulated amortization. Amortization
      is
      provided on a declining-balance basis at the following annual rates:
      Amortization is provided at half the annual rate in the year of
      acquisition.







Mining
                equipment and pilot plant
            30%Office
                furniture and equipment
            20%Computer
                equipment
            30%







*Resource
      Interests*




The
      Company follows the policy of capitalizing all acquisition (including plant
      and
      equipment acquired with the property), exploration and development costs
      relating to the resource interests. The amounts shown for resource interests
      represent costs incurred to date, less recoveries, and do not necessarily
      reflect present or future values. These costs will be amortized against revenue
      from future production or written off if the interest is abandoned or
      sold.




Depletion
      of costs capitalized on projects put into commercial production will be recorded
      using the unit-of-production method based upon estimated proven and probable
      reserves.




The
      carrying values of resource interests, on a property-by-property basis, are
      reviewed by management at least annually to determine if they have become
      impaired. If impairment is deemed to exist, the resource interest will be
      written down to its net recoverable value.




Ownership
      in resource interests involves certain inherent risks, including geological,
      metal prices, operating costs, and permitting risks. Many of these risks are
      outside the Company’s control.




The
      ultimate recoverability of the amounts capitalized for the resource interests
      is
      dependent upon the delineation of economically recoverable ore reserves,
      obtaining the necessary financing to complete their development, obtaining
      the
      necessary permits to operate a mine, and realizing profitable production or
      proceeds from the disposition thereof. Management’s estimates of recoverability
      of the Company’s investment in Prairie Creek has been based on current
      conditions. However, it is reasonably possible that changes could occur which
      could adversely affect management’s estimates and may result in future write
      downs of capitalized property carrying values.




*Property
      Option Agreements*




Property
      Option payments are recorded as resource property costs or recoveries when
      the
      payments are made or received, respectively.




*Asset
      Retirement Obligations*




Future
      obligations to retire an asset, including dismantling, remediation and ongoing
      treatment and monitoring of the site, are recognized and recorded as a liability
      at fair value as at the time in which they are incurred or the event occurs
      giving rise to such an obligation. The liability is increased (accreted) over
      time through periodic charges to earnings. The corresponding asset retirement
      cost is capitalized as part of the asset’s carrying value, and is amortized over
      the asset’s estimated useful life. The amount of the liability will be subject
      to re-measurement at each reporting period.














7




**2.**  **Significant
      Accounting Policies** (continued)




*Asset
      Retirement Obligations (continued)*




The
      Company, where possible, has estimated asset retirement obligations based on
      current best practice. These estimates, made by Management, are subject to
      change as a result of changes in regulations, the extent of environmental
      remediation required, the means of reclamation, or cost estimates. Changes
      in
      estimates are accounted for prospectively from the period the estimate is
      revised.




*Long-lived
      Assets Impairment*




Long-lived
      assets of the Company are reviewed when events or changes in circumstances
      suggest the carrying value of such assets may not be recoverable or has become
      impaired. Management considers assets to be impaired if the carrying value
      exceeds the estimated undiscounted future cash flows expected to result from
      the
      use of the asset and its eventual disposition. If impairment is deemed to exist,
      the asset will be written down to estimated fair value. Fair value is generally
      determined using a discounted cash flow analysis.




*Earnings
      (Loss) Per Share*




Earnings
      (loss) per share is computed using the weighted average number of common shares
      outstanding during the period. Diluted earnings (loss) per share amounts are
      calculated by the treasury stock method giving effect to the potential dilution
      that would occur if options, warrants or other contracts to issue common shares
      were exercised or converted to common shares. As the Company incurred net losses
      in fiscal 2006 and 2005, the stock options and share purchase warrants as
      disclosed in Note 7 were not included in the computation of loss per share
      as
      such inclusion would be anti-dilutive.




*Income
      Taxes*




The
      Company follows the liability method of accounting for income taxes. Under
      this
      method, current income taxes are recognized for the estimated income taxes
      payable for the current period. Future income tax assets and liabilities are
      recognized for temporary differences between the tax and accounting basis of
      assets and liabilities as well as for the benefit of losses available to be
      carried forward to future years for tax purposes that are likely to be realized.
      The Company adopted EIC 146 in respect of flow through shares. Under this EIC,
      a
      future income tax liability must be recognized, and shareholders’ equity
      reduced, on the date that the Company renounces the tax credits associated
      with
      flow through expenditures, provided that there is reasonable assurance that
      the
      expenditures will be made.




*Stock-based
      Compensation*




The
      Company follows the fair value method of accounting for the stock options awards
      granted to employees and directors, as recommended by CICA Handbook Section
      3870, “Stock-based Compensation and Other Stock-based Payments”. The fair value
      of stock options is determined by the widely used Black-Scholes Option Pricing
      Model with assumptions for risk-free interest rates, dividend yields, volatility
      of the expected market price of the Company’s common shares and an expected life
      of the options. The fair value of direct awards of stock is determined by the
      quoted market price of the Company’s stock. Stock based compensation is
      amortized to earnings over the vesting period of the related
      option.




Option-pricing
      models require the use of highly subjective estimates and assumptions including
      the expected stock price volatility. Changes in the underlying assumptions
      can
      materially affect the fair value estimates and, therefore, existing models
      do
      not necessarily provide reliable measurement of the fair value of the Company’s
      stock options.











8




**2.**  **Significant
      Accounting Policies** (continued)




*Flow
      through shares*




Canadian
      tax legislation permits a company to issue flow through shares whereby the
      deduction for income tax purposes for qualified resource expenditures can be
      renounced and claimed by the investors.




The
      Company follows the guidelines contained in *CICA
      Handbook - Emerging Issues Committee Abstract* - 146,
“Flow Through Shares” (“EIC-146”) for all flow through share transactions
      entered into by the Company after March 19, 2004.




*Revenue
      Recognition*




Interest
      income on cash and cash equivalents and short-term investments is recognized
      as
      it is earned.






**3.**
            **Marketable
                Securities**




On
      December 21, 2006, the Company participated in a private placement and
      subscribed to 5,000,000 Units of Ste. Genevieve Resources Ltd. at $0.05 per
      Unit
      for a total of $250,000. Each Unit consists of one common share and one common
      share purchase warrant entitling the holder to acquire an additional common
      share at a price exercisable at $0.06 on or before December 29, 2008.





The
      market value as at December 31, 2006 was $300,000.







**4.**
            **Resource
                Interests**




The
      Company’s resource interests comprise the Prairie Creek Mine
      Property:




2006
            
            2005
            
            2004Acquisition
                costs:-
                mining lands
            
            $
            3,158,000
            
            $
            3,158,000
            
            $
            3,158,000-
                plant and mill
            
            
            500,000
            
            
            500,000
            
            
            500,0003,658,000
            
            
            3,658,000
            
            
            3,658,000Reclamation
                security deposits
            
            
            395,000
            
            
            190,000
            
            
            160,000Increase
                from asset retirement obligations
            
            
            746,630
            
            
            875,350
            
            
            1,004,070Exploration
                and development costs (see table below)
            
            
            21,900,626
            
            
            13,771,790
            
            
            12,105,654$
            26,700,256
            
            $
            18,495,140
            
            $
            16,927,724









9




**4.**  **Resource
      Interests** (continued)




Exploration
      and development costs incurred in 2006, 2005 and 2004 are detailed
      below:




2006
            
            2005
            
            2004**Exploration
                and development costs**Assaying
                and metallurgical studies
            
            $
            275,514
            
            $
            182,450
            
            $
            37,310Camp
                operation and project development
            
            
            1,963,577
            
            
            865,738
            
            
            794,755Drilling
                and underground development
            
            
            4,226,350
            
            
            -
            
            
            912,258Lease
                rental
            
            
            73,384
            
            
            82,527
            
            
            58,003Permitting
                and environmental
            
            
            578,952
            
            
            139,821
            
            
            35,417Transportation
                and travel
            
            
            753,717
            
            
            155,676
            
            
            282,9207,871,494
            
            
            1,426,212
            
            
            2,120,663Amortization
                - asset retirement obligations
            
            
            128,720
            
            
            128,720
            
            
            128,719Amortization
                - mining plant and equipment
            
            
            50,714
            
            
            36,988
            
            
            42,837Asset
                retirement accretion
            
            
            77,908
            
            
            74,216
            
            
            66,817**Total
                exploration and development costs for the year**
            
            
            8,128,836
            
            
            1,666,136
            
            
            2,359,036**Exploration
                and development costs**,
                beginning of year
            
            
            13,771,790
            
            
            12,105,654
            
            
            9,746,618**Exploration
                and development costs**,
                end of year
            
            $
            21,900,626
            
            $
            13,771,790
            
            $
            12,105,654








*Prairie
      Creek Mine*




The
      Company holds a 100% interest in the Prairie Creek Mine property, plant and
      equipment located in the Northwest Territories, Canada.




In
      2004,
      the Company entered into an agreement with Titan Logix Corp. (Titan) to purchase
      Titan’s interest in the Prairie Creek Mine Property. Under The Agreement with
      Titan, the Company acquired the remaining 40% interest in the physical plant
      and
      equipment and repurchased the 2% N.S.R.. The consideration for the acquisition
      was the issuance to Titan of 300,000 common shares and 250,000 purchase warrants
      exercisable at $1.25 per share until June 22, 2005 (see Note 10).











10




**4.**  **Resource
      Interests** (continued)




*Prairie
      Creek Mine (cont’d)*




During
      2003 the Company renewed two surface leases granted by the Federal Government
      relating to the operation and care and maintenance of the Prairie Creek Mine
      Property for a period of ten years terminating March 31, 2012. The Company
      paid
      $100,000 upon execution of the lease and is obligated to pay $30,000 per year
      for five years to a maximum of $250,000 (of which $220,000 was paid as at
      December 31, 2006, $190,000 as at December 31, 2005 and $160,000 as at December
      31, 2004), as a security deposit for the performance of abandonment and
      reclamation obligations under the leases.




On
      September 10, 2003 the Company was granted a Type A Land Use Permit and a Type
      B
      Water Licence (reissued February 2006) by the Mackenzie Valley Land and Water
      Board for a period of five years commencing September 10, 2003 for underground
      development and exploration and for metallurgical testing.




On
      June
      12, 2006, under the terms of the Land Use Permit (MV2001C0023 Part 3C, Section
      38) and Water Licence (MV2001L2-0003, Part B, Section 2) the Company contributed
      $30,000 and $70,000, respectively, as security deposits for reclamation
      obligations.




On
      May
      11, 2006 the Mackenzie Valley Land and Water Board issued a Land Use Permit
      for
      the Phase 3 Exploration Drilling Program. The Land Use Permit (MV2004C0030),
      is
      valid for five years and allows surface exploration and diamond drilling at
      up
      to 60 sites. Under the terms of the Permit (Part C, Section 56), a security
      deposit for $75,000 was made on June 12, 2006.




In
      1996,
      the Company concluded a Co-operation Agreement with the Nahanni Butte Dene
      Band
      (“Nahanni”), part of the Deh Cho First Nations. In return for co-operation and
      assistance undertakings given by the Nahanni towards the development of the
      Prairie Creek Project, the Company granted the following net profit interest
      and
      purchase option to the Nahanni:




(i)
            A
                5% annual net profits, before taxation, interest in the Prairie Creek
                Project, payable following the generation of profits after taxation
                equivalent to the aggregate cost of bringing the Prairie Creek Project
                into production and establishing the access road;
                and




(ii)
            An
                option to purchase either a 10% or a 15% interest in the Prairie
                Creek
                Project at any time prior to the expiry of three months following
                permitting for the Project, for the cash payment of either $6 million
                or
                $9 million, subject to price adjustment for exploration expenditure
                and
                inflation, respectively.




In
      October 2003 the Nahanni has informed the Company that Nahanni considers the
      Agreement terminated. Such termination is not in accordance with the provisions
      of the Agreement.




During
      2006, the Company staked six new mineral claims [the WAY 1-6] at Prairie Creek.
      The WAY claims cover 4,126.25 hectacres and are in good standing until November
      11, 2008.






****




11




**5.**
            **Plant
                and
                Equipment**







2006Cost
            
            Accumulated
              Amortization
            
            Net
                Book
              ValueMining
                and exploration equipment
            
            $
            619,287
            
            $
            217,610
            
            $
            401,677Pilot
                plant
            
            
            108,162
            
            
            71,062
            
            
            37,099Furniture,
                fixtures & equipment
            
            
            92,077
            
            
            75,432
            
            
            16,645$
            819,526
            
            $
            364,104
            
            $
            455,422








2005Cost
            
            Accumulated
              Amortization
            
            Net
                Book
              ValueMining
                and exploration equipment
            
            $
            222,384
            
            $
            182,794
            
            $
            39,590Pilot
                plant
            
            
            108,161
            
            
            55,162
            
            
            52,999Furniture,
                fixtures & equipment
            
            
            89,825
            
            
            71,029
            
            
            18,796$
            420,370
            
            $
            308,985
            
            $
            111,385











2004Cost
            
            Accumulated
              Amortization
            
            Net
                Book
              ValueMining
                and exploration equipment
            
            $
            215,202
            
            $
            168,521
            
            $
            46,681Pilot
                plant
            
            
            108,161
            
            
            32,449
            
            
            75,712Furniture,
                fixtures & equipment
            
            
            79,065
            
            
            67,911
            
            
            11,154$
            402,428
            
            $
            268,881
            
            $
            133,547





During
      2006 the Company purchased mining and exploration equipment at a cost of
      $423,583, office equipment at a cost of $2,252 and wrote off mining equipment
      of
      $26,680.




**6.**
            **Asset
                Retirement
                Obligation**




2006
            
            2005
            
            2004Opening
                balance - beginning of the year
            
            $
            1,302,212
            
            $
            1,227,996
            
            $
            117,990Obligations
                re-measured during the year
            
            
            -
            
            
            -
            
            
            1,043,189Accretion
                expense
            
            
            77,908
            
            
            74,216
            
            
            66,817Ending
                balance - end of the year
            
            $
            1,380,120
            
            $
            1,302,212
            
            $
            1,227,996







12




**6.**  **Asset
      Retirement Obligation** (continued)




The
      Company’s asset retirement obligation arises from its obligations to undertake
      site reclamation and remediation in connection with its mining activities.
      The
      Company has posted reclamation security deposits of $395,000.




The
      total
      discounted amount of the estimated cash flows required to settle the asset
      retirement obligation as at December 31, 2006 is estimated to be $1,380,120
      measured in 2006 dollars (December 31, 2005 - $1,302,212) excluding the security
      deposits. While it is anticipated that some expenditures will be incurred during
      the life of the operation to which they relate, a significant component of
      this
      expenditure will only be incurred at the end of the mine life. In determining
      the carrying value of the asset retirement obligation, the Company has assumed
      a
      long-term inflation rate of 2.5%, a credit-adjusted risk-free discount rate
      of
      6.5% and a weighted average useful life of production facilities and
      equipment of ten years. Elements of uncertainty in estimating this amount
      include changes in the projected mine life, reclamation expenditures incurred
      during ongoing operations and reclamation and remediation requirements and
      alternatives.




**7.**  **Share
      Capital**




Authorized:
      Unlimited (2005 - unlimited) common shares with no par value.




Shares
      Issued during the year:




Number
              of
                Shares
            AmountBalance,
                December 31, 2003
            64,482,932
            $
                34,937,298Warrants
                exercised at various exercise prices per share
            4,462,010
            2,410,125Shares
                issued pursuant to mineral interest agreement
            300,000
            408,000Stock
                options exercised at $0.23 per share
            150,000
            34,500Balance,
                December 31, 2004
            69,394,942
            $
                37,789,923Warrants
                exercised at $0.60 per share
              Private
                Placement of flow through shares at $0.55 per share
              (issuance
                costs)
              Brokers
                warrants issued at $0.60 per share
            388,813
              9,090,909
            233,288
              5,000,000
              (444,685)
              (109,091)Private
                Placement of flow through shares at $0.75 and $0.85 per share
              (issuance
                costs)
              Brokers
                warrants issued at $0.85 per share
            872,548
            675,000
              (57,235)
              (20,333)Balance,
                December 31, 2005
            79,747,212
            $
                43,066,867Private
                Placement at $0.72 per share
              ($768,141
                issuance costs - tax effected)
            13,333,333
            9,599,999
              (497,671)Value
                of share purchase warrants added to contributed surplus
            
            (2,263,858)Broker
                warrants issued at $0.72 per share
            
            (773,333)Broker
                warrants issued at $1.00 per share
            
            (319,999)









13




**7.**
            **Share
                Capital******(continued)







Broker
                warrants exercised between $0.55 and $0.85 per share (including $394,082
                from contributed surplus attributed to the value of warrants
                issued)
            1,307,590
            1,215,183Stock
                options exercised at $0.60 per share (including $255,397 from contributed
                surplus attributed to stock-based compensation recognized in prior
                periods)
            690,000
            669,397Private
                Placement of flow through shares at $1.15 per share
              Private
                Placement at $0.90 per unit
              ($1,029,783
                issuance costs - tax effected)
            6,956,522
              5,555,555
            8,000,000
              5,000,000
              (671,253)Value
                of share purchase warrants added to contributed surplus
            
            (845,077)Broker
                warrants issued at $0.93 per share
            
            (166,549)Broker
                warrants issued at $1.15 per share
            
            (257,085)Future
                income tax effect of flow through shares
            
            (1,763,000)Balance,
                December 31, 2006
            107,590,212
            $
                59,993,621







*Stock
      Options*




The
      Company has outstanding directors and employee stock options entitling the
      holders to acquire additional common shares as follows:




Number
              of
                Shares
            Exercise
                Price
            Expiry
                Date450,000
            $0.23
            March
                18, 20072,860,000
            $0.60
            January
                14, 2010270,000
            $0.89
            June
                27, 20111,200,000
            $0.90
            December
                13, 20114,780,000







In
      December 2006, pursuant to the Company’s 10% Rolling Stock Option Plan, the
      Company granted stock options to directors to purchase an aggregate of 1,200,000
      common shares at $0.90 per share. These stock options vest immediately and
      expire in five years on December 13, 2011.




In
      June,
      2006, the Company granted stock option to certain employees and consultants
      to
      purchase an aggregate of 300,000 common shares at $0.89 per share. These stock
      options vest immediately and expire in five years on June 27, 2011 and 30,000
      of
      these options were cancelled in 2006.




The
      weighted average fair value of the options granted in 2006 was estimated at
      $0.68 per share by using the Black-Scholes Option Pricing Model with the
      following weighted average assumptions: risk-free interest rate of 4.02%,
      dividend yield of 0%, volatility of 101% and expected life of 5 years. An
      expense of $ 1,023,000, in
      respect of stock based compensation, was charged to operations and added to
      contributed surplus for the year ended December 31, 2006.









14




**7.**
            **Share
                Capital**(continued)






*Stock
      Options (continued)*




In
      January 2005, pursuant to the Company’s 10% Rolling Stock Option Plan, the
      Company granted stock options to purchase an aggregate of 3,650,000 common
      shares at $0.60 per share to directors, officers, consultants and service
      providers of the Company. These stock options vested immediately and expire
      in
      five years on January 14, 2010. Each option entitles the holder to acquire
      one
      common share of the Company. 690,000
      of these options were exercised in 2006 and 100,000 expired in
      2005.




The
      weighted average fair value of the options granted in 2005 was estimated at
      $0.36 per share by using the Black-Scholes Option Pricing Model with the
      following weighted average assumptions: risk-free interest rate of 3.5%,
      dividend yield of 0%, volatility of 91% and expected life of 5 years. An expense
      of $1,314,000 in respect of stock based compensation, was charged to operations
      and added to contributed surplus for the year ended December 31,
      2005.




The
      Black-Scholes model was developed for use in estimating the fair value of freely
      traded options which are fully transferable and have no vesting restrictions.
      In
      addition, this model requires the input of highly subjective assumptions,
      including future stock price volatility and expected time until exercise. The
      Company’s options have characteristics which are significantly different from
      those of traded options, and changes in any of the assumptions can materially
      affect fair value estimate.




A
      summary
      of the stock option activity for the year is as follows:




Shares
            
            Weighted
                Average
              Exercise
                PriceOptions
                outstanding and exercisable at December 31, 2003
            600,000
            $
            0.23Exercised
            (150,000)
            $
            (0.23)Options
                outstanding and exercisable at December 31, 2004
            450,000
            $
            0.23Granted
            3,650,000
            $
            0.60Cancelled
            (100,000)
            $
            0.60Options
                outstanding and exercisable at December 31, 2005
            4,000,000
            $
            0.56Exercised
            (690,000)
            $
            0.60Granted
            1,500,000
            $
            0.90Cancelled
            (30,000)
            $
            0.89Options
                outstanding and exercisable at December 31, 2006
            4,780,000
            $
            0.66










15




**7.**  **Share
      Capital** (continued)






*Stock
      Options (continued)*




The
      remaining contractual life of these options is as follows:





Range
                of Exercise Price
            Number
                Outstanding and Exercisable
            Weighted
                Average Remaining Contractual Life$0.23
                - $0.60
            3,310,000
            2.66
                years$0.61
                - $0.90
            1,470,000
            4.87
                years4,780,000
            3.34
                years







*Warrants*




9,444,444
      warrants and 3,070,289 broker warrants totalling 12,514,733 were issued as
      part
      of the private placements of shares completed during 2006. In accordance with *CICA
      Handbook Section 3860, “Financial Instruments - Disclosure and
      Presentation”,* share
      purchase broker warrants attached to private placements units issued in 2006
      were allocated at fair value of $1,516,966 based on the Black-Scholes Option
      Pricing Model. During 2006, 1,307,590 broker warrants issued as part of the
      private placements of shares completed during 2005 were exercised between $0.55
      and $0.85 per share for gross proceeds of $821,102.




During
      2005, 788,350 broker warrants were issued as part of the private placements
      of
      shares completed. In accordance with *CICA
      Handbook Section 3860,* “Financial
      Instruments - Disclosure and Presentation” *,* share
      purchase broker warrants attached to private placements units issued in 2005
      were allocated at fair value based on the Black-Scholes Option Pricing Model.
      During 2005, 388,813 warrants were exercised at $0.60 per share for gross
      proceeds of $233,288.




A
      summary
      of the warrants activity to December 31, 2006 is as follows:




Number
                of Warrants
              Outstanding
                at December 31, 2004
            Number
                of Warrants
              Expired/
                Exercised during 2005
            Number
                of Warrants
              Outstanding
                at December 31, 2005
            Number
                of Warrants
              Expired/
                Exercised during 2006
            Issued
                during 2006
            Balance
                of Warrants Outstanding at December 31, 2006
            Exercise
              Price
              Per
                Warrant
            Expiry
                Date
            Warrant
                Value690,190
            (650,190)
            -
            
            
            
            $0.60
            May
                10, 2005
            $
                -3,358,875
            (3,358,875)
            -
            
            
            
            $0.60
            May
                10, 2005
            -3,275,000
            (3,275,000)
            -
            
            
            
            $1.25
            June
                22, 2005
            -727,273
            (727,273)
            -
            -
            $0.55
            October
                27, 2007
            -46,666
            (46,666)
            -
            -
            $0.75
            December
                30, 2006
            -14,411
            (14,411)
            -
            -
            $0.85
            December
                30, 2006
            --
            -
            6,666,666
            6,666,666
            $1.00
            January
                30, 2008
            2,263,858-
            (519,240)
            1,333,333
            814,093
            $0.72
            January
                30, 2008
            508,676-
            -
            666,666
            666,666
            $1.00
            January
                30, 2008
            319,999-
            -
            2,777,778
            2,777,778
            $1.15
            November
                23, 2008
            845,077-
            -
            194,444
            194,444
            $1.15
            November
                23, 2008
            73,362-
            -
            486,957
            486,957
            $1.15
            November
                23, 2008
            183,723-
            -
            388,889
            388,889
            $0.93
            November
                23, 2008
            166,549788,350
            (1,307,590)
            12,514,733
            11,995,493
            
            
            $4,361,244









16




**7.**  **Share
      Capital** (continued)




*Warrants
      (continued)*




In
      January 2006, the Company completed an underwritten private placement for total
      proceeds of $9.6 million, through the issuance of 13,333,333 units, priced
      at
      $0.72 per unit. Each unit consists of one common share and one-half share
      purchase warrant (6,666,666 warrants) exercisable to purchase one common share
      at a price of $1.00 per share for a period of two years. A value of $2,263,858
      was assigned to the warrants issued and added to contributed surplus. The fair
      value of warrants is $0.34 each.





A
      commission of 7% in cash and underwriter’s warrants (1,333,333 warrants)
      exercisable for units in the amount of 10% of the number of units sold at $0.72
      per unit for a period of two years. A value of $773,333 was assigned to the
      warrants issued and added to contributed surplus.





On
      June
      14, 2006, at the Company’s Annual
      Meeting, shareholders approved the issuance to Northern Securities Inc. of
      underwriters options on 1,333,333 Units, exercisable for a period of two years
      from January 30, 2006 at $0.72 per Unit, with each Unit consisting of one common
      share and one half share purchase warrant (666,666 warrants) exercisable at
      $1.00 per share for a period of twenty four months, pursuant to the underwritten
      financing of the Company completed in January 2006. A value of $319,999 was
      assigned to the broker warrants issued and added to contributed
      surplus.




In
      November 2006 the Company completed an underwritten private placement for total
      proceeds of $13,000,000 consisting of 5,555,555 Units at $0.90 per Unit and
      6,956,522 shares at $1.15 per Flow Through Share. Each Unit consists of one
      common share and one-half share purchase warrant (2,777,778 warrants). Each
      full
      warrant is exercisable to purchase one common share at a price of $1.15 per
      share until November 23, 2008. A
      value
      of $845,077 was assigned to the warrants issued and added to contributed
      surplus.





A
      commission of 7% in cash was paid and broker warrants equal to 7% of the
      5,555,555 Units sold in the offering were issued (388,889 warrants). Each broker
      warrant is exercisable at $0.93 into one broker unit consisting of one common
      share and one-half warrant (194,444 warrants), with each whole warrant
      exercisable at $1.15 until November 23, 2008. A
      value
      of $166,549 and $73,362 were assigned to the broker warrants
      issued.





In
      addition, a commission of broker warrants of 7% of the Flow through Shares
      were
      issued (486,957 warrants). Each broker flow through warrant is exercisable
      into
      one common share at $1.15 until November 23, 2008. A
      value
      of $183,723 was assigned to the broker warrants issued.


17







**7.**  **Share
      Capital** (continued)






*Warrants
      (continued)*




The
      fair
      value of all the warrants issued during the year was estimated at awarded date
      by using the Black Scholes Option Pricing Model with the following weighted
      average assumptions: risk-free interest rate of 3.26%, dividend yield of 0%,
      volatility of 71% and expected life of 2 years.





*Contributed
      Surplus*





2006
            
            2005
            2004Contributed
                surplus at beginning of year
            $
            1,479,424
            $
            36,000
            $
                36,000Value
                of warrants issued
            
            4,625,901
            
            129,424
            -Stock
                based compensation on options granted
            
            1,023,000
            
            1,314,000
            -Exercise
                of options
            
            (255,397)
            
            -
            -Exercise
                of broker warrants
            
            (394,082)
            
            -
            -Contributed
                surplus at end of year
            $
            6,478,846
            $
            1,479,424
            $
                36,000







**8.**  **Related
      Party Transactions**




The
      Company incurred the following expenses to directors and corporations controlled
      by directors of the Company:




2006
            
            2005
            2004Consulting
                fees
            $
            248,069
            $
            142,350
            $
                115,258Executive
                and director compensation
            
            320,100
            
            200,883
            108,054Rent
            
            12,000
            
            13,200
            12,000$
            580,169
            $
            356,433
            $235,312








All
      transactions with related parties were within the normal course of business.
      These transactions have been recorded at the exchange amounts being the amounts
      agreed to by the transacting parties.


18







**9.**
            **Income
                Taxes**




The
      Company’s income tax expense for each of the years 2006, 2005 and 2004 is $nil.
      The Company provided a valuation allowance equal to the future tax assets
      because the timing of the utilization of the future tax assets is
      indeterminable.




A
      reconciliation of the statutory tax rate to the effective rate for the Company
      is as follows:




2006
            2005
            2004Future
                income tax assetsNon-capital
                loss carry forwards
            $
                1,672,000
            $
                1,537,000
            $
                1,307,000Capital
                assets
            287,000
            287,000
            273,000Other
            1,050,000
            761,000
            708,0003,009,000
            2,585,000
            2,288,000Valuation
                allowance
            (805,000)
            (811,000)
            (552,000)Net
                future tax assets
            2,204,000
            1,774,000
            1,736,000Future
                income tax liability
            (3,338,000)
            (1,774,000)
            (1,736,000)Future
                income tax liability (net)
            $
                (1,134,000)
            $
                -
            $
                -





As
      at
      December 31, 2006, the Company has non-capital losses of approximately 5,381,000
      ($1,672,000 @ 31% tax rate) and unused cumulative Canadian exploration and
      development expenses of $15,648,000 to carry forward for tax purposes and are
      available to reduce taxable income of future years. The non-capital losses
      expire from 2007 to 2016. The exploration and development expenses and
      undepreciated capital costs can be carried forward indefinitely. Future income
      tax benefits which may arise as a result of these losses have been recognized
      in
      these financial statements to the extent necessary to reduce future income
      tax
      liabilities that have arisen on issuance of flow through shares.





During
      the year ended December 31, 2005 the Company renounced, to subscribers of
      9,963,457, flow through shares Canadian Exploration Expenditures (CEE) of
      $5,675,000. The Company has applied the accounting treatment in EIC-146
      requiring the transaction to be reported in the 2006 fiscal period. The net
      effect of the adoption of EIC-146 has resulted in the recognition of the
      estimated tax benefits renounced by the Company to the investors in respect
      to
      flow through shares. As a result, a future income tax liability of $1,134,000
      and a corresponding reduction in shareholders’ equity was recorded.





During
      the year ended December 31, 2006, the Company renounced, to subscribers of
      6,956,522, flow through shares Canadian Exploration Expenditures (CEE) of
      $8,000,000. The Company has applied the accounting treatment in EIC-146
      requiring the transaction to be reported in the 2007 fiscal period.





19





**9.**
            **Income
                Taxes**(continued)





As
      at
      December 31, 2005, the Company has non-capital losses of approximately
      $4,503,000 and unused cumulative Canadian exploration and development expenses
      of $13,291,000 to carry forward for tax purposes and are available to reduce
      taxable income of future years. The non-capital losses expire from 2006 to
      2015.
      The exploration and development expenses and undepreciated capital costs can
      be
      carried forward indefinitely. Future income tax benefits which may arise as
      a
      result of these losses have been recognized in these financial statements to
      the
      extent necessary to offset future income tax liabilities that have arisen on
      issuance of flow through shares.




The
      reconciliation of income tax attributable to operations computed at the
      statutory tax rates to income tax expense (recovery), using a 35.01% statutory
      tax rate, as at December 31 is:




2006
            
            2005
            
            2004Loss
                per financial statements
            $
            1,486,000
            $
            1,967,000
            $
            679,000Income
                tax rate
            
            35.01%
            
            34.87%
            
            35.62%Income
                tax recovery
            
            520,000
            
            686,000
            
            242,000Permanent
                differences
            
            (401,000)
            
            (519,000)
            
            (41,000)Expired
                losses
            
            (739,000)
            
            (68,000)
            
            (170,000)Other
            
            637,000
            
            (10,000)
            
            (638,000)Income
                tax rate changes
            
            (155,000)
            
            (2,000)
            
            (24,000)Change
                in valuation allowance
            
            138,000
            
            (87,000)
            
            631,000$
            -
            $
            -
            $
            -










20




**10.**  **Non-cash
      Transactions**




In
      the
      fiscal year 2006 and 2005, there were no non-cash transactions.




In
      the
      fiscal year 2004 **,** the
      Company entered into an agreement with Titan Logix Corp. (“Titan”) to purchase
      Titan’s interest in the Prairie Creek Mine Property. The consideration for the
      acquisition was the issuance to Titan of 300,000 common shares at $1.36 per
      share, being the fair value at the time of issuance, and 250,000 purchase
      warrants exercisable at $1.25 per share until June 22, 2005.




**11.**  **Financial
      Instruments**




Fair
      value estimates of financial instruments are made at a specific point in time,
      based on relevant information about financial markets and specific financial
      instruments. As these estimates are subjective in nature, involving
      uncertainties and matters of significant judgement, they cannot be determined
      with precision. Changes in assumptions can significantly affect estimated fair
      values. The carrying value of cash and cash equivalents, marketable securities,
      term deposits, accounts receivable, accounts payable and accrued liabilities
      approximate their fair value because of the short-term nature of these
      instruments. The Company places its cash and cash equivalents and term deposits
      with high credit quality financial institutions which invested the funds in
      AAA
      debt instruments. The Company is not exposed to significant interest or currency
      risks arising from these financial instruments.






**12.**
            **Comparative
                Figures**




Certain
      2005 and 2004 comparative figures have been reclassified to conform with the
      financial statement presentation adopted for 2006.
























21


**13.** **Reconciliation
      of Canadian and United States Generally Accepted Accounting
      Principles**




**For
      the
      purposes of US GAAP the Company is considered to be an Exploration Stage
      Enterprise**




a.  The *Statement
      of Shareholders’ Equity* ,
      prepared in accordance with the U.S. GAAP as required, is presented
      below:




TotalAdditional
            
            
            
            
            
            Share-Common
                shares
            
            
            
            paid-in
            
            
            
            Deficit
            
            holders’Shares
            
            Amount
            
            
            
            capital
            
            accumulated
            
            equity**Balance,**December 31, 2003
            
            
            64,482,932
            
            
            
            
            $
            -
            
            
            
            
            $
            36,522,849
            
            
            
            
            $
            (19,852,062
            )
            $
            16,670,787Exercise
                of warrants at various prices
            
            
            4,462,010
            
            
            
            
            
            -
            
            
            
            
            
            2,410,125
            
            
            
            
            
            -
            
            
            2,410,125Shares
                issued pursuant to a mineralInterest
                agreement
            
            
            300,000
            
            
            
            
            
            -
            
            
            
            
            
            408,000
            
            
            
            
            
            -
            
            
            408,000Exercise
                of stock options at$0.23
                per share
            
            
            150,000
            
            
            
            
            
            -
            
            
            
            
            
            34,500
            
            
            
            
            
            -
            
            
            34,500Comprehensive
                income-
                net (loss) for the year
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            (3,038,163
            )
            
            (3,038,163
            )**Balance,**December 31, 2004
            
            
            69,394,942
            
            
            
            
            $
            -
            
            
            
            
            $
            39,375,474
            
            
            
            
            $
            (22,890,225
            )
            $
            16,485,249Exercise
                of warrants at $0.60
            
            
            388,813
            
            
            
            
            
            -
            
            
            
            
            
            233,288
            
            
            
            
            
            -
            
            
            233,288Private
                Placement of flow-through sharesat
                $0.55 per share less issuance costs
            
            
            9,090,909
            
            
            
            
            
            -
            
            
            
            
            
            4,555,315
            
            
            
            
            
            -
            
            
            4,555,315Broker
                warrants
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            (109,091
            )
            
            
            
            
            -
            
            
            (109,091
            )Private
                Placement of flow through sharesat
                $0.75 & $0.85 per share less issuance cost
            
            
            872,548
            
            
            
            
            
            -
            
            
            
            
            
            617,765
            
            
            
            
            
            -
            
            
            617,765Broker
                warrants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (20,333
            )
            
            
            
            
            -
            
            
            (20,333
            )Issuance
                of stock options and broker warrants
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            1,443,424
            
            
            
            
            
            -
            
            
            1,443,424Comprehensive
                income-
                net (loss) for the year
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            (3,633,448
            )
            
            (3,633,448
            )**Balance,**December 31, 2005
            
            
            79,747,212
            
            
            
            
            $
            -
            
            
            
            
            $
            46,095,842
            
            
            
            
            $
            (26,523,673
            )
            $
            19,572,169




**13.**
            **Reconciliation
                of
                Canadian and United States Generally Accepted Accounting Principles**(continued)




TotalAdditional
            
            
            
            
            
            Share-Common
                shares
            
            
            
            paid-in
            
            
            
            Deficit
            
            holders’Shares
            
            Amount
            
            
            
            capital
            
            accumulated
            
            equity**Balance,**December 31, 2005
            
            
            79,747,212
            
            
            
            
            $
            -
            
            
            
            
            $
            46,095,842
            
            
            
            
            $
            (26,523,673
            )
            $
            19,572,169Private
                Placement at $0.72
            
            
            13,333,333
            
            
            
            
            
            -
            
            
            
            
            
            9,599,999
            
            
            
            
            
            
            
            
            9,599,999Less
                tax effected issuance costs
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (497,671
            )
            
            
            
            
            
            
            
            (497,671
            )Broker
                warrants issued at $0.72 per share
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (773,333
            )
            
            
            
            
            
            
            
            (773,333
            )Broker
                warrants issued at $1.00 per share
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (319,999
            )
            
            
            
            
            
            
            
            (319,999
            )Broker
                warrants exercised between $0.55 and $0.85 per share
            
            
            1,307,590
            
            
            
            
            
            -
            
            
            
            
            
            1,215,183
            
            
            
            
            
            -
            
            
            1,215,183Options
                exercised at $0.60
            
            
            690,000
            
            
            
            
            
            -
            
            
            
            
            
            669,397
            
            
            
            
            
            -
            
            
            669,397Private
                Placement of flow through sharesat
                $1.15 per share
            
            
            6,956,522
            
            
            
            
            
            
            
            
            
            
            
            8,000,000
            
            
            
            
            
            -
            
            
            8,000,000Private
                Placement at $0.90 per share
            
            
            5,555,555
            
            
            
            
            
            
            
            
            
            
            
            5,000,000
            
            
            
            
            
            -
            
            
            5,000,000Less
                issuance costs
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            (671,253
            )
            
            
            
            
            -
            
            
            (671,253
            )Issuance
                of stock options and warrants
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            4,999,422
            
            
            
            
            
            -
            
            
            4,999,422Value
                of share purchase warrants added to contributed surplus
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            (3,108,935
            )
            
            
            
            
            -
            
            
            (3,108,935
            )Broker
                warrants issued at $1.15 per share
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (257,085
            )
            
            
            
            
            
            
            
            (257,085
            )Broker
                warrants issued at $0.93 per share
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (166,549
            )
            
            
            
            
            
            
            
            (166,549
            )Comprehensive
                income-
                net (loss) for the year
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            (9,615,252
            )
            
            (9,615,252
            )Flow
                through share premium paid in excess of market value
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            (1,530,435
            )
            
            
            
            
            -
            
            
            (1,530,435
            )Future
                income tax effect of flow through shares
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            (1,763,000
            )
            
            
            
            
            -
            
            
            (1,763,000
            )**Balance**,
                December 31, 2006
            
            
            107,590,212
            
            
            
            
            $
            -
            
            
            
            
            $
            66,491,583
            
            
            
            
            $
            (36,138,925
            )
            $
            30,352,658










22




**13.**
            **Reconciliation
                of
                Canadian and United States Generally Accepted Accounting  P**rinciples**(continued)**




b.
            Reconciliation
                of*Balance
                Sheet*Items:




2006
            
            2005
            
            2004Resource
                interest (Canadian GAAP)
            
            $
            26,700,256
            
            $
            18,495,140
            
            $
            16,927,724Exploration
                and Development costs written-off
            
            
            (21,900,626
            )
            
            (13,771,790
            )
            
            (12,105,654
            )Resource
                interest (U.S. GAAP)
            
            $
            4,799,630
            
            $
            4,723,350
            
            $
            4,822,070Total
                assets (U.S. GAAP)
            
            $
            34,861,560
            
            $
            20,922,790
            
            $
            17,888,325Total
                liabilities (Canadian GAAP)
            
            $
            2,978,467
            
            $
            1,350,621
            
            $
            1,403,076Flow
                through share premium paid in excess of market value
            
            
            1,530,435
            
            
            -
            
            
            -Total
                liabilities (U.S. GAAP)
            
            $
            4,508,902
            
            $
            1,350,621
            
            $
            1,403,076





c.
            Reconciliation
                of*Statement
                of Operations*Items:




2006
            
            2005
            
            2004Loss
                for the year (Canadian GAAP)
            
            $
            (1,486,416
            )
            $
            (1,967,312
            )
            $
            (679,127
            )Exploration
                and Development costs written-off
            
            
            (8,128,836
            )
            
            (1,666,136
            )
            
            (2,359,036
            )Loss
                for the year (U.S. GAAP)
            
            $
            (9,615,252
            )
            $
            (3,633,448
            )
            $
            (3,038,163
            )Loss
                per share
              -
                basic and diluted (U.S. GAAP)
            
            $
            (0.10
            )
            $
            (0.05
            )
            $
            (0.05
            )Weighted
                average number of common shares outstanding
              -
                basic and diluted (U.S. GAAP)
            
            
            94,734,979
            
            
            71,378,444
            
            
            67,174,891





d.  Reconciliation
      of *Statement
      of Cash Flows* Items:




2006
            
            2005
            
            2004Cash
                flow from operating activities: (Canadian GAAP)
            
            $
            (261,642
            )
            $
            (776,334
            )
            $
            (679,750
            )Deferred
                exploration and development costs
            
            
            (7,871,494
            )
            
            (1,426,212
            )
            
            (2,120,663
            )Lease
                and property abandonment deposit
            
            
            (205,000
            )
            
            (30,000
            )
            
            (30,000
            )Cash
                flow from operating activities (U.S. GAAP)
            
            $
            (8,338,136
            )
            $
            (2,232,546
            )
            $
            (2,830,413
            )Cash
                flow from investing activities (Canadian GAAP)
            
            $
            (24,231,047
            )
            $
            (1,474,155
            )
            $
            (2,196,320
            )Deferred
                exploration costs
            
            
            7,871,494
            
            
            1,426,212
            
            
            2,120,663Lease
                and property abandonment deposit
            
            
            205,000
            
            
            30,000
            
            
            30,000Cash
                flow from investing activities (U.S. GAAP)
            
            $
            (16,154,553
            )
            $
            (17,943
            )
            $
            (45,657
            )




**13.**  **Reconciliation
      of Canadian and United States Generally Accepted Accounting Principles**(continued)




e.
            Resource
                Interests




For
      the
      purposed of U.S. GAAP, the Company is considered to be an Exploration Stage
      Enterprise. U.S. GAAP requires that exploration cost of resource interest not
      be
      deferred and capitalized until there is evidence of economically recoverable
      resources. Therefore, all exploration costs will not be capitalized for U.S.
      GAAP purposes as the Company is at present exploring its properties for
      economically recoverable ore reserves. The effect of the write-off is presented
      in Notes 13(b) and 13(c).




f.
            Asset
                Retirement Obligations




The
      Company adopted the provisions of CICA 3110 “Asset Retirement Obligations” for
      Canadian GAAP purposes effective January 1, 2003. The Canadian and U.S.
      standards for asset retirement obligations are substantially the
      same.




g.
            Other
                Comprehensive Income




U.S.
      GAAP
      requires that a statement of comprehensive income be displayed with the same
      prominence as other financial statements and that the aggregate amount of
      comprehensive income excluding the deficit be disclosed separately in
      shareholders’ equity. Comprehensive income, which incorporates the net loss,
      includes all changes in shareholders’ equity during a period except those
      resulting from investments by and distributions to owners. There is currently
      no
      requirement to disclose comprehensive income under Canadian GAAP.




h.
            Flow
                through Shares





Under
      Canadian GAAP, no liabilities are recorded on flow through shares until
      expenditures have been renounced. Under U.S. GAAP, a liability on these flow
      through shares is needed at the time such shares are issued for the excess
      of
      the shares over quoted market value.  In 2006, $1,530,435 was recognized as
      a difference between U.S. GAAP and Canadian GAAP for the 6,956,522 flow through
      shares issued in November, 2006 at $1.15 per share. The market value of the
      shares was $0.93, the difference of $0.22 on the 6,956,522 flow through shares
      issued resulted in a liability of $1,530,435. This will be included in income
      when the related tax benefits are renounced by the Company. Under U.S. G.A.A.P,
      the flow through funds which are unexpended at the balance sheet date are
      separately classified as restricted cash. As at December 31, 2006, unexpended
      flow through funds totalled $6,796,900 (2005 - $5,675,000; 2004 - $Nil)




23


**13.**  **Reconciliation
      of Canadian and United States Generally Accepted
      Accounting  Principles**(continued)




i.
            New
                Accounting Pronouncements


**U.S.
      GAAP Standards**




In
      November 2004, the FASB issued SFAS No. 151, *“Inventory
      Costs-an amendment of ARB No. 43, Chapter 4”,* which is
      the result of the FASB’s project to reduce differences between U.S. and
      international accounting standards. SFAS No. 151 requires idle facility costs,
      abnormal freight, handling costs, and amounts of wasted materials (spoilage)
      be
      treated as current-period costs. Under this concept, if the costs associated
      with the actual level of spoilage or production defects are greater than the
      costs associated with the range of normal spoilage or defects, the difference
      would be charged to current-period expense, not included in inventory costs.
      SFAS No. 151 will be effective for inventory costs incurred during fiscal years
      beginning after June 15, 2005. The adoption of SFAS No. 151 will not have a
      material impact on the Company’s financial statements.





In
      December 2004, the FASB issued SFAS No. 153, *Exchanges
      of Nonmonetary Assets* , *an
      amendment of APB* No.
      29 *,
      Accounting for Nonmonetary Transactions* .
      SFAS
      No. 153 requires exchanges of productive assets to be accounted for at fair
      value, rather than at carryover basis, unless (1) neither the asset received
      nor
      the asset surrendered has a fair value that is determinable within reasonable
      limits or (2) the transactions lack commercial substance. SFAS 153 is effective
      for nonmonetary asset exchanges occurring in fiscal periods beginning after
      June
      15, 2005. The adoption of FASB No. 153 will not have a material impact on the
      Company’s financial statements.





FAS
      154,
“Accounting changes and error corrections” - establishes, unless impracticable,
      retrospective application as the required method for reporting a change in
      accounting principle. Effective for accounting changes and corrections of errors
      made in fiscal years beginning after December 15, 2005. The Company does not
      expect that the adoption of this pronouncement will have an impact on its
      financial statements.





The
      Financial Accounting Standards Board ("FASB") has issued Statement of Financial
      Accounting Standards ("SFAS") 157, "Fair Value Measurements" ("SFAS 157"),
      which
      defines fair value, establishes a framework for consistently measuring fair
      value under GAAP and expands disclosures about fair value measurements. SFAS
      157
      is effective beginning January 1, 2008, and the provisions of SFAS 157 will
      be
      applied prospectively as of that date. The adoption of SFAS 157 is not expected
      to have an effect on the Company's financial position.





24




**13.**  **Reconciliation
      of Canadian and United States Generally Accepted Accounting Principles**(continued)


i.
              New
                  Accounting Pronouncements
                  (continued)




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities - including an amendment of FASB
      statement No. 115.” This Statement permits all entities to choose, at specified
      election dates, to measure eligible items at fair value (the “fair value
      option”). A business entity shall report unrealized gains and losses on items
      for which the fair value option has been elected in earnings (or another
      performance indicator if the business entity does not report earnings) at each
      subsequent reporting date. Upfront costs and fees related to items for which
      the
      fair value option is elected shall be recognized in earnings as incurred and
      not
      deferred. If an entity elects the fair value option for a held-to-maturity
      or
      available-for-sale security in conjunction with the adoption of this Statement,
      that security shall be reported as a trading security under Statement 115,
      but
      the accounting for a transfer to the trading category under paragraph 15(b)
      of
      Statement 115 does not apply. Electing the fair value option for an existing
      held-to-maturity security will not call into question the intent of an entity
      to
      hold other debt securities to maturity in the future. This statement is
      effective as of the first fiscal year that begins after November 15, 2007.
      The
      Company is currently analyzing the effects of SFAS 159 but does not expect
      its
      implementation will have a significant impact on the Company's financial
      condition or results of operations.





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108,
      Considering the Effects of Prior Year Misstatements when quantifying
      Misstatements in Current Year Financial Statements (“SAB 108”).
      SAB 108 requires companies to evaluate the materiality of identified
      unadjusted errors on each financial statement and related financial statement
      disclosure using both the rollover approach and the iron curtain approach,
      as
      those terms are defined in SAB 108. The rollover approach quantifies
      misstatements based on the amount of the error in the current year financial
      statement, whereas the iron curtain approach quantifies misstatements based
      on
      the effects of correcting the misstatement existing in the balance sheet at
      the
      end of the current year, irrespective of the misstatement’s year(s) of origin.
      Financial statements would require adjustment when either approach results
      in
      quantifying a misstatement that is material. Correcting prior year financial
      statements for immaterial errors would not require previously filed reports
      to
      be amended. If a company determines that an adjustment to prior year financial
      statements is required upon adoption of SAB 108 and does not elect to
      restate its previous financial statements, then it must recognize the cumulative
      effect of applying SAB 108 in fiscal 2006 beginning balances of the
      affected assets and liabilities with a corresponding adjustment to the fiscal
      2006 opening balance in retained earnings. SAB 108 is effective for interim
      periods of the first fiscal year ending after November 15, 2006, and will
      be adopted by the Company in the first quarter of 2007. The Company does not
      expect the adoption of this interpretation to have an impact on its financial
      position or results of operations.


25




**13.**  **Reconciliation
      of Canadian and United States Generally Accepted
      Accounting  Principles**(continued)




i.
            New
                Accounting Pronouncements
                (continued)




The
      FASB
      has also issued FAS Interpretation No. 48, "Accounting for Uncertainty in Income
      Taxes" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income
      taxes recognized in an enterprise's financial statements in accordance with
      FAS
      Interpretation No. 109, "Accounting for Income Taxes". FIN 48 prescribes a
      recognition threshold and measurement attributable for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosures and
      transitions. FIN 48 is effective for fiscal years beginning after December
      15,
      2006. The adoption of FIN 48 is not expected to have an effect on the Company's
      financial position.








F *ASB
      123(R) - Share-Based Payment*





On
      December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB
      Statement No. 123 (revised 2004), Share-Based Payment, which is a revision
      of
      FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement
      123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
      and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the
      approach in Statement 123(R) is similar to the approach described in Statement
      123. However, Statement 123(R) requires all share-based payments to employees,
      including grants of employee stock options, to be recognized in the income
      statement based on their fair values. Pro forma disclosure is no longer an
      alternative. The Company does not anticipate that adoption of Statement 123(R)
      will have a material impact on its results of operations or its financial
      position. Under Statement 123(R), the Company is required to estimate
      forfeitures of unvested awards when recognizing compensation cost. Based on
      historical experience of forfeitures and expectations of forfeitures in future
      periods a forfeiture rate of 0% was applied to the fair value of unvested
      options."












26




**13.**  **Reconciliation
      of Canadian and United States Generally Accepted
      Accounting  Principles**(continued)




i.
            New
                Accounting Pronouncements
                (continued)




**Canadian
                GAAP Standards**




In
      2005,
      the CICA approved the following Handbook Sections: 1530, Comprehensive Income,
      3855, Financial Instruments - Recognition and Measurement, 3865, Hedges and
      3251, Equity. These standards will be effective for the Company beginning
      January 1, 2007.




The
      impact of implementing these new standards on the Company’s financial statements
      is currently being evaluated. The following provides further information on
      each
      of the new accounting standards as they relate to the Company.




*Comprehensive
      Income*




Other
      comprehensive income will be included as a separate component of the
      shareholders’ equity on the balance sheets. The major components that will be
      included in this category include unrealized gains and losses on financial
      assets classified as available-for-sale, unrealized foreign currency translation
      amounts, net of hedging, and changes in the fair value of the effective portion
      of cash flow hedging instruments.




These
      amounts will be recorded in the statement of other comprehensive income until
      the criteria for recognition in the statement of income are met. Handbook
      section 3251 establishes standards for the presentation of equity and changes
      in
      equity during the reporting period. It specifies that an entity should
      separately present the following components of equity: retained earnings,
      accumulated other comprehensive income, contributed surplus, share capital
      and
      reserves.


27









**13.**  **Reconciliation
      of Canadian and United States Generally Accepted
      Accounting  Principles**(continued)


** i.
            New
                Accounting Pronouncements
                (continued)


**


*Financial Instruments - Recognition and Measurement*




Under
      the
      new standard, for accounting purposes, financial assets will be classified
      as
      one of the following: held-to-maturity, loans and receivables, trading or
      available-for-sale, and financial liabilities will be classified as
      held-for-trading or other than held-for-trading. Financial assets and
      liabilities classified as held-for-trading will be measured at fair value with
      gains and losses recognized in net income. Financial assets held-to-maturity,
      loans and receivables and financial liabilities other than those
      held-for-trading, will be measured at amortized cost.




Available-for-sale
      instruments will be measured at fair value with unrealized gains and losses
      recognized in other comprehensive income. The standard permits an entity to
      designate any financial instrument, upon initial recognition, as
      held-for-trading. All derivatives, including embedded derivatives that must
      be
      separately accounted for, generally must be classified as held for trading
      and
      recorded at fair value in the balance sheets.




*Hedges*




This
      new
      standard specifies the criteria under which hedge accounting can be applied
      and
      how hedge accounting is to be executed for each of the permitted hedging
      strategies: fair value hedges, cash flow hedges and hedges of a foreign currency
      exposure of a net investment in a self-sustaining foreign operation.




*Non-monetary transactions*




In
      June
      2005, the CICA issued Handbook Section 3831, Non-Monetary Transactions,
      replacing Section 3830 of the same title. The new accounting standard requires
      all non-monetary transactions be measured at fair value unless certain
      conditions are satisfied.  The new requirements are effective for
      non-monetary transactions initiated in periods beginning on or after January
      1,
      2006. The early adoption of this statement did not have any material impact
      on
      our results of operations or financial position.