UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  _____________

                                    FORM 20-F

(Mark One)
      |X|   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
            SECURITIES  EXCHANGE ACT OF 1934 [FEE REQUIRED]
                                      OR
      | |   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
            EXCHANGE ACT OF 1934 [FEE REQUIRED]
                          For the fiscal year ended
                                      OR
      | |   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
            EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
              For the transition period from__________to__________
                           __________________________

                         Commission file number 0-21799

                              DIADEM RESOURCES LTD.
             (Exact name of Registrant as specified in its charter)
                                 Not Applicable
                 (Translation of Registrant's Name into English)
                                     CANADA
                 (Jurisdiction of incorporation or organization)
                               110 Meadowvale Road
                              Scarborough, Ontario
                                     M1C 1S1
                    (Address of principal executive offices)
                           __________________________

Securities registered or to be registered pursuant to Section 12(b) of the Act.
                                      None

Securities registered or to be registered pursuant to Section 12(g) of the Act.
                                  Common Shares
                                (Title of Class)
 Securities for which there is a reporting obligation pursuant to Section 15(d)
                                  of the Act.

                                (Title of Class)
Indicate the number of  outstanding  shares of each of the  issuer's  classes of
capital  or common  stock as of the close of the  period  covered  by the annual
report.
                            23,843,551 Common Shares

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 13(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such shorter  periods that the  registrant  was
required  to file such  reports),  and (2) has been  subject  to such  reporting
requirements for the past 90 days.
                                 Yes | | No |X|

Indicate by check mark which financial statement item the registrant has elected
to follow.
                             Item 17 |X|  Item 18 | |
                           |_|
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY  PROCEEDINGS  DURING THE PAST
                                  FIVE YEARS)
Indicate  by check mark  whether  the  registrant  has filed all  documents  and
reports  required  to be filed by  Sections  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court.
                                Yes | | No | |


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<TABLE>
<CAPTION>


                                GLOSSARY OF TERMS
<S>                     <C>
ABITIBI BELT OF         A vast area of ancient volcanic rocks extending from Kenora to Sudbury,
QUEBEC-ONTARIO          Ontario to Chibougamau, Quebec.                                        
                        
ADITS:                  An opening driven  horizontally into the side of a mountain or hill for
                        providing access to a mineral deposit.

AGGLOMERATES:           A volcanic  breccia  formed  by  disruption  of  a solidified  crust or
                        hardened  plug of  lava;  blocks  may  fit  together  or be  completely
                        disordered.

ALKALINE:               Having the qualities of a base.

ALLUVIAL:               Relatively  recent deposits of sedimentary  material laid down in river
                        beds, flood plains, lakes or at the base of mountain slopes.

AIRBORNE MAGNETIC/      A survey  made  from the air for the purpose of recording  the magnetic
                        characteristics of rocks

AEROMAGNETIC SURVEY:    on and below the surface of the earth.

AMPHIBOLES:             Metamorphic rock of primarily mafic minerals, chiefly hornblende.

ANDESITE:               A dark-coloured, fine-grained extrusive rock.

ARCHEAN AGE:            The oldest rocks of the  Precambrian  Era,  formed prior to 2.5 billion
                        years ago.

ASHUANIPI FORMATION:    A unit of ancient sedimentary  rocks  in New  Quebec and Labrador, with
                        an age of two billion years.

BASAL:                  Situated at base of a rock unit or structure.

BRECCIA:                The  texture  displayed  by  a  rock  which  has  been  fragmented  and
                        dislocated since initial lithification.

CARAT (CT):             A unit of weight  for  diamonds,  equivalent  to 0.2 of a gram.

CASSITERITE:            A brown or black tetragonal mineral, it is the  principle ore of tin.

CHALCOPYRITE:           A sulphide mineral of copper and iron; the most important ore mineral
                        of copper.

CHROMIUM-DIOPSIDE:      A  bright-green  variety of  pyroxene  which can occur in kimberlite.

CHROMITE:               An  iron-chromium  oxide  often  found as small  grains  in  ultrabasic
                        igneous rocks and kimberlitic rocks.

COBBING:                The  separation,  generally  with  a  hand-held  hammer,  of  worthless
                        minerals from desired minerals in a mining operation.

COLLUVIUM:              A general term applied to loose and incoherent deposits, usually at the
                        foot of a slope or cliff and brought there chiefly by gravity.

CUT-OFF GRADE:          The lowest grade of  mineralized  material  that  qualifies as ore in a
                        given deposit.

DIAMOND:                A cubic variety of crystalline carbon which may be of gem quality.

DIAMOND DRILL HOLES:    Rotary  drilling  using  diamond  impregnated  bits  to produce a solid
                        continuous core sample of the rock.

                                               2


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DIAMONDIFEROUS:         Containing diamond.

DIATREME:               A  volcanic  vent  piercing  country  rock,  usually  the  result of an
                        explosive eruption.

DIOPSIDE:               A white to green mineral of the clinopyroxene group.

DIORITE:                An  intrusive  igneous  rock  composed  chiefly  of sodic  plagioclase,
                        hornblende, biotite or pyroxene

DISSEMINATED:           Fine particles of mineral dispensed through the enclosing rock.

ECOLOGITE:              An ultrabasic rock consisting mainly of garnet and clinopyroxene.

ELECTROMAGNETIC         A geophysical method employing the generation of electromagnetic  waves
                        at the earth's surface

(PROSPECTING):          when the waves  impinge on a conducting  formation or ore body at depth
                        they induce currents that are the source of new waves radiated from the
                        conductors and detected by instruments at the surface.

EPITHERMAL:             A term applied to low temperature (100-200C) hydrothermal processes.

FEASIBILITY:            Program to  establish  whether a mineral  deposit  can be  successfully
                        mined considering technical and economic parameters.

GABBRO:                 A dark, course-grained igneous rock.

GEM QUALITY             A  diamond  free of  flaws,  as far as can be  determined  by a trained
of a                    observer with the aid 10-power  magnifying  glass,  and having a colour
DIAMOND:                and other  characteristics  that do not deleteriously  affect its value
                        for use as a faceted ornamental (gem) diamond.                         
                        
                        
GEOCHEMISTRY:           Study of variation of chemical elements in rocks or soils.

GEOPHYSICS:             Study of the earth by quantitative physical methods.

GNEISS:                 A layered or banded  crystalline  metamorphic  rock the grains of which
                        are aligned or elongated into a roughly parallel arrangement.

GOSSAN:                 A surface  capping of oxides of iron from the  weathering  of  metallic
                        sulphide.

GRADE:                  (To contain a particular)  quantity of ore or mineral relative to other
                        constituents, in a specified quantity of rock.

GRANODIORITES:          The intrusive rock with intermediate composition.

GREENOCKITE:            A yellow or orange mineral containing cadmium and sulfur.

HYDRAULIC MINING:       The  extraction  of desired  earth  material by means of strong jets of
                        water, such as washing gold-bearing gravel into sluices.

HYDROTHERMAL            Pertaining  to hot  water,  especially  with  respect  to its action in
                        dissolving,  re-depositing,  and otherwise  producing  mineral  changes
                        within the crust of the globe.

INDICATOR MINERALS:     In connection with kimberlite exploration,  indicator minerals include:
                        pyrope   garnet;   picroilmenite   (also   called   magnesianilmenite);
                        chrome-diopside; chromite; and diamond.

INTRUSION/INTRUSIVE:    A volume of igneous rock that was injected,  while still  molten,  into
                        the earth's crust or other rocks.

                                               3


<PAGE>

KIMBERLITE/OLIVINE      Uneven-grained,  ultramafic  rock in which  the  visible  minerals  may
                        include olivine, phlogopite, pyrope

LAMPROITE:              garnet,  picroilmenite  and  chrome/diopside,  which are  cemented by a
                        groundmass  that  may  include  serpentine,   calcite,   and  chromite.
                        Kimberlite and olivine  lamproite are the only known types of intrusive
                        rock (primary source rocks ) that may carry diamonds from the depths of
                        the earth to the surface and may form  primary  diamond  deposits.  The
                        principal distinction between kimberlite and olivine lamproite is based
                        on geochemical grounds.

LABRADOR TROUGH:        A major geological structure extending for 900 kilometres in Quebec and
                        Labrador.

LAHAR:                  A  landslide  or  mudflow  of  pyroclastic  material  on the flank of a
                        volcano; also, the deposit produced.

LENS OR LENSES:         Generally  used to describe a body of  mineralization  that is thick in
                        the middle and tapers towards the ends.

LODE:                   A tubular or vein like deposit of valuable mineral between well defined
                        walls of rock.

MAGNETIC SURVEY:        A  geophysical  survey  that  measures  the  intensity  of the  Earth's
                        magnetic field.

MAFIC:                  Igneous  rocks  composed  mostly  of  dark,  iron  and   magnesium-rich
                        minerals.

MAGNETOMETER:           An  instrument  used to measure the magnetic  attraction  of underlying
                        rocks.

MAGNETITE:              Black, magnetic iron ore, an iron oxide.

MASSIVE SULPHIDE:       Mineralized rock rich in sulphide minerals (>50%).

MEHRTENS (VOLCANICS):   A  widespread  local unit of volcanic  flows and  mudslides  in eastern
                        California approximately 12 million years old.

MICRODIAMOND:           Natural  diamonds,  generally  of a size  less  than  0.4  millimetres.
                        Although  these  diamonds  do  not  have  monetary   value,   they  are
                        significant in that their presence indicates the possible occurrence of
                        larger diamonds.

MINERALIZATION:         The concentration of metals and their chemical  compounds within a body
                        of rock.

NET SMELTER RETURN:     A share of the net revenues  generated  from the sale of metal produced
                        by a mine.

NIOBIUM:                An exotic alloy metal, sometimes called columbium.

OLIVINE:                A  rock-forming  silicate  mineral  series  ranging  from  iron-rich to
                        magnesium-rich. Important in mafic and ultramafic rocks.

OPEN CUT, OPEN PIT:     A mine worked at the surface.

ORE:                    A natural  aggregate of one or more minerals  which, at a specific time
                        and place, may be mined and sold at profit, or from which some part may
                        be profitably separated.

ORTHOMAGMATIC:          The main stage of  crystallization  of silicates  from a typical magma,
                        during which as much as 90% of the magma may crystallize.

OVERBURDEN:             Loose or consolidated  rock that overlies a mineral deposit and must be
                        removed prior to mining

OXIDIZED:               Decomposed by exposure to the atmosphere and ground water.


                                               4

<PAGE>



PAYSTREAK:              That portion of a vein which carries the profitable ore.

PENTLANDITE:            Nickel iron sulphide, the most common nickel ore.

PERIDOTITE:             An intrusive igneous rock consisting mainly of olivine.

PIPE:                   A common term for a vertical  cylindrical or  column-like  mass of rock
                        that cooled and solidified in the neck of a volcano.

PLACER:                 A deposit of sand and gravel  containing  valuable metals such as gold,
                        tin or diamonds, normally resulting from erosion.

PLATFORM COVER:         Generally  used to  describe  areas  formed  by  relatively  undeformed
                        sediments lying on basement rocks.

PLIOCENE:               An epoch of the  Tertiary  period,  after the  Miocene  and  before the
                        Pleistocene;  it is  considered  to be a period  when the  Tertiary  is
                        designated as an era.

PLUG:                   A common name for a small offshoot from a large body of molten rock.

PORPHYRY:               Any igneous rock in which relatively large conspicuous  crystals ae set
                        in a finer-grained groundmass.

PRECAMBRIAN:            All geologic time, and its corresponding rocks, before the beginning of
                        the Paleozoic; it is equivalent to about 90% of all geologic time.

PROPYLITIC:             A term that may be applied to any kind of a vein,  meaning that the ore
                        solution  which has  furnished  the vein  filling  has also  effected a
                        decomposition or alteration of the wall rock as well, so that the walls
                        of the vein consist of clay, talc, etc.

PROSPECT:               Mineral occurrence with potential for an economic deposit.

PYROCLASTIC:            Pertaining  to clastic rock  material  formed by volcanic  explosion or
                        aerial expulsion from a volcanic vent.

PYROPE GARNET:          A  variety  of  garnet   (cubic   iron-,   magnesium-,   calcium-,   or
                        manganese-aluminosilicates)  which  contains  mainly  magnesium  and  a
                        little iron; many pyrope garnets also contain chromium.

RADIOLARIAN CHERT:      A well-bedded microcrystalline rock with fossil shells and silica.

RECONNAISSANCE:         First-pass exploration of a large area.

SCHIST:                 A foliated metamorphic rock the grains of which have a roughly parallel
                        arrangement; generally developed by shearing.

SERICITE                A white,  fine-grained  potassium  mica  occurring  in small scales and
                        flakes as an alteration  product of various  aluminosilicate  minerals,
                        having  a  silky  lustre,  and  found  in  various  metamorphic  rocks,
                        especially  schists and phyllites or in the wall rocks, fault gouge and
                        vein fillings of ore deposits.

SERPENTINE:             A family of minerals which are the  alteration  products of olivine and
                        pyroxenes.

SILL:                   An intrusive  sheet of igneous rock of roughly  uniform  thickness that
                        has been forced between the bedding planes of existing rock.

STOCKWORK:              An interlacing system of small veins or lodes.


                                               5


<PAGE>



STRANGE LAKE:           A lake near the Quebec/Labrador boundary.

SULPHIDE:               A metallic mineral containing unoxidized sulphur.

TAILINGS:               Reject products from a mineral treatment plant.

TUFF:                   A  rock  formed  from  compacted  volcanic  origin  containing  clastic
                        fragments.

ULTRABASIC:             An  igneous  rock  having a silica  content  lower than that of a basic
                        rock, or less than about 45%.

ULTRAMAFIC:             An  igneous  rock  composed   chiefly  of  mafic   minerals,   such  as
                        monomineralic rocks composed of hypersthene,  augite or olivene.  VEIN:
                        Sheet-like body of minerals formed by  fracture-filling  or replacement
                        of the host rock.

XENOCRYST:              A mineral found in an igneous rock but which did not crystallize in the
                        same place at the same time as the containing rock.

XENOLITH:               An inclusion of a pre-existing rock in an igneous rock.


The rate of exchange, as reported by the Federal Reserve Bank of New York for the conversion of
United States dollars into Canadian dollars was, as at December 11, 1997,  $0.7022 (U.S.$1.00 =
CDN$1.4241).


</TABLE>






































                                            6

<PAGE>


Item 1   DESCRIPTION OF BUSINESS
                                     GENERAL

The Company was formed in Ontario under the Business Corporations Act on June 1,
1989 by the  amalgamation  of Howe  Exploration  & Development  Co.  Limited and
Merigomish Investments Limited. On April 20, 1993, the Company filed Articles of
Amendment  changing its name from Howe  Exploration & Development Co. Limited to
Howex  Enterprises  Ltd.  The  Articles of  Amendment  also served to remove the
private  company  restrictions  from its Articles.  On September  23, 1994,  the
Company filed Articles of Amendment  changing its name to Diadem  Resources Ltd.
and   consolidating   its   issued   common   shares   on  the   basis   of  one
post-consolidation  common  share  for each two and  one-half  pre-consolidation
common shares.  The registered  head office of the Company is located at 350 Bay
Street,  7th Floor,  Toronto,  Ontario,  M5H 2S6, while its principal  office is
located at 110 Meadowvale Road, Scarborough, Ontario, M1C 1S1.

                           THE BUSINESS OF THE COMPANY

The Company and its predecessor company prior to amalgamation,  Howe Exploration
& Development  Co.  Limited,  have been in the mineral  exploration  business in
Canada and  elsewhere  since May,  1965.  The Company was a contractor  for mine
development  in the years  1965-1975 and has been an investor in properties  and
shares of mining  companies and a consultant to mining companies since then. The
Company currently has interests in mining  properties  situated in Amador County
and El Dorado County,  California;  Northern  Quebec/Labrador  and the Northwest
Territories,  Canada, the La India District, Nicaragua and on Belitung Island in
Indonesia. The Company also owns an interest in Waseco Resources Inc. ("Waseco")
which is engaged in the exploration and development of an alluvial gold prospect
and a hard rock gold  prospect on the Island of  Kalimantan,  Indonesia  and two
hard  rock  gold  prospects  on the  Island  of  Java,  Indonesia.  Diadem  is a
development  stage  company,  and  while  it has not  yet  determined  that  its
properties  contain  economically   recoverable  reserves,   Diadem  anticipates
completing  a  favourable  feasibility  study in respect of its  Nicaragua  gold
property  within the next 12 month period and Waseco has  completed a favourable
feasibility  study in respect of its  alluvial  gold  prospect  on the Island of
Kalimantan, Indonesia.

RISK FACTORS
------------

MINING EXPLORATION AND DEVELOPMENT

The Company  currently  has no  properties  in  production  and its success will
depend upon its ability to generate revenues from its properties.

All of the mineral properties in which the Company holds interests are without a
known  body  of  commercial  ore and  each of the  proposed  programs  on  these
properties  is an  exploratory  search  for ore.  Development  of these  mineral
properties  will only follow upon obtaining  satisfactory  exploration  results.
Mineral exploration and development involves a high degree of risk, which even a
combination of experience,  knowledge and careful  evaluation may not be able to
avoid.  There  is no  assurance  that  commercial  quantities  of  ore  will  be
discovered.  There is no assurance that even if commercial quantities of ore are
discovered  that a  mineral  property  will  be  brought  into  production.  The
commercial  viability of a mineral  deposit once  discovered is dependent upon a
number of other  factors,  some of which are the  particular  attributes  of the
deposit,  such as size, grade and proximity to  infrastructure  as well as metal
prices.  Most of the above  factors  are  beyond  the  control  of the  Company.
Furthermore,  several  years may pass between the discovery of a deposit and its
exploitation.

Mining  operations  generally  involve  a  high  degree  of  risk  which  even a
combination of experience,  knowledge and careful  evaluation may not be able to
overcome. The business of mining is subject to a variety of risks such as ground
fall,  explosions and other  accidents,  flooding,  environmental  hazards,  the

                                        7


<PAGE>


discharge  of toxic  chemicals  and other  hazards.  Such  occurrences,  against
destruction  of  mines  and  other  production  facilities,  damage  to life and
property,  environmental damage, delayed production,  increased production costs
and possible legal liability for any and all damages.  Such liabilities may have
a material adverse effect on the Company's financial position.

FOREIGN GOVERNMENTS AND GOVERNMENTAL REGULATIONS

The Company hold interests in mineral resource  properties in Canada, the United
States,  Nicaragua and Indonesia.  Because the Company holds interest in mineral
resource  properties in foreign  countries,  the Company's mineral  exploration,
development  and  mining  activities  may be  affected  in  varying  degrees  by
political stability,  government regulations relating to the mining industry and
foreign  investment  therein.  Currently  there are no  restrictions on currency
movement  within or from such  countries.  However,  there is no assurance  that
future  political and economic  conditions in these countries will not result in
their governments adopting different policies respecting foreign development and
ownership of mineral  resources.  Any such changes in  regulations  or shifts in
political  conditions  are beyond the control of the  Company and may  adversely
affect its business. Operations may be affected in varying degrees by government
regulations,  including those with respect to restrictions on production,  price
controls, export controls, income taxes, expropriation of property,  employment,
land use, water use, environmental  legislation and mine safety.  Operations may
also be affected  in varying  degrees by  political  and  economic  instability,
economic  or other  sanctions  imposed  by other  nations,  terrorism,  military
repression,  crime and high inflation.  It may be more difficult for the Company
to obtain any required project  financing in these countries from senior lending
institutions  because  such lending  institutions  may not be willing to finance
projects in developing countries due to the possible investment risk.

Government  approvals  and  permits  are  currently,  and may in the  future be,
required  in  connection  with the  Company's  operations.  To the  extent  such
approvals  are  required  and not  obtained,  the  Company may be  curtailed  or
prohibited from  proceeding  with planned  exploration or development of mineral
properties.

The  Company  believes  it  is  currently  in  compliance  with  all  applicable
government regulations.  Failure to comply with applicable laws, regulations and
permitting requirements may result in enforcement actions thereunder,  including
orders issued by regulatory or judicial  authorities causing operations to cease
or  be  curtailed  and  may  include   corrective   measures  requiring  capital
expenditures, installation of additional equipment, or remedial actions. Parties
engaged in mining  operations may be required to compensate those suffering loss
or damage by reason of the  mining  activities  and may have  civil or  criminal
fines or penalties imposed for violations of applicable laws or regulations.

Amendments to current laws,  regulations  and permits  governing  operations and
activities of mining companies, or more stringent  implementation thereof, could
have a material  adverse  impact on the Company and cause  increases  in capital
expenditures  or  require  abandonment  or delays in  development  of new mining
properties.

TITLE MATTERS

The  Company  has  investigated  its rights to explore  and  exploit its various
properties and, to the best of its knowledge,  those rights are in good standing
and none of the Company's  current mining and  exploration  rights are in doubt.
However no assurance can be given that applicable  governments  will not revoke,
or significantly alter the conditions of, the applicable  exploration and mining
authorizations and that such exploration and mining  authorizations  will not be
challenged or impugned by third parties.

MARKET CONDITIONS

The mining  industry is  competitive  and there is no  assurance  that,  even if
commercial  quantities of mineral resources are discovered,  a profitable market

                                      8


<PAGE>



will exist for the sale of same.  There can be no assurance  that mineral prices
will be such that the  Company's  properties  can be mined at a profit.  Factors
beyond the control of the Company may affect the  marketability  of any minerals
discovered.  The prices of gold and other  precious  metals and base metals have
historically  experienced  volatile and  significant  price movements over short
periods of time, and are affected by numerous  factors beyond the control of the
Company, including international economic and political trends,  expectations of
inflation, currency exchange fluctuations, interest rates and global or regional
consumption  patterns,  speculative  activities and increased  production due to
improved  mining  and  production  methods.  The  aggregate  effect of all these
factors is impossible to predict

CURRENCY AND FOREIGN EXCHANGE

The Company's  operations  in Indonesia  and  Nicaragua  will make it subject to
fluctuations  in  currency  exchange  rates  that may  significantly  impact the
Company's financial position and results.  Precious metals are generally sold at
prices stated in U.S.  dollars while costs  incurred are paid in the currency of
the country in which the activities are  undertaken.  Any change in the ratio of
Indonesian or Nicaraguan currency to the U.S. dollar could affect profitability.
The Company does not intend to engage in currency  hedging to offset any risk of
currency fluctuations.

FINANCIAL RESOURCES OF THE COMPANY

The Company  currently does not have any revenues and has not paid any dividends
since its  incorporation.  The  financial  resources  of the  Company may not be
sufficient  to  bring  into  production  any  economic  deposit  which  it might
discover.  Given that the Company does not have a property that has yet been the
subject  of a mine  feasibility  study and given the above risk  factors,  it is
unlikely  that the  Company  will  make a profit  in the near  future.  The work
programs  may be  interrupted  at any time in the even that the Company does not
have the  necessary  funding  to carry out future  work  required.  The  further
development  and  exploration  of the various  mineral  properties  in which the
Company holds interests  depends upon the Company's ability to obtain additional
financing through any or all of the joint venturing and syndication of projects,
debt  financing,  equity  financing or other means.  Such funding may dilute the
interests of existing shareholders.  There is no assurance that the Company will
be successful in obtaining such additional financing.  Furthermore, even if such
financing is successfully  completed,  there can be no assurance that it will be
obtained on terms  favourable  to the  Company or  providing  the  Company  with
sufficient  funds  to meet  its  objectives,  which  may  adversely  affect  the
Company's business and financial condition.

UNINSURED RISKS

The Company may become  subject to liability  for  cave-ins,  pollution or other
hazards  against  which it cannot  insure or  against  which it may elect not to
insure  because of high  premium  costs or other  reasons.  The  payment of such
liabilities  would  reduce  the  funds  available  for  exploration  and  mining
activites and would adversely affect the Company's financial position.

CONFLICT OF INTEREST

Certain of the directors and officers of the Company also serve as directors and
officers  of  other  companies   involved  in  natural   resource   exploration,
development or production and,  consequently  there exists a possibility for any
such officer or director to be in a position of conflict.  Any decision  made by
such a director or officer involving the Company will be made in accordance with
his or her  fiduciary  duties and  obligations  to deal fairly and in good faith
with the  Company  and such other  companies.  In  addition,  all  officers  and
directors will declare, and refrain from voting on, any matter in which they may
have a conflict of interest.




                                      9


<PAGE>



DEPENDENCE ON KEY PERSONNEL

The  development of the Company's  business is and will continue to be dependent
on its  ability to attract and retain  highly  qualified  management  and mining
personnel.  Competition  for such  personnel  is  intense,  and  there can be no
assurance that the Company will be able to attract and retain such personnel.

COMPETITION

Significant competition exists for available mineral acquisition properties.  As
a  result  of this  competition,  some of  which  is  large  established  mining
companies  with  substantial  capabilities  and greater  financial and technical
resources  than the  Company,  the  Company  may be unable to acquire  rights to
explore   additional   attractive   mining  properties  on  terms  it  considers
acceptable. Accordingly, there can be no assurance that the Company will acquire
any interest in  additional  operations  that would yield  reserves or result in
commercial mining operations.

ENVIRONMENTAL COMPLIANCE

The Company's operations are subject to environmental  regulation in the various
jurisdictions in which it operates.  Environmental  legislation is evolving in a
manner which will require stricter  standards and  enforcement,  increased fines
and penalties for non-compliance,  more stringent  environmental  assessments of
proposed projects and a heightened  degree of  responsibility  for companies and
their officers, directors and employees.  Although the Company believes that its
exploration  operations  are  currently  carried  out  in  accordance  with  all
applicable rules and  regulations,  there is no assurance that future changes in
environmental  regulation,  if any,  will not be applied in a manner which could
limit or curtail production or development.  Environmental  hazards may exist on
the properties in which the Company holds interests which are presently  unknown
to the Company  and which have been  caused by  previous  or existing  owners or
operators  of the  properties.  An  overview  of the  environmental  legislation
applicable to the Company's operations follows.

CANADA

The mining  industry in Canada is subject to legislation at both the federal and
provincial levels relative to the protection of the environment.  In particular,
such legislation  imposes rigorous standards on the mining industry to reduce or
eliminate  the  effects  of  wastes   generated  by  extraction  and  processing
operations and  subsequently  deposited on the ground or emitted into the air or
water.  Accordingly,  the  design of mines and mills and the  conduct of overall
extraction and processing  operations are subject to the restrictions  contained
in such legislation. In addition, the construction, development and operation of
a  mine,  mill  and  refinery   typically  entail   compliance  with  applicable
environmental  legislation and/or review processes and the obtaining of land use
and other  permits,  water  licenses  and similar  authorizations  from  various
governmental  agencies.  In particular,  legislation is in place for lands under
federal  jurisdiction  or located in certain  provinces  which  provides for the
preparation  of costly  environmental  impact  assessment  reports  prior to the
commencement of any mining operations. These reports entail a detailed technical
and  scientific  assessment  as  well  as a  prediction  of  the  impact  on the
environment and proposed development.

Failure to comply with the legislation can have serious consequences. Orders may
be  issued   requiring   operations  to  cease  or  be  curtailed  or  requiring
installation of additional facilities or equipment. Violators may be required to
compensate those suffering loss or damage by reason of its mining activities and
may be fined if convicted of an offense under such legislation.

Provincial mining legislation establishes  requirements for the decommissioning,
reclamation and  rehabilitation  of mining properties in a state of temporary or
permanent  closure.  Such  closure  requirements  relate to the  protection  and
restoration  of the environment and the protection of public safety. Some former

                                      10


<PAGE>



mining  properties must be managed for long periods of time following closure in
order to fulfill closure requirements. The cost of closure of mining properties,
and, in particular, the cost of long term management of mining properties can be
substantial.  The  Company  intends  to  progressively  rehabilitate  its mining
properties  during  their  period of  operation,  should any  properties  become
operational,  so as to reduce the cost of fulfilling closure  requirements after
the termination or suspension of production.

UNITED STATES

Legislation  and  implementing  regulations  adopted or  proposed  by the United
States  Environmental  Protection  Agency ("EPA"),  in Bureau of Land Management
("BLM") and by comparable  agencies in various  states  directly and  indirectly
affect the mining  industry  in the United  States.  These laws and  regulations
address the  environmental  impact of mining and mineral  processing,  including
potential  contamination  of soil and water from tailings  discharges  and other
wastes  generated by mining  companies.  In particular,  legislation such as the
Clean Water Act, the Clean Air Act, the Resource  Conservation and Recovery Act,
the Comprehensive Environmental Response, Compensation and Liability Act and the
National Environmental Policy Act and comparable state statutes require analyses
and/or impose effluent standards,  new source performance standards, air quality
and emission standards, remediation requirements and other design or operational
requirements  for  various   contaminants  of  mining  and  mineral  processing,
including precious ore mining and processing.  Such statutes impose liability on
owners and operators for the remediation of waste.

Further,  mine operators must comply with the Federal Mine Safety and Health Act
of  1977,  as  amended,  which is  enforced  by the  Mining  Safety  and  Health
Administration  ("MSHA"),  an agency  within  the  Department  of Labour  and by
comparable  agencies in various states. All mines, both underground and surface,
are  subject  to  inspections  by  MSHA.  The  Occupational  Safety  and  Health
Administration  also has  jurisdiction  over  safety  and health  standards  not
covered by the Federal Mine Safety and Health Act of 1977.

NICARAGUA

Under  Nicaraguan  law, the Ministry of the  Environment  and Natural  Resources
("MARENA") is the government  entity  responsible  for the  preservation  of the
environment.  The Company intends to follow required  procedures with respect to
the environment,  including  monitoring of the effluent from mining  operations.
Further environmental  permitting will be required from time to time to maintain
compliance with MARENA requirements as they evolve.

INDONESIA

The  mining   industry  in  Indonesia  is  subject  to   legislation   regarding
environmental protection and preservation. The applicable legislation is set out
in each Mining  Authorization  ("Kuasa Pertambagan" or "KP") or Contract of Work
("COW") document,  and all contracting parties are required to comply with these
requirements.  To assist in the  determination  of the impact a proposed  mining
operation  may have on the natural  resources,  biological  resources  and human
settlements in a particular  area, the contracting  party is required to include
an  Environmental  Impact Study with the  feasibility  study  submitted for each
property.

DESCRIPTION OF MINERAL EXPLORATION AND DEVELOPMENT PROPERTIES
-------------------------------------------------------------

UNITED STATES

(i)   LEEK SPRINGS, ELDORADO COUNTY, CALIFORNIA

Location And Access
-------------------

The property is located in the El Dorado National  Forest,  in El Dorado County,
California, in Sierra Nevada,  California. The property is made up of four claim

                                      11

<PAGE>


blocks, separated by a narrow strip of private land. The nearest habitation is a
ski resort located three miles east of the property.  Placerville is the nearest
large  town  and the  administrative  centre  of the  county,  located  28 miles
west-northwest  of the  property,  while  Lake  Tahoe is located 22 miles to the
northeast.

Access to the  property is from  Highway 88, one of the main paved  access roads
through the Sierra Nevada mountains from the Great Valley of California. Highway
88 connects Stockton in the Great Valley with Carson City,  Nevada. The property
is well served by paved roads and gravel tracks.  The area was recently  logged,
so logging tracks and dirt roads provide additional access on the property.

The climate is Alpine.  The area experiences  warm, dry, short summers and long,
cold winters with snow  accumulations  in excess of 10 feet.  The property is at
7,000 feet elevation, experiences considerable snowfall in the winter months and
is generally snow-covered from November to May.

The main Leek  Springs  Valley is a  typical  "Alpine  Meadow"  of  grasses  and
flowers,  with  continuous  flowing  small  streams fed by  numerous  year-round
springs.  The  springs  originate  at the  geological  contact  of  the  Mehrten
Formation  andesite  and the  granite.  The Valley sides on the north are gently
sloping  while the  southern  sides are steep.  The sides are  covered by mature
conifers,  thinly spread,  due to active logging  operations over the past fifty
years.  The  valley  slopes  at  higher  elevation  have a more  sparse  conifer
population,  due to  outcropping  Mehrten  Formation  andesites  and  poor  soil
formation.

Regulations  in El Dorado  County  require a special  use  permit be issued  for
open-pit  mining or strip  mining,  for purposes of  exploration  or  extraction
resulting in the removal of more than 1,000 cubic yards of overburden.  Prior to
the issuance of the special use permit, the approving authority (the local Board
of Commissioners or Planning Authority) shall make a finding that all boundaries
of the proposed  project shall be greater than a linear  distance of 10,000 feet
from any existing  residential  use,  hospital use, church use or school use, as
designated  in the El Dorado  County  General Plan, or any community or specific
plan, or as permitted by the zoning code of El Dorado County.

Mining Rights and Titles
------------------------

By Agreement  dated  November 6, 1995 between the Company and  Silverstone,  the
Company  obtained  a 10%  interest  in  215  recorded  claims  described  below,
technical  data and any other  claims or mining  rights  acquired by  Silversone
within a  specified  area of interest  (herein,  the "Area of  Interest")  . The
property  consists of 215  unpatented  mining  claims which cover  approximately
2,500 acres. The Judy Claims ("Judy"),  comprise 46 claims,  the Adrienne Claims
("Adrienne")  consists of 10 claims,  the Susan Claims ("Susan")  consists of 80
claims and the Michelle Claims  ("Michelle")  consist of 79 claims. The Adrienne
claims were staked  between June and  September,  1994.  The Judy  Claims,  were
staked during  November and December,  1995. The Susan and Michelle  claims were
staked between June and July 1996. The total area claimed  encompasses the known
outline of the Adrienne pipe lamproitic  diatreme breccia ("Adrienne Pipe"). The
Company currently holds a 40% interest in these claims as described below.

Mr. Derek Bartlett,  a non-executive  Director of the Company,  was appointed by
the Company to negotiate on its behalf,  the transaction with  Silverstone,  the
latter being  represented  by Mr.  George  Silverman.  To acquire an initial 10%
interest in these  claims,  the Company was required,  on or before  December 6,
1995,  to (i) pay  Silverstone  the sum of  $50,000  U.S.  and (ii)  deliver  to
Silverstone a total of 150,000 common shares of the Company. Compliance with the
December 6, 1995 deadline for payment was waived by Silverstone, and the Company
paid the  $50,000  U.S.  on January  16,  1996 and  issued the common  shares on
January 18, 1996.  Exercise of this option  secured an option for the Company to
acquire an additional 15% interest in the claims.

To acquire a further 15%  interest,  increasing  the  Company's  interest in the
claims  to 25%,  the  Company  has (i) paid  Silverstone  an  additional  fee of


                                      12

<PAGE>

$100,000 U.S., (ii) delivered to Silverstone an additional 200,000 common shares
of the Company,  and (iii)  provided  technical  data and  financial  statements
establishing  cumulative  expenditures  of not less than  $500,000  U.S.  on the
properties.  Exercise of this option also provided the Company with an option to
increase its interest in the claims by a further 15%.

To increase its interest by an additional 15%,  bringing its aggregate  position
in the claims to 40%, the Company was required,  on or before March 20, 1997, to
(i) pay  Silverstone  an additional  $100,000  U.S.,  (ii) deliver an additional
200,000  common  shares of the Company,  and (iii)  provide  technical  data and
financial statements  establishing  expenditures of a further $500,000 U.S. This
was completed  and exercise of this option  secured an option for the Company to
acquire an additional 15% interest in the claims.

To acquire an additional 15% interest,  bringing its aggregate  position to 55%,
the  Company  would  be  required,  on or  before  August  2,  1998,  to (i) pay
Silverstone  an  additional  sum of $100,000  U.S.,  (ii) deliver an  additional
200,000  common  shares of the Company,  and (iii)  provide  technical  data and
financial statements establishing additional expenditures of $4,000,000 U.S.

Regional History
----------------

Since 1848,  approximately  810 alluvial diamonds have been found in California.
No accurate  records were kept. The majority of diamonds were found by chance in
the sluices used in gold mines. The only attempt at diamond exploration occurred
at the  Cherokee  Diggins  in Butte  County,  where  between  400 and 500  small
diamonds were recovered from gold-bearing gravels. A small eclogite, a potential
diamond source rock, was located nearby, but proved to be barren.

Based on the  geographical  distribution  of the  alluvial  diamonds  and  their
secondary source  environments,  Ryder divided diamond occurrences in California
into two distinct  zones,  the Sierra  Nevada  Diamond  Province and the Klamath
Mountain Diamond Belt. The majority of the California alluvial diamond finds are
located in the Sierra Nevada Diamond  Province.  Within this  Province,  greater
than 90% of the recorded  diamonds are recovered from three  locations or mining
districts: Cherokee Diggings (300-600 diamonds); Placerville Mining District (90
diamonds);  and Volcano - Rancheria District (100 diamonds). The latter location
is where the Company's  Rancheria  placer gold and diamond  prospect is located.
The majority of recorded  diamonds in the above  districts  were  recovered from
Tertiary gravels left by ancient rivers draining and eroding the emerging Sierra
Nevada Mountains. Plotting the locations of the alluvial diamonds by Silverstone
demonstrated  that  one  ancient  river  - the  Tertiary  Mokelumne  River - has
consistently  yielded  numerous large and small,  gem quality diamonds from it's
gravels.

The Leek Springs property is located at the headwaters of the present-day  north
fork of the Cosumnes River and coincidentally at the ancestral headwaters of the
Tertiary Mokelumne River, twelve miles  east-northeast of the  Volcano-Rancheria
district.  The Tertiary  Mokelumne River contained  widespread  gold-bearing and
diamond-bearing gravels. The richest diamond-bearing gravels were in the Volcano
- Rancheria  mining district.  Alluvial  diamonds were also found throughout the
channel  gravels  as well as the  tributaries  flowing  into the  main  channel.
Recorded  recoveries  of  diamonds  decreased  during  the  later  part  of  the
nineteenth  century  due to the  introduction  of stamp  mills that  crushed the
gravels and  diamonds.  Interpretation  of the available  historical  records on
diamonds in California by Silverstone  indicates that the majority of the stones
recovered were of gem quality.  This interpretation is consistent with worldwide
experience with alluvial  diamonds;  flawed diamonds will not survive in a river
environment. Diamonds recovered and authenticated range in size from microscopic
particles up to 6 carats with an average size estimated at 0.8 carats.

No modern  exploration  or  mining  of  alluvial  diamonds  has been  previously
undertaken  in  California.  This may be due, in part,  to: (i) ignorance of the
early  miners - gold was the  desired  object of the gold rush era  miners.  The
South  African  diamond  fields had not yet been  discovered,  and diamonds were
regarded as a  "curiosity";  (ii)  enthusiasm for diamonds from the "experts" of
the  time  was  not  forthcoming.  Experts  from  South  Africa  as  well as the
California  Geological  Institute  did not believe  California to be a promising

                                      13

<PAGE>

area for diamond  mining;  (iii) mining methods used,  such as hydraulics,  were
disliked  by mine  managers as well as state  mineralogists;  (iv) the nature of
alluvial  diamonds  - most of the stones  (diamonds)  pick up a coating of salts
during  their  course down the river and they could not be  collected  using the
gold  recovery  techniques  used;  and (v) the nature of the  gravels - diamonds
found during mining were invariably  found in cemented or compact  gravels.  The
gravels were crushed in stamp mills to recover the gold,  which also resulted in
the destruction of the diamonds.

Serious  consideration has only been given to the concept that economic deposits
of  diamonds  in host rocks  could be found in North  America  since the 1970's.
Exploration  during the  1970's  resulted  in the  discovery  of  diamondiferous
kimberlites in Colorado and in the early 1990's in the Northwest  Territories of
Canada. In California,  no diamondiferous source rocks for the alluvial diamonds
were found until April 1996 when the Company  announced  that diamond  fragments
were recovered from drill cuttings at Leek Springs.

Regional Geology and Mineralization
-----------------------------------

The  greater  part of the Judy Claims are  underlain  by dark,  andesitic  lahar
mudflows-agglomerates,   with  sparse   outcropping  of  granite  at  the  lower
elevation.  The claims have not been geologically mapped in detail. Ryder mapped
the Adrienne  Claims in detail in the fall of 1995. The  geological  mapping and
geophysical  ground magnetic mapping  correlated well. Outcrop is limited on the
Adrienne Claims.  The greater part of the claims are covered by a light brown to
tan-coloured soil containing small pebbles and fragments of andesitic rocks.
In the western claims, similar soils contain granite fragments.

The  western  Adrienne  Claims  have  irregular  rugged  topography  and are 80%
underlain  by medium to  coarse  granites  and  granodiorites.  Large  round and
sub-round  boulders of granite are common,  forming  boulder fields on partially
denuded granite "hills".

The granite  rocks are  unconformably  overlain by  Pliocene  Mehrten  Formation
Andesitic  volcanics.  In one area,  geophysical  data  partially  supported  by
geological  mapping  indicates a fault  contact  between the granite and Mehrten
volcanics.  The lowest  Mehrten  Formation  Volcanics,  where  outcropping,  are
andesitic  mud  slides and flow  breccias  composed  of angular to  sub-rounded,
cobble sized blocks of andesitic rocks in a hard,  fine-grained,  mud matrix. At
higher  elevations,  in the  northern and north  eastern part of the claims,  no
outcrops are exposed. Abundant boulders and cobbles, sub-rounded to sub-angular,
of a light  coloured  massive,  medium grained  andesitic  rock with  scattered,
occasional,  large  amphiboles  predominate.  The  distribution  of the "boulder
fields" of this andesitic rock type coincides with elevated magnetic  intensity,
and are clearly  visible on the  contoured  magnetic  map.  The area between the
massive  andesites  and  outcropping  granites is covered by buff to light brown
soils which contain small fragments of different andesite rocks.

No surface evidence of the diamondiferous  diatreme breccia was found during the
geological  mapping.  The surface of the diatreme is covered by either a 20 foot
thick blanket of grey, brown soil or Mehrten Formation Andesite.

Exploration Results
-------------------

Based on the results of a literature  study  completed by Silverstone  and field
visits to alluvial  diamond  localities by Silverstone,  a three thousand square
mile area was targeted for  reconnaissance  and heavy  mineral  stream  sediment
sampling.  A lack of detailed  magnetic or other data precluded target selection
by available  geophysics.  Testing of tertiary  gravels  allowed  Silverstone to
select  optimum  sampling  conditions.  Sample and  mineral  size  helped in the
determination of alluvial diamond  indicator  mineral  association.  Orientation
sampling  of  present  day  rivers and creeks  helped  refine the  sampling  and
processing methods.

The main creeks and river  draining the target  areas were  sampled  along their
courses  at  approximately  five  mile  intervals  back  to  their  present  day
headwaters.  At each sample site between 30 and 50 litres of stream sediment was

                                      14

<PAGE>

collected.  At each location optimum heavy mineral sediment traps were selected.
The samples were  screened on site at the minus 1/4 inch  fraction  retained for
processing.  An initial heavy mineral  concentrate  was prepared from the sample
and was further processed again by screening, magnetic separation and the use of
density liquids (lithium metatungstate). The final heavy mineral concentrate was
microscopically  examined,  minerals  identified and counted.  Selected  mineral
grains were picked, and identification of the grains was undertaken.  A total of
250 stream sediment samples were taken,  processed and the heavy mineral content
for each sample plotted.

Silverstone used conventional and non-conventional  indicator minerals to target
a number of drainages for follow-up exploration and prospecting. After follow-up
sampling,  the north fork of the Consumes River, with Leek Springs Meadow at its
headwaters,  proved to be Silverstone's number one target in the area, based on:
(i) red garnet  content  found;  (ii) the unusual  abundance  of  green-diopside
minerals; (iii) the meadow, the topographic low, at the headwaters of the river;
(iv)  the  presence  of  chrome  spinels;  and  (v) the  paleoheadwaters  of the
ancestral, diamondiferous Mokelumne River.

Microprobe   analyses  on  the  green   diopside   minerals   showed  that  many
(approximately 15%) had a chrome and calcium ratio within the stability field of
diamond occurrences  world-wide.  The downstream samples also showed appreciable
olivines that  continued to the head of the valley.  Although  olivine is not an
"indicator  mineral",  it is present in significant  amounts in both kimberlites
and lamproite volcanics.

Based on the heavy  mineral  data,  Silverstone  staked a number  of  unpatented
mining claims,  the "Adrienne  Claims",  in 1994.  Detailed sediment sampling of
creeks and dry gulches draining the Adrienne Claims was undertaken in the summer
of 1995 by  Silverstone.  Heavy  mineral  concentrates  (total 18) contained the
following  suite of minerals:  clinopyroxenes,  diopside,  olivine,  amphiboles,
chrome spinels,  ilmenite,  orthopyroxenes,  aluminium spinels,  and an assorted
variety  of  garnets,  zircons  and  other  minerals.  These  minerals  included
conventional  indicator minerals,  chrome spinels and chromium diopside, as well
as many other minerals.  Plotting of the heavy mineral  results,  in conjunction
with the  geophysical  data,  helped select drill sites for the fall drilling of
1995.

In conjunction with the heavy mineral sediment sampling, Silverstone conducted a
detailed ground magnetic survey over the northern Adrienne Claims. A north south
trending magnetic  anomalous zone,  approximately 600 feet wide, was identified.
Five separate magnetic anomaly zones of interest were outlined.  The correlation
of the magnetic data with the heavy mineral survey,  field mapping,  prospecting
and  drilling in this  anomalous  zone  determined  the source of the  indicator
minerals.

Upon the  execution of the  Diadem-Silverstone  agreement on November 6, 1995, a
budget and program of work was agreed upon for the Adrienne Claims.  The time of
the  year  restricted  field  activities  to:  (i)  core  drilling  the  initial
geophysical  targets,  coincident  with heavy mineral  targets;  (ii) commencing
infill heavy mineral stream sediment sampling within the Area of Interest in the
vicinity of the Adrienne Claims; and (iii) prospecting/geological mapping of the
Area of Interest.

The heavy mineral  sampling  programme  that proved  successful in targeting the
Adrienne  Claims for core  drilling  and eventual  discovery  of  diamondiferous
breccia was extended to cover the  Company's  Area of Interest  centred on these
claims.  All minor  creeks and dry  gulches  were  sampled,  to the north of the
Adrienne Claims.

A total of 50 sites were sampled  prior to the arrival of the first  snows.  The
samples were processed in the same way as described  above.  It became  apparent
during the sampling and the preliminary  screening of the samples that indicator
minerals used to locate the Adrienne  Claims were present in the majority of the
gulches/creeks  to the  north of the  Adrienne  Claims.  The  sediment  sampling
program  continued until  mid-December  1995. The last samples were processed by
mid-February.  Plotting of the indicator minerals resulted in the identification
of other targets.


                                      15

<PAGE>

The  intersection of diatreme  breccia  material with indicator  minerals in the
first drill hole and the discovery of abundant  indicator  minerals in sediments
to the north of the Adrienne  Claims  resulted in a change in program.  The area
north of the Adrienne  Claims was staked (the "Judy  Claims"),  resulting in the
curtailment of the geological mapping and infill sampling. The arrival of winter
snows in mid-December 1995 halted all field operations at Leek Springs.

Core drilling  commenced in early  November,  1995. By  mid-December  1995 three
drill holes (drill holes #1, 2 & 3) had  commenced,  but only the third had been
completed.  A total of 504.5 feet of core  drilling was  completed  prior to the
onset of winter. A small processing plant to treat the drill cuttings, cores and
the heavy mineral sediment samples was erected close to Leek Springs. It was the
intention of the Company to process the drill  material to  determine  indicator
mineral  content and to check for  microdiamonds,  by  preparing  heavy  mineral
concentrations  to reduce  the volume of  material  for  shipment  to Canada for
analysis.  All drill  cores and  cuttings  were  crushed,  screened,  milled and
concentrates collected. Small samples (2 to 3 ounces) of concentrates were taken
for heavy mineral identification.

The 1995 drilling program confirmed the presence of  diamondiferous  breccias on
the property at Leek  Springs.  This is the first  known/confirmed  diamond host
rock in the  history  of  California.  A total  of 234  diamond  fragments  were
identified in the final  caustic  leach  residues of samples from drill hole #1.
Only one diamond  fragment  was  recorded  from drill hole #3. The  diamonds are
clear, white, angular fragments of different sizes, ranging from 0.06 mm to 0.68
mm and  weighing  from 3,616 to 216,972  octacarats.  One  octacarat  equals one
hundred-millionth of a carat.

In July 1996, the Company  resumed  drilling.  A total of 42 rotary holes (8" in
diameter) and 10 diamond drill holes (HQ size) were  completed  during the year.
Cuttings from the rotary holes were screened to two (2) sizes and the undersized
fraction was concentrated on a shaking table at Jackson, California.

Both sizes  were sent to a  processing  plant in  Colorado  owned by  BHP/DiaMet
Minerals. This plant produced a concentrate and eliminated the -0.5 mm material.
This process eliminated most of the micro diamonds assumed to be present,  since
they were considered economically  unimportant.  It also reduced the size of the
bulk  sample  and  resulted  in  reduced  costs  for  the  next  stage,  caustic
dissolution of each metre sampled.  The caustic  dissolution  was carried out by
the Saskatchewan Research Council laboratories between January and June of 1997.
The end result was that nine (9) holes of the 1996  drilling  program  contained
diamonds. This is in addition to the two holes in 1995's program, making a total
of 11 holes containing diamonds.

The drill  program also  outlined a huge  800-acre  crater  filled with volcanic
breccia.  During  the  drilling  program,  the  results  of  a  previous  ground
magnetometer  survey  were  interpreted  by  Geophysicist,  Dr.  George Wahl who
plotted three (3) large circular  anomalies plus several smaller ones within the
crater.  It is  significant  that each of the 11 holes  containing  diamonds  is
located on or near the circular features,  thus indicating the circular features
to be the probable volcanic vents or pipes through which the explosions occurred
and delivered the diamonds.

Work  to-date  does not allow the Company to  calculate a resource  potential or
carat-weight-per-ton.  However,  it has established  that the lamproite  deposit
covers a large area containing gem-quality diamonds. It remains to be determined
where the concentration of diamonds in economic quantity exists on the property.
To date, a total of 247 diamonds have been recovered ranging in size from 0.06mm
to 0.68mm.

Current work is designed to discover additional vents or pipes on the 75% of the
property  still  unexplored.  A due diligence  report by Dr.  Mousseau  Tremblay
indicates that the volcanic breccia is an olivine lamproite. This is significant
since the largest  diamond mine in the world,  the Argyle Mine in Australia,  is
from a lamproite  deposit.  On the basis that the diamond  bearing pipes usually
occur in clusters.  Dr. Tremblay has recommended further exploration to discover
additional pipes on the property. Following his recommendations,  the Company is
carrying  out  geological  mapping and has  commenced  an airborne  magnetometer
survey to follow-up.  After all anomalies are evaluated,  the Company intends to
resume  drilling of the ones deemed to be most favourable to contain the largest
diamonds.  The ultimate  purpose is to discover the pipe or pipes which were the
source of the large (up to 2.65 carats)  diamond  found in the rivers below Leek
Springs.






                                      16

<PAGE>


LA INDIA, NICARAGUA

Location
--------

Nicaragua  is  situated  in the heart of  Central  America,  and is its  largest
republic.  The temperature in Nicaragua is relatively stable at approximately 25
degrees Celsius,  with very little  fluctuation.  The average annual rainfall is
approximately 170 centimetres, with a dry season between December and April. The
La India gold  deposits are located  approximately  80  kilometres  north of the
capital city of Managua in the Santa Rosa municipality.

Nicaragua has excellent infrastructure,  with easy access to major world markets
via the  international  airport in Managua,  numerous  ports  located along both
coasts and an efficient road system that includes the Pan American  Highway.  As
well, the  telecommunications  system has recently been  extensively  modernized
throughout the country, with several international  telecommunication  companies
now providing services in Nicaragua.


Mining Rights and Titles
------------------------

The La Mestiza  property is held under an Exploitation  Permit by Empresa Minera
La Mestiza  S.A.  ("EMLM").The  Company  entered into an option  agreement  with
Archon Prospecting Syndicate ("Archon") on December 10, 1996, to acquire up to a
68%  interest in the 200 hectare  gold  property  known as the  Espinito-Mendoza
concessions  (hereinafter referred to as the "La Mestiza" property).  Archon had
acquired an interest in the La Mestiza  property  when it entered into an option
agreement on November 28, 1996 with EMLM. The terms of the Company's  agreement,
as subsequently amended by amending letter agreement dated November 21, 1997 may
be  summarized as set out below.  The Company was required to pay to Archon,  by
January  10,  1997,  U.S.$50,000,  in  partial  repayment  of the  approximately
$300,000 Archon had spent on exploration  activities on the property and deliver
to Archon  100,000  shares of the capital of Diadem  within 175 days of December
11,  1996.  Diadem  also  assumed the  responsibilities  of Archon in its option
agreement  with EMLM,  including  a payment of  U.S.$110,000  to EMLM in partial
repayment of prior expenditures by EMLM on the concessions. Within 350 days from
December 11, 1996,  Diadem was required to pay Archon an additional  U.S.$75,000
and deliver  200,000  common  shares of Diadem.  The Company has  delivered  the
shares and has paid U.S.$5,000; the US$70,000 balance is to be paid on or before
March 25, 1998. Within 500 days of December 11, 1996, Diadem will be expected to
pay  Archon an  additional  U.S.$100,000  and  deliver,  subject  to  regulatory
approval,  an additional  200,000 common shares of Diadem.  Within 1,000 days of
December  11,  1996,  Diadem  will  be  expected  to pay  Archon  an  additional
U.S.$125,000 and deliver,  subject to regulatory approval, an additional 200,000
common  shares  of  Diadem.  Further,  Diadem  will  be  required  to  fund  all
exploration  and  development   expenditures  through  to  the  commencement  of
production of La Mestiza.  This program is to be completed in five phases,  with
Diadem earning a 13.5% interest upon the completion of each of the phases,  such
that upon payment of the foregoing fees and shares and completion of the phases,
Diadem shall have earned a 65.8% interest with 2.5% interest retained by Archon.
Diadem shall have the option of increasing its interest to 68.25% by paying EMLM
the sum of  $200,000  within  two (2) years  after the date of  commencement  of
commercial production.

Regional History
----------------

Nicaragua was a major gold producer in the 1800's and 1900's, beginning with the
discovery  of gold at La  Libertad  in  central  Nicaragua  and  Bonanza  in the
northeast in 1880. Gold mining reached its peak in the 1940's and 1950's, during
which period  Nicaragua  ranked as the 14th largest gold  producer in the world,
with an average  annual  output of over  300,000  oz.  Despite  this  history of
production,  it is believed that many of Nicaragua's  known gold deposits remain
relatively unexploited.

                                      17


<PAGE>

The La India District was first mined by Noranda Mines Inc. during the period of
1936-56,  extracting  approximately  800,000  metric tons of ore with an average
yield of 9.5  grams of gold per  metric  ton of ore and 10 grams of  silver  per
metric ton or ore.

In 1983,  INMINE,  the Nicaraguan Mining  Institute,  proposed an evaluation and
exploration  program of the La India  district,  that was  conducted  by Russian
geologists  from the  Zarubezhgeologia  organization.  Their  final  report  was
presented  in 1991 and  their  calculations  revealed  a  proven,  probable  and
possible  reserve of 2.5 million  tons with a probable  average of 2.5 grams per
ton from four veins: Espinito, Tatiana, Buenos Aires and Jicaro.

Exploration Results
-------------------

There is no record of past production on the La Mestiza  concession;  however, a
program by Russian  scientists  working with the Nicaraguan  government  agency,
INMINE,  describes underground workings including exploration drifts and shallow
shafts.  These may have been  excavated by Noranda in the 1940's in  conjunction
with their  production  facility six (6)  kilometres to the south of La Mestiza.
The INMINE group sampled these  underground  workings,  drilled 31 diamond drill
holes and dug surface trenches to explore five (5) of the veins on the property.
Based on the results of the INMINE work, the Company's  consultant has estimated
proven  reserves of 455,000 tonnes grading 9.23 gm/tonne,  probable  reserves of
1,449,000  tonnes of 8.21 gm/tonne and possible  reserves of 2,600,500 tonnes of
10.90gm/tonne.  This makes a total of 4,962,098 short tons averaging 0.29 ounces
per ton  containing  1,440,000  ounces  of gold.  Since  the  Company  commenced
exploration on the property, an additional seven veins have been identified with
sample results varying from 5 gm/tonne to 19.50 gm/tonne.

The  Company's  consultant  has  assumed a mill  throughput  of a minimum of 500
tonnes per day and has estimated the mining and milling costs to be in the range
of US$170.00 to US$200.00  per ounce.  The  consultant's  report states that the
Tatiana and Buenos Aires veins  appear to be  expanding  in grade and  thickness
with  depth and if the  expansion  holds  true for other  veins,  a larger  mill
capacity  will be  warranted.  The  Company is driving a new adit to explore the
Buenos Aires Nos. 1 and 2 veins and the Jicaro vein.  In addition,  the Espinito
vein explored underground by the INMINE group, which established proven reserves
of 175,500  tonnes of 7.48  gm/tonne for a length of 800 metres on three levels,
is being opened up via an adit on one level.  The Company intends to establish a
pilot  plant  to  treat  bulk  samples  from  the  veins  and to  establish  the
metallurgical characteristics of the ore prior to installing a production plant.

Micon  International  Limited  was  retained  by the  Company to carry out a due
diligence  examination  of the  property.  Micon  concluded  that La Mestiza has
excellent potential for becoming a low cost (500-800 tpd) mine. Furthermore, the
report  concluded  that there was  potential  for the  outlining of further gold
resources and discovery of new gold mineralization.

CANADA

PEKAN RIVER AND SARAH LAKE, QUEBEC

Location and Access
-------------------

The Pekan River Prospect is located in Courchesne Township,  50 kilometres south
of the  nearest  town,  Fermont,  Quebec.  The Sarah Lake  Project is located in
Desportes  Township,  90 kilometres  southeast of Fermont.  Both  properties are
accessible by  float-equipped  or ski-equipped  aircraft from Wabush,  Labrador.
There is limited road access along the lines  supplying  hydroelectric  power to
the areas. Fermont has rail access to the port of Port Cartier.

The Pekan River  property  was selected as one of the many  untested  gossans or
showings of copper-nickel-  copper mineralization in the area to the east or the


                                      18


<PAGE>


south of the Labrador Trough.  There are some similarities to the geology of the
recent copper-nickel  discovery at Voisey's Bay, Labrador.  Both occurrences are
in gneissic rocks of Archean age. Both occurrences have copper-nickel and cobalt
mineralization,  with negligible platinum and gold. Pekan River and Voisey's Bay
sulfides  both  occur at the base of  ultramafic  rock,  which are  overlain  by
lighter  coloured  rocks.  The two deposits differ in the Pekan River deposit is
conformable with the overlying rock,  while at Voisey's Bay, the  nickel-bearing
rocks cut across both the underlying and overlying rock units.

Mining Rights and Titles
------------------------

The Company currently holds an 80% interest in the subject claims.

By agreement dated July 21, 1995 as amended by letter  agreements  dated June 4,
1996,  and July 31, 1996  between the Company and Beaver  Syndicate  ("Beaver"),
Suite 360, 4100 Yonge Street,  Toronto,  Ontario, M2P 2B5, the Company agreed to
purchase a majority interest in two Mineral Exploration Permits (the "Permits").
The first Permit,  #1017, located in Courchesne Township,  Quebec was designated
the Pekan  River  Prospect.  By letter  agreement  dated  June 4,  1996,  Beaver
confirmed  that they have  staked  another  property,  Permit  #1106  located in
Desportes  Township,  Quebec  and  known as the  Sarah  Lake  Project  (formerly
referred to as Lac Edgar Project), and other than a fee of $5,000, no additional
consideration  was paid by the Company to include the  additional  permit in the
July 21, 1995 agreement.

Pursuant to the July 21, 1995 agreement,  as amended, the Company optioned a 51%
interest in the Permits. To acquire the 51% interest,  the Company was required,
on or  before  May  30,  1996,  to  (i)  pay to  Beaver  the  sum of  $9,200.00,
representing  Beaver's  out-of-pocket  expenses  in  prospecting  and rental fee
payments on the Permits (ii) deliver to Beaver $40,000.00 worth of the Company's
common shares,  and (iii) commit to complete one year's  assessment  work on the
Permits.  These  conditions  were  fulfilled by the Company and by doing so, the
Company secured an option to acquire a further 19% interest in the Permits.  The
Company has been  advised by Beaver that the #1017  exploration  permit is valid
until May 23, 2000 and is in good standing until May, 1998 at which time renewal
fees must be paid and suitable assessment work filed. Exploration permit 1106 is
valid until October 25, 2000,  provided the Company pays annual renewal fees and
files assessment work within the time required.

The option to acquire a further 19% interest,  increasing the Company's interest
in the Permits to an aggregate of 70%, had to be exercised by the earlier of (i)
October 31, 1996, and (ii) 30 days from receipt of Montreal Exchange approval to
the issue and  listing of the $60,000  worth of common  shares in the capital of
the Company.  To exercise the option, the Company was required to (i) deliver to
Beaver  $60,000  worth of common  shares in the  capital  of the  Company;  (ii)
complete the first year's annual rental payments; and (iii) commit to complete a
second year of assessment work on the properties.  The shares were issued within
the time required. Exercise of this option provided an option for the Company to
acquire an additional 10% interest in the Permits.

To increase its interest by an additional 10%,  bringing its aggregate  position
in the Permits to 80%, the Company was  required,  on or before May 30, 1997, to
deliver to Beaver an additional $60,000 worth of common shares in the capital of
the Company.  The shares were issued within the time required.  Exercise of this
option  provided an option for the Company to acquire an additional 10% interest
in the Permits.

To increase its  aggregate  position in the Permits to 90%, the Company would be
required, on or before May 30, 1998 to deliver to Beaver $60,000 worth of common
shares in the capital of the Company.  Beaver retains a one and one half percent
net smelter return on the property.

Regional History
----------------

Copper and nickel were  discovered on the Pekan River  Property in 1952, as part
of the exploration  activity seeking the extension of the Wabush iron range. The

                                      19

<PAGE>

claims were acquired by a junior exploration  company,  whose geologists carried
out a detailed  program of surface  prospecting and trenching,  a reconnaissance
magnetometer survey, and surface mapping.

This program indicated sulfide  mineralization in a hill of ultramafic rock near
Pegma Lake overlain by  unmineralized  gabbro and gneiss,  and traceable for 600
feet along strike.  The lower contact of the ultramafic unit was not exposed.  A
series of 27 packsack drill holes was completed in an attempt to sample the base
of the sill,  considered  to be  favourable  from the  information  from surface
prospecting.  Because of the attitude of the sill,  dipping  fairly steeply into
the hill,  only two of the 27 packsack holes succeeded in reaching their targets
since target depth exceeded the 25 metre capacity of the drill.

In 1988,  another  junior mining company  acquired  rights over the property and
carried out a reconnaissance  sampling program over various sulfide  occurrences
in the district. Only the Pegma Lake copper-nickel occurrences and a nearby zinc
occurrence showed any significant base metal values.

Regional Geology and Mineralization
-----------------------------------

The  properties  are  included  in the  Grenville  geological  province  of late
Precambrian  (Hadrynian) age. The most recent  metamorphic event occurred around
900 million years ago. The Grenville  Geological Province is a major sequence of
highly  metamorphosed rocks to the south and east of the Archean Keewatin Rocks,
predominantly  the Abitibi  Belt of Quebec and Ontario.  The  contact,  which is
occasionally  a fault  between  the Archean  (2-3 to 3-5 million  years) and the
Grenville rocks is called the Grenville Front.

In the  Fermont-Wabush  region the Grenville  Front is a  metamorphic  boundary,
where the Early  Proterozoic (1.5 million years) sediments are  metamorphosed to
schists,   gneisses,  and  recrystallized  iron  formation  (taconite).  In  the
Grenville rocks of Quebec,  ten nickel deposits have been  identified,  of which
two  have  been in  production.  All ten are  located  in  sills,  with  sulfide
mineralization controlled by the mafic or ultramafic intrusives.

Bedrock  in the  immediate  vicinity  of the Pegma  Lake  Deposit  is the highly
metamorphosed  equivalent of the sediments of the Ashuanipi formation consisting
of  high  grade   schists  and   gneisses,   crystalline   dolomite   and  minor
recrystallized  iron  formation.  These units are derived  from the  sandstones,
shales,  carbonates  and iron  formations  which are the source of production at
Schefferville, Labrador City, Wabush and Fermont.

The  ultramafic  sill  at  Pegma  Lake  is  intruded  along  the  contact  at  a
garnet-quartz biotite gneiss below and a more aluminous graphite-bearing biotite
gneiss above.  Ultramafic rocks and the intruded  gneisses dip moderately to the
east. To the east, in the Sarah Lake area, the pervasive rock types are gneissic
granite representing a higher degree of metamorphism and depth of burial.

In addition to the Pegma Lake and Sarah Lake  ultramafic  sills,  Quebec  M.E.R.
Report  No.  ET9101  describes  the  location  of ten  other  ultramafic  bodies
extending south from Pegma Lake. Sulfide  mineralization  including  pyrrhotite,
pyrite,  chalcopyrite  and pentlandite  attains  proportions of up to 10% at the
Sarah Lake, Pegma Lake and Guillimin occurrences. The ultramafic massif at Sarah
Lake is impoverished in sulfides in its southern (upper) part. At Pegma Lake the
sulfides are richest in the lower  portion.  The lower  contact at Sarah Lake is
not exposed.  All of these deposits are classified as "orthomagmatic".  The term
implies  that  the  sulfides  were   precipitated   at  the  same  time  as  the
crystallization  of the  rock-forming  minerals.  Such  deposits  are  marked by
disseminated  "net-textured"  sulfides  in the upper part of the  intrusive  and
frequently contain more massive sulfides at the base.

Exploration Results
-------------------

PEGMA LAKE SULFIDE DEPOSIT

At Pegma  Lake,  the  ultramafic  portion of the sill is up to 70 meters in true
thickness,  with the western and  northwestern  sectors removed by erosion.  The

                                  20

<PAGE>

geophysical survey over this area showed a strong magnetometer response from the
ultramafic sill, extending for 4,1000 feet from a line 1,500 feet north to 2,600
feet south.  The Company carried out a surface  sampling program together with a
review  of  available   geological  data.  This  sampling  confirmed  widespread
mineralization  at the base of an ultramafic  sill.  Based on this  information,
Diadem carried out magnetometer and electromagnetic surveys of part of the Pekan
River  property.  In  February,  1996 Diadem  carried out a 3,000 metre  diamond
drilling  program.  This program  consisted of 24 drill holes,  including  eight
drill tests down dip from the original  find.  The other 16 holes tested various
electromagnetic conductors in other parts of the survey area. In July, 1996, the
Company  announced  that  mobilization  was  underway to resume  drilling of the
copper-nickel  deposit at Pekan River.  After drilling resumed in July, 1996, 47
additional holes were drilled, resulting in a total of 71 holes drilled to date.

The  assays  returned  from the drill  holes can be  separated  into two  zones,
aggregating  from 2.5 to 64 metres in thickness.  The content of both copper and
nickel  increase  as the  lower  content  of the  sill is  approached.  From the
information  generated,  there appears to be an improvement in base metal grades
and thickness of mineralization to the south and east. The holes,  together with
a coinciding magnetic anomaly,  have confirmed a north-south strike length of at
least 860 metres of an  ultramafic  sill.  The sill outcrops on the property and
continues  with a flat dip for  approximately  1.5  kilometres to the east.  The
intercepts of the  mineralization  in the drill holes indicates that the deposit
increases in thickness to the south and the east,  with a higher nickel content.
The deposit is open for extension in both directions.  Overall,  approximately 2
million tons of  copper-nickel-cobalt  mineralization were indicated by drilling
in 1996,  which were calculated to contain 0.62% copper,  0.35% nickel and 0.03%
cobalt.

Geopysical surveys have indicated  additional  targets on the property.  Further
drilling is required to bring this  property to  feasibility  study  stage.  The
Company  intends to joint  venture  the  property  to finance  the next stage of
exploration and development.

The later drilling also outlined a zinc prospect,  situated at three  kilometres
north of the copper-nickel deposit. Mineralization was encountered in each of 13
drill  holes put down  to-date in the area  roughly  250 metres by 100 metres in
size with values of 3% to 4% zinc over 2 to 10 metres in nine  holes,  and up to
9.4% zinc over 1 metre.

The  zinc   mineralization   occurs  within  a  series  of  marble  units.   The
mineralization  has been traced on surface for 800 metres by drilling to a depth
of  250  metres.  However  a  recent  geochemical  survey  by  Diadem  indicated
mineralization  may continue for 6 km north of the drilled area. A joint venture
partner is being sought to further develop this deposit.

THE SARAH LAKE PERIDOTITE

The Sarah Lake Permit, 5,200 hectares,  is situated 7 km south-east of the Pekan
River permit, and was staked by the Beaver Syndicate on behalf of Diadem because
of an  ultramafic  sill  similar  to the one at  Pekan  River.  Surface  samples
analysed up to 2.15%  copper,  0.3% nickel,  0.61 gm/tonne  gold,  0.64 gm/tonne
platinum and 0.60gm/tonne palladium. Twelve short holes confirm an average metal
content of 0.35% copper, 0.03% nickel and 0.30gm/tonne of gold,  equivalent over
an area of 1,000  metres by 400  metres.  The most  encouraging  hole was No. 8,
which  intersected  10.2 metres  averaging  0.75% copper,  0.12% nickel and 0.35
gm/tonne of gold,  platinum  and  palladium.  The sill has not been  explored at
depth and future  work has been  recommended  to test the base of the sill where
the metal values are normally the highest in ultramafic  sills.  A joint venture
partner is being sought to further develop this deposit.






                                      21


<PAGE>



MERCURY, QUEBEC

Location and Access
-------------------

The  property  covers an area of 11,500  hectares in northern  Quebec,  near the
Labrador border. The property covers seven peridotite intrusives,  and four have
been found to contain measurable  nickel-iron sulfides traceable for up to eight
kilometres.

Mining Rights and Titles
------------------------

The Company currently holds an 80% interest in this property as described below.

The Company entered into a letter agreement with Trinity  Syndicate  ("Trinity")
on July 21, 1995,  subsequently amended by letter agreement dated July 31, 1996,
whereby  the  Company  agreed to  acquire a  majority  interest  (51%) in Quebec
Mineral  Exploration  Permit (the "Permit") #991. To acquire this interest,  the
Company was  required  to pay to Trinity  the sum of $16,300 to cover  Trinity's
out-of-pocket  expenses,  deliver $40,000 of common shares in the capital of the
Company and commit to complete one year's worth of assessment  work. The Company
completed the delivery of an aggregate of 80,000 common shares of the Company on
January 29, 1996, at a price of $0.50 per share. Exercise of this option secured
an option for the Company to earn a further 19% interest in the Permit.  Trinity
has  advised  the  Company  that the  Permit  is  valid to May 11,  2000 and the
property is in good standing until May, 1998, at which time  additional  renewal
fees will be payable and  assessment  work would need to be filed,  and annually
thereafter.

The option to earn a further 19% in the Permit, bringing the Company's aggregate
interest to 70% was  exercised by (i)  delivering  to Trinity  $80,000  worth of
common shares of the Company, (ii) completing the first year's annual rentals on
the property and (iii)  committing to complete a second year of assessment work.
Exercise  of this  option  also  secured an option for the  Company to acquire a
further 10% interest in the Permit.

To acquire an additional  10% interest in the Permit,  the Company was required,
on or before May 16, 1997 to deliver to Trinity  $80,000  worth of common shares
in the capital of the Company.  This was completed and secured an option for the
Company to acquire a final 10% interest in the property.

To bring its  aggregate  interest  in the  Permit to 90%,  the  Company  will be
required,  on or before May 16,  1998 to  deliver  to Trinity  $80,000 of common
shares in the capital of the  Company.  Trinity  also retains a one and one-half
percent net smelter return on the property.

Exploration Results
-------------------

The  property  was  optioned  on the basis of seven known  peridotite  intrusive
bodies and on the border of one of these was found a boulder  containing massive
sulphides assaying 0.5% copper, 0.3% nickel and 0.1% cobalt.

During the summer of 1997, the Company carried out magnetic and  electromagnetic
surveys.  Prior to  winter  shut-down,  one hole  was  drilled  in each of three
coincident electromagnetic/magnetic anomalies. The results are pending.

LAC DE GRAS AREA, NORTHWEST TERRITORIES

This property is located 300 kilometres by  ski-equipped  aircraft from the city
of Yellowknife, the capital of the Northwest Territories.  There are no roads to
the property,  but winter road access via Artillery Lake, 35 kilometres south of
Fletcher  Lake is feasible.  The climate is  subarctic,  with winter  conditions
affecting field work from October to June.


                                      22

<PAGE>

Mining Rights and Titles
------------------------

Pursuant to an agreement dated April 21, 1993, the Company initially acquired an
option to secure a 60% interest in the property from Noront  Resources  Limited,
11th Floor, 365 Bay Street, Toronto, Ontario, M5H 2V1 ("Noront"). The agreement,
as  subsequently  amended,  provided  that in order to exercise  this option the
Company would be required to:

(a)   Issue 100,000  common shares of its capital stock to Noront  following the
      signing of the agreement; these shares were issued on December 22, 1993;

(b)   Issue a further 100,000 common shares of its capital stock to Noront prior
      to April 21, 1995; and

(c)   Complete $1,000,000 in work prior to February 12, 1999.

The  original  staker  of the  property,  Northern  Geophysics  Ltd.,  Box  2045
Yellowknife,  Northwest  Territories,  retained a royalty  of 3% on any  diamond
production  and a  1-1/2%  net  smelter  royalty  on  any  base  metal  or  gold
production.

On February 12, 1994, the Company and Noront entered into an agreement with Pure
Gold Resources Inc. ("Pure Gold"),  which was amended by an agreement dated with
effect  June 7, 1994,  (the "Pure Gold  Agreement")  pursuant to which Pure Gold
agreed to purchase a 40%  undivided  interest in the Fletcher  Lake property pro
rata from each of the Company and Noront by issuing 100,000 common shares of its
capital  (60,000 to the  Company),  incurring  $500,000 of  expenditures  on the
property  prior to  February  12,  1996 and  maintaining  the  property  in good
standing to March 15,  1996.  As a  consequence,  the  Company had no  financial
obligations  with respect to the property  until the  completion  of Pure Gold's
work. Pure Gold failed to complete the work, with the result that several of the
claims  were  forfeited.  In order to  mitigate  damages,  Pure Gold  offered to
re-stake  some of the lost claim,  and this  resulted in the  re-acquisition  of
certain  of the  claims.  The  Company  and Noront  are  attempting  to reach an
accommodation  with Pure Gold  concerning  its breach,  and in the interim,  the
Company and Noront have agreed between themselves that the Company will complete
a magnetic survey of the area in an attempt to locate drilling targets which was
completed in June,  1996. The Company is currently  interpreting  the results of
the survey. By agreement dated July 31, 1996, Noront and the Company agreed that
the Company may earn a 60% interest in the claims  maintained  and in additional
staked claims by spending an aggregate of $250,000 of additional  expenditure on
or before March 15, 1999.

This  property  has a potential  for  diamond-bearing  kimberlite  pipes.  It is
located  near  Fletcher  Lake,  adjacent  to  Mountain  Province  Mining  Inc.'s
announced diamond discovery.  Reconnaissance sampling of soil for heavy minerals
reported the presence of kimberlite  indicator  minerals.  Diadem  contracted an
airborne  magnetometer survey in June 1996 to identify the kimberlite sources of
the indicator minerals. Possible sources up-ice from the indicator minerals have
been  identified.  Follow-up soil sampling and mapping is recommended to confirm
whether these magnetic anomalies are due to kimberlite.

MINERAL RESOURCE EXPLORATION AND DEVELOPMENT IN INDONESIA

Geography
---------

Indonesia is the world's largest archipelago,  with over 13,000 islands covering
an area of over 5,000  kilometres,  located along the equator.  The land area of
Indonesia  is  approximately  1.2 million  square  kilometres.  The five largest
islands are Sumatra,  Java,  Kalimantan  (formerly  Borneo),  Sulawesi and Irian
Jaya.  Kalimantan is in the central part of Indonesia,  and is the third largest
island in the world. With over 4,400 volcanoes,  including  active,  dormant and
extinct,  Indonesia is the most volcanic country in the world. The population of
Indonesia is estimated at approximately 180 million people, making it the fourth
most populous country in the world.


                                      23


<PAGE>

Mining History in Indonesia
---------------------------

Indonesia  was a Dutch colony from the turn of the 16th century  until  Japanese
occupation in World War II. The present-day  mining industry  started with Dutch
exploration  and  development in the mid-19th  century.  Following World War II,
when Indonesia declared itself  independent,  all mining activities were carried
out by government-owned  companies.  Foreign companies were not allowed in until
1967, when revisions to the mining laws were enacted.

Under the  Indonesian  Constitution  of 1945,  the  Government  of Indonesia has
sovereignty over all natural  resources.  The Mining Law and Foreign  Investment
Law of  1967  allowed  foreign  companies  into  Indonesia  to  commence  mining
activities  in two ways,  through a Contract of Work  ("COW") or through a Kuasa
Pertambangan mining authorization ("KP").

KPs and COWs
------------

KPs

A KP is the principal  mining right that is available to Indonesian  miners.  In
fact, KPs can only be held by Indonesian  citizens or Indonesian owned companies
or  partnerships,  the only way a foreign  company  can  participate  in a KP is
through a contract with the Indonesian  owner.  There are various levels of KPs,
and the  appropriate KP depends on the stage of development of the area covered.
As work in an area progresses,  a KP holder must apply for the next level of KP.
The first level KP is the "General  Survey",  which is valid for a period of one
year, with a one year extension available;  The "Exploration" KP has a period of
three years, with a one year extension;  The  "Exploitation" and "Processing and
Refining" KPs are each valid for 30 years,  with  consecutive  10 year extension
available;  "Transportation"  and "Sales" are both for 10 year periods with five
year extensions available.  As the level of KP progresses,  the maximum area per
KP and per KP holder  decreases.  The  Director  General of General  Mining (the
"Director  General") has the discretion to grant General Survey and  exploration
KPs  covering  an area  greater  than the  respective  areas  stated  above,  in
consideration of technical and economic factors.

The formal  procedure is for the KP holder to obtain  approval from the Minister
of Mines  and  Energy,  through  the  Director  General  regarding  co-operative
arrangements with a foreign investor, although practically,  this requirement is
applied only where there is a proposed  direct  investment by the formation of a
PMA company  (see  below) for the  purpose of  entering  into a Contract of Work
relating to the KP area. It should be noted that a KP holder has rights to carry
out activities  specified by the KP, but does not have title to the land,  which
remains with the State, or private owner, as the case may be.

An  applicant  for  the  General  Survey  KP or an  Exploration  KP  must  pay a
seriousness bond of US$5 per hectare.  If the area of the KP exceeds the maximum
area allowed, the cost of the bond increases to US$10 per hectare.

COWs

The COW facility has been in use since 1967, when Freeport McMoran Copper & Gold
Inc. began  development of the  Grasberg/Erstberg  copper-gold  deposit in Irian
Jaya. This was a "first  generation" COW, and the system has been  progressively
refined,  with  each  set  of  amendments  being  incorporated  into  successive
"generations"  of COWs to reflect such things as changes in  taxation,  security
deposits, minimum expenditure requirements,  changes in socio-economic benefits,
environmental  concerns.  The current COW  applications  (those  submitted after
January, 1996) are for seventh generation agreements.

Foreign  mining  tenure in Indonesia  can only be held  through a COW.  COWs are
agreements with the Indonesian government, pertaining to a particular project or
area of land,  covering  all  aspects of a  project,  from  exploration  through


                                      24


<PAGE>

development and production.  The maximum area for a COW is 250,000 hectares, but
there is  discretion to grant a COW that covers a larger area. A COW is formally
granted by the President of Indonesia,  after  negotiation  with the appropriate
government  agency,  depending on the type of minerals being sought.  A COW will
only be  granted  over  areas  with  pre-existing  KP's if the  owner  of the KP
consents to its  incorporation  in the COW.  This usually  involves the KP owner
becoming a minority  shareholder  in the PMA company (see below)  established to
enter into the COW.

A COW is held by an Indonesian  domiciled  company,  known as a Penanaman  Model
Asing company  ("PMA"),  which is a foreign  investment  company  established to
enter into a COW and to  undertake  the  exploration  and mining  activities  on
behalf of participating interests. The COW applicants must form a PMA company to
enter into a COW, which is executed by the PMA and not the applicant, who is not
a party to the COW.  The PMA is  classified  as a "Perseroan  Terbates"  ("PT"),
which is largely equivalent to a Canadian limited liability  company.  Most PMAs
involve  direct  equity  investment by the foreign party in joint venture with a
minority Indonesian  partner.  Under first to fifth generation COWs, the maximum
foreign  shareholding in a PMA was limited to 90% of the paid-up capital and the
foreign  partner  was  obliged  to  provide  the  Indonesian  partner  with  the
opportunity to increase its shareholding to more than 50% between the years 5 to
15 of the  contract.  Sixth and seventh  generation  COWs  permit  100%  foreign
ownership  with no obligation to provide an Indonesian  partner with  increasing
partnership.

A PMA can only  enter  into  one COW  and,  as a  contractor  to the  Indonesian
government,   is  responsible  in  the  contract  area  for  exploration,   mine
construction,  mine  production  and marketing and sales of product.  The PMA is
responsible  for the  management  of the  operation,  is entitled to all profits
derived  from  the  operation  and also  bears  the risk  associated  with  such
operation.

COWs are divided into five separate stages,  which are listed below.  Each stage
has a  specific  initial  period,  and each  initial  is  usually  eligible  for
extension upon  application by the PMA. The PMA must commence the general survey
period  within  six  months of the  execution  of the COW.  Further,  the PMA is
obligated to  relinquish a certain  portion of the original  area covered by the
COW at the conclusion of each stage.

--------------------------------------------------------------------------------
STAGE              INITIAL PERIOD (+                CUMULATIVE PERCENTAGE
                   EXTENSIONS YEARS)                OF ORIGINAL AREA TO BE
                                                    RELINQUISHED %
--------------------------------------------------------------------------------
                         1
General Survey     1 (+1)                           25
--------------------------------------------------------------------------------
Exploration        2 (+1+1)                         50, by the end of yr. 2
--------------------------------------------------------------------------------
Feasibility Study  2 (+1+1)                         75, with remaining area not
                                                    more than 62,5000 hectares
--------------------------------------------------------------------------------
Construction       Schedule to be approved by the   Mining Area identified in
                   Ministry of Mines and Energy     feasibility report to be
                                                    approved by the Minister.
--------------------------------------------------------------------------------
                     2
Operating          30                                         ----
--------------------------------------------------------------------------------

1 Generally, any unexpired period relating to a SIPP may be added to the general
survey period

2 Seventh  generation  draft COWs require the  operating  period to begin within
seven years of the beginning of the general survey period.

At the end of the  contract,  the PMA has the right to apply  for an  extension,
which may be on different terms. The government guarantees sole rights to access
to  minerals  in the  COW  area  and  is  responsible  for  assisting  with  the

                                      25

<PAGE>

acquisition  of land  required  for  development,  and  will  resettle  affected
residents if required,  with compensation paid by the PMA. The PMA is subject to
minimum  expenditure  requirements  during the  general  survey and  exploration
periods,  and must  complete  approved  budgets  and pay rental fees on the area
under the COW  throughout  the term of the  agreement.  When a COW  reaches  the
production stage, a monthly royalty is payable to the Indonesian Government.

Obtaining  a COW is a  several  step  process.  The  first  step  is to  file an
application with the Director General. A "seriousness" bond, which is refundable
within six months after receipt of the application,  of US$5 per hectare of area
applied for must be deposited at the time of application. If the COW applied for
exceeds the maximum area  prescribed  above,  the cost of the bond  increases to
US$10 per hectare  for the area in excess.  If the ground is  available  and the
Director  General has no objection,  he will issue a document  approving the COW
"in principle", which represents a preliminary title to the COW.

After an approval "in principal" has been granted by the Director  General,  the
applicant may apply for a SIPP, to begin preliminary  survey activities  pending
the processing of the application  (see below).  Also after the Director General
has given his  approval  "in  principle",  the  Mines  Department  will give the
applicant  a draft COW,  and the  parties  negotiate  the terms of it. When both
parties  are  satisfied,  representatives  from  the  applicant  and  the  Mines
Department initial the draft COW.

The  final  step  is the  approval  of the  COW  by the  Indonesian  Government,
particularly the Parliament,  the Foreign Investment Co-ordinating Board and the
President.  The Minister of Mines and Energy is then authorized by the President
to sign the COW on behalf of the Government of Indonesia.

There  is  currently  a six to  twelve  month  wait  to  have  COW  applications
processed.  Companies are able to commence  exploration  activities  during this
application period only by applying for a Preliminary Survey Permit ("SIPP") and
posting the seriousness bond required at the time the application for the COW is
posting the seriousness bond required at the time the application for the COW is
lodged,  which replaces the former performance bond of U.S.  $100,000.00 per COW
application and U.S. $0.25 per hectare. No mining is permitted under a SIPP, but
the applicant may conduct geological, geochemical and geophysical investigations
in the area reserved for the COW.

The grant of a SIPP is not a guarantee  that COW will be granted,  but the Mines
Department  will not issue other mining rights  relating to areas covered by the
SIPP. A SIPP is valid for one year,  but may be extended on  application  to the
Director  General.  The period of  extension  is included as part of the general
survey  period under a  subsequently  granted COW. The SIPP holder must submit a
complete report of its activities  under the SIPP following  expiry of the SIPP.
Any  expenditure  incurred  by the SIPP holder can be  amortized  and taken into
account when determining compliance with the minimum expenditure requirements of
any subsequently granted COW.

BELITUNG ISLAND, INDONESIA

LOCATION AND ACCESS

Belitung Island is located between Sumatra and Kalimantan,  400 kilometers north
of  Jakarta.  It is the most  southerly  of the 1,000  kilometer  string of "Tin
Islands".  The Kelapa Kampit Mining camp is located via paved road 60 kilometers
northeast of the capital  city of Tannung  Panda,  and the airport  there offers
daily air service to Jakarta.  The Kelapa Kampit  townsite is owned by PT Gunung
Ki-Kara  Mining  ("GKM") and  includes  50 houses and  offices,  change  houses,
laboratory.  and guest house. The property is located 32 kilometers northwest of
the Port of Manggar, which is capable of handling 1,250 tonne cargos. There is a
reasonable  road network and a reservoir  that supplies  process water and water
for  domestic  use.  The  climate  is  moderate  and  tropical,  with an  annual
precipitation of 250 cm.




                                      26


<PAGE>



Mining Rights and Titles
------------------------

By agreement  dated  September 30, 1995 between the Company and GKM, the Company
and GKM agreed to form a joint  venture to develop  base metal  deposits and tin
deposits on Belitung Island.  The property which is the subject of the agreement
contains one of the most  important  known primary tin deposits in the southeast
Asian tin belt.  Pursuant to this agreement,  the Company acquired the rights to
earn a 90% interest in the property for an  expenditure  of $1,000,00  U.S. over
two years and payment of 100,000 common shares in the capital of the Company. By
agreement made with Bresea  Resources  Ltd.  ("Bresea") on February 6, 1996, the
Company  agreed to include  Bresea in the joint venture and transfer to Bresea a
right to  acquire a 60%  working  interest  in the  property,  with the  Company
retaining a right to acquire a 30% working interest in the property.  Bresea was
required to pay the first  $100,000  U.S.  of  exploration  expenditures  on the
property.

From the work  conducted  to-date,  Diadem  has  earned a 30%  interest  in this
zinc-lead-silver  and tin  property.  The property was mined as a tin deposit by
Billiton  Mining from 1905 until the war interrupted  production in 1941.  After
the COW system of permits was instituted by the government, BHP Minerals ("BHP")
acquired  a  second  generation  COW to mine  tin in  1972.  Its work led to the
identification of a zinc-lead-silver  zone in three sedimentary beds parallel to
the tin bed. Although not explored for base metals,  these beds were intersected
by drill holes and adits from  surface.  As a result of this  exploration  and a
subsequent geochemical survey, these beds were traced for a strike length of 7.5
kilometres.  Tin mining ceased when the price of tin collapsed in the mid-1980's
and the C.O.W.  reverted to the Indonesian  partner,  P.T. Gunung Ki-Kara Mining
("GKM").

Over US$2 million has been spent since mid 1996 by the joint venture partners. A
due  diligence  report by the  Company's  consultant  summarized  the results as
13,000,000  tonnes of indicated  and inferred  resources  within a 1.5 kilometre
section of 7.5 kilometre indicated strike length averaging 8.5% zinc, 4.25% lead
and 2.00 ozs. silver per tonne.

Bresea was notified by the  Indonesian  govrenment in May, 1997 that all mineral
exploration  activities of Bre- X Minerals Ltd. and its affiliated companies had
been suspended.  Bresea is an affiliated company of Bre-X,  owning more than 20%
of its issued common shares. As a consequence, Bresea has advised the Company of
its  intention  to divest  itself of its  interests  in the joint  venture.  The
Company is currently  looking for a joint venture  partner to replace  Bresea on
this project and the Company does not intend to allocate any exploration funding
for this project until a new joint venture relationship is formed.

The Company also formed joint ventures with Bresea to obtain 7th Generation COWS
on two other  properties on Belitung  Island.  Tikus is a tin plus lead zinc and
copper  prospect,  while Lilangan is a gold prospect.  The  applications for the
COWs have not yet been  approved by the  Indonesian  government.  The Company is
currently  looking for a joint  venture  partner(s)  to replace  Bresea on these
projects as well and the Company  does not intend to  allocate  any  exploration
funding for these projects until new joint venture  relationships are formed for
each.

INTERESTS IN WASECO RESOURCES INC.

In September 1995,  Diadem acquired an option to acquire up to 60% of the shares
of P.T.  Ashton Mercu Buana Mining  ("AMBM"),  an Indonesian  company with a 4th
generation COW covering the Tewah alluvial deposit in Kalimantan.

This deposit was drilled in the late 1980's by a joint  venture  between  Ashton
Mining and AMBM.  A resource  of 450  million  cu.  metres of river and  terrace
gravels containing 2.8 million ounces of gold was established.
Ashton subsequently withdrew.

The aagreement between the Company and AMBM provided that the Company could earn
its 60%  interest  in the shares of AMBM by  completing  a bankable  feasibility

                                      27

<PAGE>

study.  An option of this interest was  transferred to Waseco in exchange for up
to 7,000,000 common shares of Waseco.

Waseco began its work by completing due diligence  drilling of the Kahayan River
with lines of holes drilled between the lines of the previous joint venture. The
feasibility study,  conducted by alluvial consultants Alcon Ltd., Thailand,  was
completed in October 1997 and approximately  U.S.$1,400,000 was spent by Waseco.
The study has confirmed  proven,  probable and possible  reserves of 150,893,000
cu. metres of gravel in the river and associated meanders averaging 0.154 gm/cu.
metre  containing over 700,000 ounces of gold mineable by a dredge at an average
cost of U.S.$158 per ounce.

It is  recommended  that  initially a dredge capable of treating 5.5 million cu.
metres per year be installed  to commence  production  immediately  at a capital
cost of  U.S.$14million.  Subsequently,  in year two, a second dredge of similar
size should be installed, thus producing 60,000 ounces of gold per year from the
two dredges.  During year two a feasibility study is expected to be completed on
the terrace gravel deposit.

The initial  agreement  with Waseco also  provided that the Company would assist
Waseco in acquiring mineral resource properties of merit in Indonesia on a right
of first refusal  basis,  with the exception of the  Company's  Belitung  Island
interests.  Three  properties  were  subsequently  acquired  by  Waseco  in this
fashion.  All are hard rock gold  prospects,  with one  located on the Island of
Kalimantan, while the other two are located on the Island of Java.

To-date, the Company has received 5,000,000 shares of Waseco and is scheduled to
receive  2,000,000  more for the  completion of the Tewah  alluvial  feasibility
study.  The  Company  has filed a notice of its  intention  to  dispose of up to
1,000,000  of its Waseco  shares in private  and open market  transactions  with
third  parties.  The proceeds of sale are to be loaned to Waseco on a short term
basis to finance payables relating to the completion of the feasibilty study and
for working capital purposes.  Repayment is to be made with funds to be received
by Waseco in the form of refundable  security bond  deposits  previously  lodged
with the Indonesian government.  Assuming the successful completion of this sale
and the issuance to the Company of the 2,000,000  common shares in fulfilment of
the previous agreement,  Diadem will hold 6,000,000 common shares,  representing
approximately 40.3% of the issued shares of Waseco on a non-diluted basis.

Under the initial  agreement  with Waseco,  the Company was entitled to nominate
two individuals for membership on the Waseco Board.  Mr. A.C.A.  Howe became the
President  and a  director  of Waseco on May 8, 1996 and on the same  date,  Mr.
Derek Bartlett,  a director of the Company and Mr. Michael Bird became directors
of Waseco.  Mr. Bird also became an officer of the Company on May 17, 1996.  The
Waseco board of directors currently has six members, three of whom are directors
and officers of the Company.

ITEM 3. LEGAL PROCEEDINGS.

The  Company is not  involved  in nor is aware of any  litigation  or  impending
litigation.

ITEM 4.     CONTROL OF REGISTRANT.

      (a) Not applicable.

      (b) The following  table lists,  as at December 10, 1997,  the  beneficial
      share holdings in the Company of all persons or companies who are known to
      the Company that beneficially own, directly or indirectly,  ten percent or
      more of the issued and  outstanding  common shares,  and the directors and
      officers of the Company as a group:






                                      28


<PAGE>



                               (2)
     (1)              Identity of Person            (3)              (4)
Title of Class              or Group            Amount owned   Percent of class
--------------        --------------------      ------------   ----------------

Common Shares         Directors and Senior
                      Officers as a group         1,851,651          7.7%
                      (ten persons)

(1) Total does not include  common  shares  issuable  upon exercise of incentive
stock options granted by the Company.

(c) None.

ITEM 5.     NATURE OF TRADING MARKET.

The Company was listed on the Montreal  Exchange on March 24, 1995.  The closing
price range and trading  volume of the  Company's  common shares on the Montreal
Exchange during the periods indicated are as follows:

<TABLE>
<CAPTION>
                                               CLOSING PRICE
                                               -------------
         PERIOD (CALENDAR YEAR)              HIGH         LOW           VOLUME
         ----------------------              ----         ---           ------
         <S>                                <C>           <C>         <C>
         March 24-31, 1995                  $0.60         $0.40          347,800
         2nd Quarter, 1995                   0.71          0.47        2,020,074
         3rd Quarter, 1995                   1.81          0.42        6,076,227
         4th Quarter, 1995                   3.25          0.75       12,478,847
         1st Quarter, 1996                   2.90          1.15       11,614,502
         2nd Quarter, 1996                   8.25          2.75       17,634,839
         3rd Quarter, 1996                   8.60          5.15        9,562,263
         4th Quarter, 1996                   8.30          4.70        6,071,083
         1st Quarter, 1997                   5.85          2.85        8,299,445
         2nd Quarter, 1997                   3.15          1.00        8,590,404
         3rd Quarter, 1997                   1.45          0.90        2,879,179
         October, 1997                       1.19          0.80          574,492
         November, 1997                      0.79          0.40        1,561,454
         December, 1997 (to December 10 )    0.51          0.30          403,901
</TABLE>


ITEM 6.     EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.

There are no  governmental  laws,  decrees or regulations in Canada  relating to
restrictions  on the  import/export  of  capital  affecting  the  remittance  of
interest,  dividends  or  other  payments  to  non-residential  holders  of  the
Company's shares. Any such remittances to United States residents,  however, are
subject to a 15%  withholding  tax pursuant to Article X of the  reciprocal  tax
treaty between Canada and the United States. See Item 7, "Taxation".

Except as  provided  in the  Investment  Canada  Act (the  "Act"),  there are no
limitations under the laws of Canada,  the Province of Ontario or in the charter
or any other constituent  documents of the Company on the right of foreigners to
hold and/or vote the shares of the Company.

The Act requires a  non-Canadian  making an investment  to acquire  control of a
Canadian  business,  the gross assets of which exceed certain defined  threshold
levels,  to file an application for review with Investment  Canada,  the federal
agency created by the Act.

As a result of the  Canada-U.S.  Free Trade  Agreement,  the Act was  amended in
January 1989 to provide  distinct  threshold  levels for  Americans  who acquire
control of a Canadian business.


                                      29

<PAGE>



A Canadian  business  is  defined in the Act as a business  carried on in Canada
that has a place of business in Canada,  an individual or  individuals in Canada
who are employed or self-employed in connection with the business, and assets in
Canada used in carrying on the business.

An American,  as defined in the Act, includes:  an individual who is an American
national or a lawful  permanent  resident of the United States;  a government or
government  agency  of  the  United  States;  an   American-controlled   entity,
corporation  or limited  partnership  or trust which is not  controlled  in fact
through  ownership of its voting  interests of which  two-thirds of its board of
directors, general partners or trustees, as the case may be, are any combination
of Canadians or Americans.

The following  investments by a non-Canadian are subject to review by Investment
Canada:

      (a)   all  direct  acquisitions  of control of  Canadian  businesses  with
            assets of $5 million or more;


      (b)   all indirect  acquisitions  of control of Canadian  businesses  with
            assets of $50 million or more if such assets represent less than 50%
            of the value of the assets of the entities,  the control of which is
            being acquired; and

      (c)   all indirect  acquisitions  of control of Canadian  businesses  with
            assets of $5 million or more if such assets  represent more than 50%
            of the value of the assets of the entities,  the control of which is
            being acquired.

Review by Investment  Canada is required when  investments  by Americans  exceed
$150 million for direct  acquisitions  of control.  For the purposes of the Act,
direct acquisition of control means:

            a purchase  of the voting  interest on a  corporation,  partnership,
            joint  venture  or trust  carrying  on a Canadian  business,  or any
            purchase of all or substantially  all of the assets used in carrying
            on a Canadian business; and

indirect acquisition of control means:

            a purchase  of the voting  interest of a  corporation,  partnership,
            joint venture or trust,  whether a Canadian or foreign entity, which
            controls a corporation, partnership, joint venture or trust carrying
            on a Canadian business in Canada.

The  acquisition  of certain  Canadian  businesses  is excluded  from the higher
thresholds set out for Americans.  These excluded  businesses  include oil, gas,
uranium,  financial  services (except  insurance);  transportation  services and
cultural  services  (i.e.  the  publication,  distribution  or  sale  of  books,
magazines, periodicals (other than printing or typesetting businesses), music in
print or machine readable form, radio, television, cable and satellite services;
the publication,  distribution,  sale or exhibitions of film or video recordings
or audio or video music recordings).

Direct or indirect  acquisitions  of control of these  excluded  businesses  are
reviewable at the $5 and $50 million thresholds.

A non-Canadian shall not implement an investment reviewable under the Act unless
the  investment  has been reviewed and the Minister  responsible  for Investment
Canada is satisfied or is deemed to be satisfied  that the  investment is likely
to be of net  benefit to  Canada.  If the  Minister  is not  satisfied  that the
investment is likely to be a net benefit to Canada,  the non-Canadian  shall not
implement the  investment  or, if the  investment  has been  implemented,  shall
divest himself of control of the business that is the subject of the investment.

A non-Canadian or American making the following investments:

                                      30

<PAGE>
      (i)   an investment to establish a new Canadian business; and

      (ii)  an  investment  to  acquire  control of a  Canadian  business  which
            investment is not subject to review under the Act

must  notify  Investment   Canada,   within  prescribed  time  limits,  of  such
investments.

ITEM 7. TAXATION.

Management of the Company  considers  that the following  discussion  respecting
taxation fairly describes the principal and material Canadian federal income tax
consequences  applicable to shareholders of the Company who are residents of the
United  States and are not  residents of Canada and do not hold,  and are deemed
not to hold,  shares of the Company in connection with carrying on a business in
Canada (a "non-resident").

Generally,  dividends paid by Canadian corporations to non-resident shareholders
are subject to a withholding  tax of 25% of the gross amount of such  dividends.
However,  Article X of the  reciprocal  tax treaty between Canada and the United
States reduced to 15% the withholdings tax on the gross amount of dividends paid
to residents of the United  States.  A further 9 % reduction in 1996,  and a 10%
reduction  in 1997 and  thereafter  in the  withholding  tax  rates on the gross
amount of dividends is applicable when a U.S.  corporation  owns at least 10% of
the voting stock of the Canadian corporation paying the dividends.

A  non-resident  who holds  shares of the Company as capital  property  will not
subject to tax on capital  gains  realized  on the  disposition  of such  shares
unless such shares are  "taxable  Canadian  property"  within the meaning of the
Income Tax Act  (Canada),  and no relief is afforded  under any  applicable  tax
treaty.  The shares of the  Company  would be  taxable  Canadian  property  of a
non-resident if, at any time during the five year period immediately preceding a
disposition  by the  non-resident  of such  shares  (a) not less than 25% of the
issued shares of any class of the Company belonged to the non-resident,  (b) the
person with whom the non-resident  deal did not deal at arm's length, or (c) the
non-resident  and any person  with whom the  non-resident  did not deal at arm's
length.

Certain United States Federal Income Tax Consequences
-----------------------------------------------------

The following discussion is based upon the sections of the Internal Revenue Code
of 1986,  as amended  (the  "Code"),  Treasury  Regulation,  published  Internal
Revenue Service ("IRS") rulings,  published  administrative positions of the IRS
and court decisions that are currently applicable,  any or all of which could be
materially and adversely changed,  possibly on a retroactive basis, at any time.
This  discussion  does not  consider  the  potential  effects,  both adverse and
beneficial,  of any recently  proposed  legislation  that, if enacted,  could be
applied,  possibly on a retroactive basis, at any time. The following discussion
is for general  information  only and it is not intended to be, nor should it be
construed  to be,  legal or tax  advice to any holder or  prospective  holder of
shares of the  Company  and no opinion  or  representation  with  respect to the
United States Federal income tax  consequences to any such holder or prospective
holder is made.  Accordingly,  holders and prospective  holders of shares of the
Company should consult their own tax advisors  about the Federal,  state,  local
and foreign tax  consequences  of purchasing,  owning and disposing of shares of
the Company.

U.S. Holders
------------

As used herein,  a "U.S.  Holder" includes a holder of shares of the Company who
is a citizen  or  resident  of the  United  States,  a  corporation  created  or
organized  in or  under  the  laws  of the  United  States  or of any  political
subdivision  thereof,  any entity that is taxable as a corporation  for U.S. tax
purposes and any other person or entity whose ownership of shares of the Company
is  effectively  connected with the conduct of a trade or business in the United
States. A U.S. Holder does not include persons subject to special  provisions of
Federal income tax law; such as tax exempt  organizations,  qualified retirement
plans,  financial  institutions,  insurance  companies,  real estate  investment

                                      31

<PAGE>

trusts,  regulated  investment  companies,  broker-dealers,   nonresident  alien
individuals or foreign  corporations whose ownership of shares of the Company is
not  effectively  connected  with  conduct  of trade or  business  in the United
States,  shareholders  who acquired their stock through the exercise of employee
stock  options or otherwise as  compensation  and  shareholders  who holds their
stock as ordinary assets and not as capital assets.

Distributions on Shares of the Company
--------------------------------------

U.S. Holders receiving dividend distributions (including constructive dividends)
with  respect to shares of the Company are  required to include in gross  income
for  United  States  Federal  income  tax  purposes  the  gross  amount  of such
distributions to the extent that he Company has current or accumulated  earnings
and profits as defined  under U.S.  Federal tax law,  without  reduction for any
Canadian income tax withheld from such distributions. Such Canadian tax withheld
may be  credited,  subject to certain  limitations,  against  the U.S.  Holder's
United States Federal income tax liability or, alternatively, may be deducted in
computing the U.S.  Holder's  United Sates Federal  taxable  income by those who
itemize  deductions.  (See more  detailed  discussion  at  "Foreign  Tax Credit"
below.) To the extent that distributions  exceed current or accumulated earnings
and profits of the  Company,  they will be treated  first as a return of capital
upon to the U.S.  Holder's  adjusted  basis in the shares and thereafter as gain
from the sale or exchange of the shares.  Preferential tax rates for net capital
gains are applicable to a U.S.  Holder that is an  individual,  estate or trust.
There are currently no preferential  tax rates for long term capital gains for a
U.S. Holder that is a corporation.

Dividends  paid on the shares of the Company will not  generally be eligible for
the dividends received deduction  provided to corporations  receiving  dividends
from certain  United States  corporations.  A U.S.  Holder that is a corporation
may, under certain  circumstances,  be entitled to a 70% deduction of the United
States source portion of dividends received from the Company (unless the Company
qualifies  as  a  "foreign  personal  holding  company"  or a  "passive  foreign
investment  company",  as  defined  below)  if  such  U.S.  Holder  owns  shares
representing  at least 10% of the  voting  power and value of the  Company.  The
availability  of this deduction is subject to several complex  limitations  that
are beyond the scope of this discussion.

Foreign Tax Credit
------------------

A U.S. Holder who pays (or has withheld from distributions)  Canadian income tax
with respect to the  ownership of shares of the Company may be entitled,  at the
option of the U.S. Holder, to ether a deduction or a tax credit for such foreign
tax paid or withheld.  Generally, it will be more advantageous to claim a credit
because  a  credit   reduces   United   States   Federal   income   taxes  on  a
dollar-for-dollar  basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on a year-by-year basis and applies to all
foreign taxes paid by (or withheld from) the U.S. Holder during that year. There
are significant and complex limitations that apply to the credit, among which is
the general limitation that the credit cannot exceed the proportionate  share of
the U.S.  Holder's  United States  Federal  income tax  liability  that the U.S.
Holder's foreign source income bears to his or its worldwide  taxable income. In
the  determination of the application of this  limitation,  the various items of
income and  deduction  must be  classified  into foreign and  domestic  sources.
Complex rules govern this classification  process. There are further limitations
on the foreign tax credit for certain types of income such as "passive  income",
"high withholding tax interest", "financial services income", "shipping income",
and certain other classifications of income. The availability of the foreign tax
credit and the  application  of the  limitations on the credit are fact specific
and holders and  prospective  holders of shares of the  Company  should  consult
their own tax advisors regarding their individual circumstances.

Disposition of Shares of the Company
------------------------------------

A U.S.  Holder  will  recognize  a gain or loss  upon the sale of  shares of the
Company equal to the difference, if any, between (I) the amount of cash plus the

                                      32

<PAGE>

fair market value of any property received, and (ii) the shareholder's tax basis
in the shares of the  Company.  This gain or loss will be a capital gain or loss
if the shares are a capital asset in the hands of the U.S. Holder, and will be a
short-term or long-term  capital gain or loss  depending upon the holding period
of the U.S.  Holder.  Gains and  losses are netted  and  combined  according  to
special  rules in arriving at the overall  capital gain or loss for a particular
tax  year.  Deductions  for  net  capital  losses  are  subject  to  significant
limitations.  For U.S. Holders which are individuals, any unused portion of such
net  capital  loss may be carried  over to be used in later tax years until such
net capital loss is thereby  exhausted.  For U.S. Holders which are corporations
(other than  corporations  subject to  Subchapter S of the Code),  an unused net
capital  loss may be  carried  back three  years from the loss year and  carried
forward five years from the loss year to be offset  against  capital gains until
such net capital loss is thereby exhausted.

ITEM 8.           SELECTED FINANCIAL DATA.

                                     SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
      The following table sets forth selected historical  information  concerning the Company presented
in accordance with CDN GAAP and is qualified by reference to the consolidated  financial statements and
notes thereto. See "Financial Statements."


                              As at          As at          As at          As at          As at        
                              May 31, 1997   May 31, 1996   May 31, 1995   May 31, 1994   May 31, 1993
                              or the         or the         or the         or the         or the      
                              Year then      Year then      Year then      Year then      Year then   
                              Ended          Ended          Ended          Ended          Ended       
                                            
                       [Canadian Dollars and Share Numbers in Thousands except per share amounts ]
                  ------------------------------------------------------------------------------------- 
<S>                          <C>            <C>            <C>              <C>             <C>
Working Capital              $1,706         $2,616         $1,249           $(60)           $45
                            
Cash and Term Deposits        1,647          2,863          1,264             34            116
                            
Mineral Properties           12,053          3,172            507             82             15
                            
Share Capital                17,142          8,001          3,563          1,227          1,154
                            
Deficit                      (3,257)        (1,810)        (1,755)        (1,193)        (1,079)
                            
Net Loss for the Year          (800)           (42)         (160)           (114)           (41)
                            
Interest Income                 188             55            16              -               1
                            
Administrative Expenses         785            270           122             101             44
                            
Property Write Downs            238             35            58              23             -
                            
Gain on Marketable                
Securities and Investments        8            208             4               9             (4) 
                                  
Net Loss per Share           ($0.03)        ($0.01)       ($0.03)         ($0.02)        ($0.01)
                            
Shares Outstanding           23,844         21,916        12,400           4,654          4,573
                            
Fully Diluted Shares         
Outstanding                  26,389         23,391        21,022           4,894          4,906  
                             
Total Assets                 14,702          6,423         1,927             194            173
                            
                            
                           
      The following table sets forth selected historical  information  concerning the Company presented
in accordance with U.S. GAAP and is qualified by reference to the consolidated financial statements and
notes thereto. See "Financial Statements".








                                                        33

<PAGE>
                              As at          As at          As at          As at          As at        
                              May 31, 1997   May 31, 1996   May 31, 1995   May 31, 1994   May 31, 1993
                              or the         or the         or the         or the         or the      
                              Year then      Year then      Year then      Year then      Year then   
                              Ended          Ended          Ended          Ended          Ended       
                                            
                       [Canadian Dollars and Share Numbers in Thousands except per share amounts ]
                  ------------------------------------------------------------------------------------- 
<S>                          <C>            <C>            <C>              <C>             <C>

Working Capital              $1,103         $8,075         $1,249           $(60)           $45

Cash and Term Deposits        1,647          8,161          1,264             34            116

Mineral Properties           12,053          3,172            507             82             15

Share Capital                16,010         12,654          3,090          1,157          1,083

Deficit                      (1,156)          (356)          (314)          (154)           (40)

Net Loss for the Year          (800)           (42)          (160)          (114)           (41)

Interest Income                 188             54             13             -               1

Administrative Expenses         785            270            122            101             44

Property Write Downs            238             35             58             23             -

Gain on Marketable               
Securities and Investments        8            208              4              9             (4)
                           
Net Loss per Share           ($0.03)        ($0.01)         ($0.02)       ($0.02)         (0.01)

Shares Outstanding           23,844         22,916          12,400         4,654          4,573

Fully Diluted Shares               
Outstanding                  26,389         24,941          21,022         4,894          4,906
                            
Total Assets                 14,745         11,876           1,942           199            182

</TABLE>

EXCHANGE RATES

         The  following  table sets out the  exchange  rates,  based on the noon
buying  rates in New York City for cable  transfers  in  foreign  currencies  as
certified for customs  purposes by the Federal Reserve Bank of New York, for the
conversion of Canadian  dollars into United States  dollars in effect at the end
of the following  periods,  and the average exchange rates (based on the average
of the  exchange  rates on the last day of each month in such  periods)  and the
range of high and low exchange rates for such periods.


                                    Year Ended May 31
--------------------------------------------------------------------------------
                          1997       1996        1995          1994        1993
--------------------------------------------------------------------------------
End of Period            .7247      .7297       .7300         .7223       .7870
--------------------------------------------------------------------------------
Average for Period       .7326      .7345       .7255         .7482       .8031
--------------------------------------------------------------------------------
High for Period          .7513      .7527       .7457         .7865       .8452
--------------------------------------------------------------------------------
Low for Period           .7151      .7224       .7023         .7166       .7761
--------------------------------------------------------------------------------

On May 30, 1997, the noon rate of exchange,  as reported by the Federal  Reserve
Bank of New York for the  conversion  of United  States  dollars  into  Canadian
dollars was $0.7247  (US$1.00 =  CDN$1.3798).  As of December 11, 1997, the noon
rate of  exchange,  as reported by the Federal  Reserve Bank of New York for the
conversion of United States dollars into Canadian dollars was $0.7022 (US$1.00 =
CDN$1.4241)


                                       34


<PAGE>



ITEM 9. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

MANAGEMENT DISCUSSION OF RESULTS

This discussion and analysis of the operating results and the financial position
of the Company should be read in conjunction  with the financial  statements and
the notes thereto forming a part of this Annual Report.

OPERATING RESULTS

The Company has incurred operating losses during the three year period ended May
31, 1997 as there have been no sources of operating  revenue during this period.
The loss during the most recent fiscal year was much higher than  experienced in
the past as operating activities were at their highest levels.

Operating expenses during the current year were  approximately  $1,022,000 which
represents a significant  increase over the prior year's  operating  expenses of
approximately  $305,000 and the fiscal 1995 operating  expenses of approximately
$177,000.  Included in  operating  expenses  are costs  associated  with various
properties  which are  written  off with the  termination  of mining  interests.
During the current  year the  Company  wrote off its  interest  in the  Dihourse
Permit  property in Quebec and the  Kalimantan  Island  properties in Indonesia.
This  resulted in the write-off of  approximately  $238,000 in  acquisition  and
deferred development expenses.

Other  significant  expenses during the current year were shareholder  relations
costs  of  approximately  $275,000  and  legal,  audit  and  accounting  fees of
approximately  $218,000.  Shareholder relations costs increased from prior years
as the Company increased its efforts in this area. In addition this expense will
naturally  increase  as the  number of  shareholders  and the  volume of trading
activity increases.  Shareholder  relations expenses included the publication of
the annual report, the employment of a investor  relations firm,  transfer agent
fees, annual listing fees, press release  expenses,  and the expenses related to
the qualification of the Company with the Securities and Exchange  Commission to
facilitate a listing in the United States.  Legal, audit and accounting expenses
increased due to the increased  complexity of the Company's business  activities
and the expenses  related to qualifying  the Company  through the Securities and
Exchange  Commission  in the United States for share  listing.  Capital taxes of
approximately $43,000 were incurred for the first time this year due to the fact
that the  shareholder's  equity has reached a level where it is now subject to a
capital tax levied by the Province of Ontario.

Offsetting  the  operating  expenses  during the current  year was  interest and
investment  income of  approximately  $196,000  and foreign  exchange  income of
approximately  $27,000.  The investment income arose primarily from the interest
earned on term  deposits  derived  from funds  raised  from the public  offering
during the current  year.  The foreign  exchange  gain  resulted  from U.S. term
deposits  and cash on hand as the U.S.  dollar  gained in value  relative to the
Canadian dollar.

The net loss for the current year was approximately $800,000 or $0.03 per share.

LIQUIDITY AND CAPITAL RESOURCES

During the current year the Company  completed a public offering for the sale of
common shares with net proceeds of approximately  $5.1 million.  In addition the
Company  raised  $147,200  through  the  exercising  of  share  options.  At the
beginning  of the  fiscal  year the  Company  had  approximately  $2,863,000  on
deposit.  These funds  together  with the funds raised during the year were used
primarily to fund property acquisitions in the amount of approximately  $478,000
and exploration activities in the amount of approximately $5,376,000.

In addition  the Company  issued  $3,244,000  of shares for the  acquisition  of
mining properties.  The Company purchased approximately $378,000 in fixed assets


                                      35

<PAGE>


consisting  for the most part of  exploration  equipment  and  vehicles  for the
Nicaraguan operations. As part of its acquisition of the Nicaraguan property the
Company  was  required  to loan  U.S.$4,240,000  to the  existing  owner  of the
property,  of which  U.S.$120,000  was subsequent to year-end.  The U.S.$110,000
payment  due by Diadem to the  co-venturer  prior to  December  20, 1997 will be
deducted  from this  loan.  The  balance  of the loan  will be repaid  with gold
produced  by the mine  property.  At the end of the fiscal  year the Company had
cash and term deposits of approximately  $1,648,000.  Subsequent to the year end
the Company  completed  two  separate  private  placements  with net proceeds of
approximately $1,350.000.

As at May 31, 1997 the Company had  $14,701,884 in assets of which the majority,
$12,053,053 relates to mining properties. The Company has $1,647,468 in cash and
term deposits as outlined  above.  The Company has marketable  securities in the
amount of $136,601 which had a market value of $178,601 as at the year end date.

The  Company's  total   investment  in  mining   properties  was   approximately
$12,053,000  as at May 31, 1997, of which  approximately  $4,946,000  relates to
acquisition costs and the remainder relates to deferred exploration costs.

The  Company  holds an  investment  of  $80,000 in mining  syndicates  which are
pursuing the  exploration  of  properties  in  Quebec/Labrador,  California  and
Central  America.  During  the  current  year the  Company  received  income  of
approximately  $14,360 from these investments.  The Company holds an interest in
Randgold Resources Limited with a cost of approximately $138,000 which were sold
subsequent to the year end for proceeds of approximately $225,000.

The Company also currently  holds  5,000,000  common shares of Waseco  Resources
Inc. ("Waseco").  This represents approximately 40% of the outstanding shares in
the publicly  traded Company.  If Waseco fulfills the remaining  requirements to
earn a 60% working  interest in the Tewah  property the Company  would receive a
further  2,000,000  common  shares of Waseco,  which when added to the Company's
current holdings,  on a then issued basis, would represent  approximately 47% of
the common shares of Waseco.

The Company's  investment  in fixed assets of  approximately  $373,000  consists
primarily  of  exploration  equipment  and  vehicles  currently  being  used for
exploration on its  Nicaraguan  property.  The Company has accounts  payable and
accrued charges of approximately $817,000.

The Company has total shareholders' equity of $13,885,108.  The Company does not
have a credit facility with a financial  institution.  The Company will continue
to fund its  exploration  activities  with its cash on hand,  including the cash
raised  subsequent  to the  current  year  end by  way of two  separate  private
placements.  The Company is currently  looking to complete  further  financings,
particularly to fund the purchase of equipment and mining  facilities  needed in
Nicaragua to complete a pilot mill so that production activities can proceed.

EXPLORATION

During the fiscal year ended May 31, 1997, a total of  approximately  $5,376,000
was spent on exploration costs on all the Company's  properties.  Of this total,
$20,115 was spent on the Lac de Gras property ($48,598 in 1996) in the Northwest
Territories.  In  California,  $150,831  ($361,897  in  1996)  was  spent on the
Rancheria  property on  exploration,  sampling  and drilling of the pay streaks,
while $2,189,801  ($292,127 in 1996) was spent on the Leek Springs on geological
mapping,  geophysical  surveying,  and sediment sampling for indicator minerals,
and  subsequent  drilling and sample  processing.  $1,019  ($85,687 in 1996) was
spent on the  property  at  Crystal  Valley,  Quebec.  $17,885  was spent on the
Dihourse  Permit,  Quebec  ($52,156  in 1996) which was  subsequently  abandoned
during the current year. On the Mercury Permit exploration cost $23,428 ($23,515
in  1996).  Pekan  River  and  Sarah  Lake,  Quebec  incurred  a cost a total of
$1,121,303 ($621,458 in 1996). In Indonesia,  a total of $1,026,378 ($110,010 in
1996) has been spent during the year on the Belitung  Island  properties,  while
$118,367 was spent on the properties on Kalimantan island ($NIL in 1996),  which
were  written off at year-end.  A total of $710,288  ($NIL in 1996) was spent on
exploring its property in Nicaragua which was acquired during the current year.

                                      36

<PAGE>




ITEM 10.    DIRECTORS AND OFFICERS OF REGISTRANT.


DIRECTORS AND EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
                                                           Principal
         Name                  Title                       Occupation
         ----                  -----                       ----------
<S>     <C>                    <C>                         <C>
         A.C.A. Howe           President and Director      Mining Engineer and Consultant,
                                                           President of the Company, President
                                                           of Ateba Mines Inc. and President
                                                           of Waseco Resources Inc.

         Lina Noble            Secretary, Treasurer and    Administrative Manager of the
                               Director                    Company and General Manager of
                                                           Ateba Mines Inc.


         Derek Bartlett*       Director                    Independent Geologist and
                                                           President, Blue Emerald
                                                           Resources Inc. and Braddick
                                                           Resources Ltd.

         George Silverman*     Director                    Prospector and Mining Executive
                                                           Consultant to La Fosse Platinum
                                                           Inc. and Hollinger North Shore
                                                           Mining Co., General Manager,
                                                           Silverstone Prospecting Syndicate

         Robin Ross*           Director                    Managing Director, Merit
                                                           Investment Corporation.

         Hank Reimer           Director                    Independent Mining Consultant
                                                           and Analyst

         Edward Thompson       Director                    President of  E.G. Thompson
                                                           Mining Consultants Inc.


         James Wade            Director                    President of World Wide
                                                           Minerals Ltd.


         Michael Bird          Vice President, Asian       Independent Geologist, Vice
                               Development                 President of Waseco Resources Inc.,
                                                           Vice President of the Company

         Paul Heney            Assistant Secretary         Lawyer, Heney & Associates


         * Member - Audit Committee
</TABLE>









                                        37


<PAGE>

ITEM 11.    COMPENSATION OF DIRECTORS AND OFFICERS.

      (a)  For the fiscal  year  ended May 31,  1997,  the  aggregate  amount of
      compensation  paid by the Company and its subsidiaries to all officers and
      directors as a group was CDN.$124,150.  This figure excludes $226,246 paid
      to a law  firm of  which the  assistant secretary  is a member  for  legal
      services rendered during the period. This figure also excludes the payment
      of 23,809 common shares valued at the time of  issuance  at $150,000 to an
      officer of the Company fulfilling a finders fee commitment  made  prior to
      the time the individual concerned became an officer of the Company. 

      (b)  None.

ITEM 12.    OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.

      Diadem  has a stock  option  plan  (the  "Plan")  which  was  approved  by
shareholders  of the Company on April 9, 1992, and  subsequently  amended by the
board of directors  with the consent of the share holders under which options to
purchase common shares in the capital of the Company may be granted by the board
of directors to directors, officers and employees of the Company. The purpose of
the Plan is to advance the  interests of the Company by  affording  such persons
the opportunity of acquiring  equity  interests in the Company.  Options granted
under the Plan will have an exercise  price of not less than the market price of
the common  shares of the  Company at the time of the grant or such other  price
determined in accordance with applicable regulation and will be exercisable over
a number of years specified at the time of the grant, which term will not exceed
five years from the date of grant.  The aggregate number of common shares in the
capital of the Company  available for issuance  under the Plan has been fixed at
5,500,000  and while  this  number may be  increased  with the  approval  of the
shareholders,  the aggregate  number of common shares of the Company that may be
reserved  for  issuance  under the Plan  shall not in the  aggregate  exceed ten
percent  of the  number of common  shares of the  Company  that are  issued  and
outstanding from time to time on a non-diluted basis. In addition, the number of
common shares of the Company reserved for issuance to any one person pursuant to
options must not exceed five percent of the issued common shares of the Company,
on a fully  diluted  basis and no one person shall hold options  entitling  such
person on the exercise of such options to more than 50% of the maximum number of
common  shares of the Company  that may be reserved  under the Plan for issuance
from time to time.  Option  agreements  entered into in conjunction with options
granted  under the Plan  terminate  30 days  following  the  termination  of the
optionee's  employment or six months  following the death of the optionee but in
no event will exceed five years from the date of grant.  Options  granted  under
the Plan are not transferable.

OPTIONS GRANTED IN LAST FISCAL YEAR

The following table sets forth  information  concerning  grants of stock options
pursuant to the rules and policies of the Montreal Exchange during the financial
year ended May 31, 1997 to the Named Executive Officer of the Company:
<TABLE>
<CAPTION>
=====================================================================================================================
                     Securities Under     % of Total     Exercise or    Market Value of
                     Options/SARS        Options/SARS    Base Price     Securities
                     Granted (#)         Granted to      ($/Security)   Underlying Options/SARS   Expiration Date
    Name and                             Employees in                   on the Date of Grant
Principal Position                       Fiscal Year
---------------------------------------------------------------------------------------------------------------------
<S>                  <C>                 <C>             <C>             <C>                     <C>       
A.C.A. Howe           75,000/NIL (1)     6.6%/NIL        $5.50           $5.50/NIL               June 6, 2001(2)
President and Chief  100,000/NIL (1)     8.0%/NIL        $5.30           $5.30/NIL               February 20, 2002(2)
Executive Officer
=====================================================================================================================
</TABLE>
(1) These options were granted  pursuant to the company's share option plan.
(2) These options were cancelled subsequent to year-end.

AGGREGATED OPTION EXERCISES

      The  following  table sets forth details of all exercises of stock options
during the financial year ended May 31, 1997 by the Named Executive Officer, and
the fiscal year end values of unexercised options on an aggregated basis:
                                      38

<PAGE>

<TABLE>
<CAPTION>
==================================================================================================================================
  Name and Principal        Securities Acquired on     Aggregate Value            Unexercised Options At    Value of Unexercised
  Position                  Exercise                   Realized                   May 31, 1997              in the Money Options
                                                                                  (Exercisable/             at May 31, 1997
                                                                                  Unexercisable)            (Exercisable/
                                                                                                            Unexercisable)
----------------------------------------------------------------------------------------------------------------------------------
  <S>                       <C>                        <C>                        <C>                       <C>
  A.C.A. Howe               NIL                        NIL                        190,000/NIL               $95,450/NIL
  President and Chief
  Executive Officer
==================================================================================================================================
</TABLE>


(1) Value of unexercised in the money options calculated using the closing price
of common  shares of the  Company  ($1.45) on the  Montreal  Exchange on May 31,
1997, less the exercise price of the in the money stock options ($0.62).

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Date of Grant             Expiry Date              Number of Options Outstanding            Exercise Price
                                                   (Held by Directors and Officers)(1)      (CDN$/Security)

<S>                       <C>                      <C>                                      <C>
June 5, 1995              June 5, 2000             440,000                                  $0.62
                                                   (440,000)                                     
--------------------------------------------------------------------------------------------------------------
November 28, 1995         November 28, 2000        30,000                                   $1.27
--------------------------------------------------------------------------------------------------------------
January 26, 1996          January 26, 2001         200,000                                  $1.86
                                                   (200,000)                                     
--------------------------------------------------------------------------------------------------------------
June 7, 1996              June 7, 2001             80,000                                   $5.50
                                                   (50,000)                                      
--------------------------------------------------------------------------------------------------------------
October 18, 1996          October 18, 2001         5,000                                    $6.50
--------------------------------------------------------------------------------------------------------------
October 21, 1996          October 21, 2001         5,000                                    $6.80
--------------------------------------------------------------------------------------------------------------
October 21, 1996          October 21, 2001         2,500                                    $8.00
--------------------------------------------------------------------------------------------------------------
February 20, 1997         February 20, 2002        15,000                                   $5.10
--------------------------------------------------------------------------------------------------------------
July 16, 1997             July 16, 2002            300,000                                  $1.40
                                                   (300,000)                                     
--------------------------------------------------------------------------------------------------------------
September 25, 1997        September 25, 2002       100,000                                  $1.00
                                                   (100,000)                                     
--------------------------------------------------------------------------------------------------------------
October 30, 1997          October 30, 2002         250,000                                  $0.85
                                                   (250,000)                                     
--------------------------------------------------------------------------------------------------------------
November 26, 1997         November 26, 2002        125,000                                  $0.85
                                                   (125,000)                                     
--------------------------------------------------------------------------------------------------------------
November 26, 1997         November 26, 1997        500,000                                  $0.50
                                                   (500,000)                                
--------------------------------------------------------------------------------------------------------------
</TABLE>
                                                   
(1) Includes options held by A.C.A. Howe indicated in table above.

ITEM 13.    INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.

From time to time, the Company may engage either A.C.A. Howe International Ltd.,
a  U.K.-based  geological  consulting  company,  or  A.C.A.  Howe  International
Limited, a Canadian-based geological consulting company, to provide professional
services  on a  contract  basis  and  the  Company  will  pay  only  reasonable,
arms-length  commercial  rates  for such  services.  Mr.  Howe  serves as both a
director  and as  President  of each of the  companies,  but he is not  actively
involved in their business  operations.  He owns a 49% voting interest in A.C.A.
Howe  International  Ltd. and a 39% voting interest in A.C.A. Howe International


                                      39


<PAGE>


Limited.  During the year ended May 31, 1997, A.C.A. Howe International  Limited
received $7,893 in aggregate fees for geological  consulting  services  rendered
during the period.  No payments were made to A.C.A.  Howe  International  Ltd. A
corporation wholly owned by Mr. Howe also received  compensation directly in the
form of  professional  consulting  fees  during  the  year  ended  May 31,  1997
totalling  $48,150.  These  expenditures  were allocated to the mineral resource
properties  for which the services were rendered.  Mr. Howe may receive  similar
consulting fees in the future at reasonable  commercial  rates and such payments
to Mr.  Howe will be made in  accordance  with the  applicable  rules set out in
Ontario Securities Commission Policy 5.2.

Mr. Howe also received  options to purchase  100,000  common shares of Waseco in
May,  1996,  and will, in  appropriate  circumstances,  declare and refrain from
voting on, any matter in which he may have a conflict of interest.

Mr. Derek Bartlett,  a director of the Company, has also served as a director of
Noront Resources Ltd. since April,  1993. Noront has also granted the Company an
option on its Fletcher Lake, Northwest Territories Property.  Mr. Bartlett holds
stock  options in his  capacity  as a  director  of Noront.  Mr.  Bartlett  also
received  options to purchase  100,000 common shares of Waseco in May, 1996. Any
decision made by Mr.  Bartlett  involving the Company will be made in accordance
with his fiduciary  duties and obligations to deal fairly and in good faith with
the Company and Noront or Waseco. In addition, Mr. Bartlett will, in appropriate
circumstances,  declare and  refrain  from voting on, any matter in which he may
have a conflict of interest.

During the year,  the  Corporation  issued  200,000 common shares to Silverstone
Prospecting  Syndicate  ("Silverstone")  to  increase  its  interest in the Leek
Springs Project from 25% to 40%. The Corporation owns a total of four of a total
of 50 units of Silverstone. Mr. George Silverman, a Director of the Corporation,
owns four units of Silverstone,  representing  eight percent of the total number
of issued units. Mr. Silverman also serves as the Manager of Silverstone.  Ateba
Mines Inc.  ("Ateba") owns four units or eight percent of  Silverstone.  Messrs.
Howe and  Silverman  serve as  directors  of  Ateba.  Mr.  Howe  also  serves as
President of Ateba,  while Mrs.  Noble serves as Ateba's  general  manager.  The
Silverstone  syndicate  agreement  provides  that no  mining  properties  may be
acquired or disposed of by Silverstone  without the prior consent of the holders
of  two-thirds of  Silverstone  units.  Ateba,  the  Corporation  and Mr. George
Silverman, each of which owns an eight percent interest in Silverstone,  abstain
from voting as Silverstone  unitholders in matters relating to transactions with
the  Corporation,  and Mr.  Silverman  abstains from voting as a Director of the
Corporation on matters affecting Silverstone.

In November,  1996, the Corporation entered into an option agreement with Archon
Prospecting  Syndicate ("Archon") for the acquisition of Archon's interest in an
option  on  the  La  Mestiza  property  located  at  La  India,  Nicaragua.  The
Corporation  owns a total of four of a total of 50 units of Archon.  Mr.  George
Silverman,   a  Director  of  the  Corporation,   owns  four  units  of  Archon,
representing  eight percent of the total number of issued units.  Mr.  Silverman
also serves as the Manager of Archon.  Ateba also owns two units or four percent
of Archon. The Archon syndicate agreement provides that no mining properties may
be acquired or disposed of by Archon without the prior consent of the holders of
two-thirds  of Archon units.  The  Corporation,  Ateba and Mr. George  Silverman
abstain from voting as Archon  unitholders in matters  relating to  transactions
with the Corporation,  and Mr.  Silverman  abstains from voting as a Director of
the Corporation on matters affecting Archon.


                                     PART II

ITEM 14.    DESCRIPTION OF SECURITIES TO BE REGISTERED.

CAPITAL STOCK TO BE REGISTERED

The Company wishes to register common shares in the capital of the Company.  The
shares carry a votingright on the basis of one vote per common share. The common


                                      40

<PAGE>


shares carry no dividend rights,  liquidation rights or conversion rights, there
are no sinking fund provisions. The shares are not liable to further calls or to
assessment by the Company.

On September  20, 1996,  the board of  directors of the Company  authorized  and
approved the adoption of a Shareholder  Rights Plan,  which was confirmed by the
shareholders of the Company,  on October 30, 1996. The Rights Plan entitles each
holder of common  shares to one right for each voting share held at the close of
business on September 20, 1996. The rights become exercisable only when a person
or  persons  announce  their  intention  to acquire  20% or more of the  Company
without complying with the "Permitted Bid" provisions of the Plan or without the
approval of the board of  directors of the Company.  Upon  exercise,  the rights
entitle  the holder to  purchase  additional  common  shares of the Company at a
price which is equal to one-half of the  prevailing  market  value of the common
shares.


                                    PART III

ITEM 15.    DEFAULTS UPON SENIOR SECURITIES.

      Not Applicable.

ITEM 16.    CHANGES  IN  SECURITIES  AND  CHANGES  IN  SECURITY  FOR  REGISTERED
            SECURITIES.

      Not Applicable.

                                     PART IV

ITEM 17.    FINANCIAL STATEMENTS.

      See  Item  19  below  for  Financial  Statements  filed  as  part  of this
Application.

ITEM 18.    FINANCIAL STATEMENTS.

      Not Applicable.

ITEM 19.    FINANCIAL STATEMENTS AND EXHIBITS.

      (a) The  following  documents  are filed as  Attachment  A hereto  and are
included as part of this Application on Form 20-F.


             DIADEM RESOURCES LTD. CONSOLIDATED FINANCIAL STATEMENTS

Description of Document                                                    Page
-----------------------                                                    ----

Consent of Independent Auditors
Auditors Report
Consolidated Balance Sheets
Consolidated Income Statements
Consolidated Statements of Changes in Financial Position
Notes to Consolidated Financial Statements

      (b) The  following  exhibits  are  filed as  Attachment  B hereto  and are
included as part of this Application on Form 20-F.





                                      41


<PAGE>


Exhibit
Number      Description of Document                                       Page
------      -----------------------                                       ----

3.1         By-Law No. 1, dated June 1, 1989 (1)

3.2         Articles of Amalgamation, dated June 1, 1989 (1)

3.3         Articles of Amendment dated April 20, 1993 (1)

3.4         Articles of Amendment dated September 23, 1994 (1)

4.1         Shareholder Rights Plan, adopted by the Board of Directors
            on September 20, 1996 and ratified by the shareholders on
            October 30, 1996 (1)

4.2         Warrant Indenture between Montreal Trust Company of Canada and
            the Company, dated September 10, 1996.  (1)

4.3         Stock Option Plan, as amended, dated October 30, 1996 (1)


Notes:

(1) Previously filed with Form 20-F filed March 31, 1997




                              DIADEM RESOURCES LTD.

                        CONSOLIDATED FINANCIAL STATEMENTS

                                  MAY 31, 1997


            CONTENTS




            Auditors' report                                            F-1

            Consolidated balance sheet                                  F-2

            Consolidated statement of income and deficit                F-3

            Consolidated statement of accumulated losses as
              development stage company                                 F-4

            Consolidated statement of changes in financial position     F-5

            Consolidated statement of accumulated cash flow as
              development stage company                                 F-6

            Notes to consolidated financial statements              F-7 to F-27









                                       42


<PAGE>



      AUDITORS' REPORT



      To the Shareholders of
      Diadem Resources Ltd.:


      We have audited the  consolidated  balance sheets of Diadem Resources Ltd.
      as at May 31, 1996 and May 31,  1997 and the  consolidated  statements  of
      income and deficit and changes in financial position for each of the years
      in the three year period ended May 31, 1997.  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 audits in accordance  with  generally  accepted  auditing
      standards.  Those  standards  require that we plan and perform an audit to
      obtain reasonable  assurance whether the financial  statements are free of
      material  misstatement.  An audit  includes  examining,  on a test  basis,
      evidence   supporting  the  amounts  and   disclosures  in  the  financial
      statements.  An audit also includes  assessing the  accounting  principles
      used and significant  estimates made by management,  as well as evaluating
      the overall financial statement presentation.

      In our opinion, these consolidated financial statements present fairly, in
      all material respects, the financial position of the company as at May 31,
      1996 and May 31, 1997 and the results of its operations and the changes in
      its  financial  position  for each of the years in the three  year  period
      ended  May 31,  1997 in  accordance  with  generally  accepted  accounting
      principles in Canada.




      Toronto, Canada                          "Green Chencinski Starkman Eles"
      October 16, 1997                               Chartered Accountants




























                                       F-1



<PAGE>

DIADEM RESOURCES LTD.

CONSOLIDATED BALANCE SHEET

AS AT MAY 31,  (IN CANADIAN DOLLARS)

<TABLE>
<CAPTION>

                                                                         1997              1996
                                                                           $                 $
-------------------------------------------------------------------------------------------------
<S>                                                                   <C>               <C>      
ASSETS
CURRENT ASSETS
Cash and term deposits                                                1,647,468         2,863,181
Marketable securities  (NOTE 3)                                         135,601            55,491
Prepaid expenses and sundry receivables                                 109,413           128,173
                                                                     ----------         ---------

                                                                      1,892,482         3,046,845
INTEREST IN MINING PROPERTIES  (NOTE 4)                              12,053,053         3,172,373
INVESTMENT IN MINING SYNDICATES AND MINING COMPANIES (NOTE 5)           217,978           177,978
LOAN RECEIVABLE (NOTE 6)                                                165,396            -
FIXED ASSETS (NOTE 7)                                                   372,975            25,448
                                                                     ----------         ---------

                                                                     14,701,884         6,422,644
                                                                     ==========         =========


LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued charges  (NOTES 3 AND 8)                   816,776           231,266
                                                                     ----------         ---------

COMMITMENTS AND CONTINGENCIES   (NOTE 12)

SHAREHOLDERS' EQUITY

CAPITAL STOCK (NOTE 9)                                               17,142,589         8,001,389

DEFICIT                                                              (3,257,481)       (1,810,011)
                                                                     ----------        ---------- 

                                                                     13,885,108         6,191,378
                                                                     ----------         ---------

                                                                     14,701,884         6,422,644
                                                                     ==========         =========

</TABLE>


ON BEHALF OF THE BOARD:



     "A.C.A. Howe"
 ------------------------------------------------  Director


     "G.C. Silverman"
 ------------------------------------------------  Director

                                       F-2



<PAGE>



DIADEM RESOURCES LTD.

CONSOLIDATED STATEMENT OF INCOME AND DEFICIT

YEAR ENDED MAY 31, (IN CANADIAN DOLLARS)

<TABLE>
<CAPTION>
                                                         1997          1996          1995
                                                          $             $             $
------------------------------------------------------------------------------------------
<S>                                                   <C>           <C>           <C>  
EXPENSES
Amortization                                             7,317         2,669         2,648
Business development                                    42,966        28,110         7,224
Capital taxes                                           49,928          --            --
Expiration of mining interests (NOTE 4A)               237,652        35,382        57,545
General                                                 21,269        10,405          (962)
Insurance                                               18,726         6,215         5,697
Legal, audit and accounting fees                       218,014        57,482         5,000
Office expenses                                         54,245        30,346        18,038
Salaries and benefits                                   80,467        57,880        27,557
Search for new properties                                 --           1,479         3,779
Shareholder relations                                  274,904        62,496        36,389
Travel                                                  16,975        12,451        13,678
                                                    ----------    ----------    ----------
                                                     1,022,463       304,915       176,593
                                                    ----------    ----------    ----------

INCOME
Interest                                               188,126        54,626        12,674
Gain on marketable securities and investments            7,762       208,107         4,217
Foreign exchange gain                                   27,015          --            --
                                                    ----------    ----------    ----------
                                                       222,903       262,733        16,891
                                                    ----------    ----------    ----------
NET LOSS                                              (799,560)      (42,182)     (159,702)
DEFICIT, BEGINNING OF YEAR                          (1,810,011)   (1,755,169)   (1,193,182)
                                                    ----------    ----------    ----------
                                                    (2,609,571)   (1,797,351)   (1,352,884)
Costs associated with issuance of shares (NOTE 9)     (647,910)      (12,660)     (402,285)
                                                    ----------    ----------    ----------
DEFICIT, END OF YEAR                                (3,257,481)   (1,810,011)   (1,755,169)
                                                    ==========    ==========    ==========

NET LOSS PER COMMON SHARE                                 (.03)         (.01)         (.03)
                                                    ==========    ==========    ==========

</TABLE>


















                                                    F-3

<PAGE>

<TABLE>
<CAPTION>

DIADEM RESOURCES LTD.

CONSOLIDATED STATEMENT OF ACCUMULATED LOSSES AS DEVELOPMENT STAGE COMPANY

PREPARED UNDER UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (SEE NOTE 11)

FOR THE PERIOD FROM JUNE 1, 1992 TO MAY 31, 1997
(IN CANADIAN DOLLARS)

                                                                            $
--------------------------------------------------------------------------------
<S>                                                                     <C>  
EXPENSES
Advertising and promotion                                                  1,349
Amortization                                                              19,451
Business development                                                      78,300
Capital taxes                                                             49,928
Expiration of mining interests                                           352,854
General                                                                   39,931
Insurance                                                                 43,068
Legal, audit and accounting fees                                         312,239
Office expense                                                           116,556
Salaries and benefits                                                    224,480
Search for new properties                                                  9,088
Shareholder relations                                                    373,789
Travel                                                                    49,239
                                                                       ---------
                                                                       1,670,272
                                                                       ---------
INCOME
Consulting and other income                                               33,215
Interest                                                                 256,747
Gain on securities and investments                                       224,420
                                                                       ---------
                                                                         514,382
                                                                       ---------
ACCUMULATED LOSSES DURING DEVELOPMENT STAGE                            1,155,890
                                                                       =========

</TABLE>






















                                        F-4



<PAGE>


DIADEM RESOURCES LTD.

CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION

YEAR ENDED MAY 31,  (IN CANADIAN DOLLARS)

<TABLE>
<CAPTION>
                                                                  1997         1996          1995
                                                                   $            $             $
---------------------------------------------------------------------------------------------------
<S>                                                          <C>           <C>           <C>      
CASH PROVIDED BY (USED FOR):

OPERATING ACTIVITIES

Net loss                                                      (799,560)      (42,182)     (159,702)
Items not affecting cash
     Amortization                                                7,317         2,669         2,648
     Expiration of mining interests                            237,652        35,382        57,545
     Gain on marketable securities and investments              (7,762)     (208,107)       (4,217)
                                                            ----------    ----------    ----------
                                                              (562,353)     (212,238)     (103,726)
Net change in non-cash working capital
     balances related to operations                            604,270        19,606       (45,113)
                                                            ----------    ----------    ----------
                                                                41,917      (192,632)     (148,839)
                                                            ----------    ----------    ----------
FINANCING ACTIVITIES
Costs associated with issuance of shares  (NOTE 9)            (645,410)      (12,660)     (402,285)
Issuance of common shares  (NOTE 9)                          9,141,200     4,438,590     2,335,800
                                                            ----------    ----------    ----------
                                                             8,495,790     4,425,930     1,933,515
                                                            ----------    ----------    ----------
INVESTING ACTIVITIES
Acquisition of interest in mining properties                (9,097,960)   (2,700,521)     (482,512)
Acquisition of fixed assets                                   (377,715)      (16,812)       (2,422)
Acquisition of marketable securities                           (86,709)         --         (51,600)
Investment in mining syndicates and mining companies           (40,000)     (137,978)      (27,500)
Loan receivable advance                                       (165,396)         --            --
Proceeds on gain on marketable securities and investments       14,360       220,751         9,655
                                                            ----------    ----------    ----------
                                                            (9,753,420)   (2,634,560)     (554,379)
                                                            ----------    ----------    ----------
Change in cash and term deposits                            (1,215,713)    1,598,738     1,230,297
CASH AND TERM DEPOSITS, BEGINNING OF YEAR                    2,863,181     1,264,443        34,146
                                                            ----------    ----------    ----------
CASH AND TERM DEPOSITS,END OF YEAR                           1,647,468     2,863,181     1,264,443
                                                            ==========    ==========    ==========

</TABLE>
















                                        F-5


<PAGE>



DIADEM RESOURCES LTD.

CONSOLIDATED STATEMENT OF ACCUMULATED CASH FLOW AS DEVELOPMENT STAGE COMPANY

PREPARED UNDER UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(SEE NOTE 11)

FOR THE PERIOD FROM JUNE 1, 1992 TO MAY 31, 1997
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
                                                                          $
--------------------------------------------------------------------------------
<S>                                                                  <C>        
CASH PROVIDED BY (USED FOR):

Net accumulated losses                                               (1,155,890)
Items not affecting cash
     Amortization                                                        19,451
     Expiration of mining interests                                     352,854
     Gain on marketable securities and investments                     (224,420)
                                                                    -----------
                                                                     (1,008,005)
Decrease in accounts receivable                                           1,761
Increase in prepaid expenses and sundry receivables                    (104,473)
Increase in accounts payable and accrued charges                        799,628
                                                                    -----------
                                                                       (311,089)
                                                                    -----------
FINANCING ACTIVITIES
Costs associated with issuance of shares                             (1,133,064)
Decrease in advances from shareholder                                    (1,435)
Issuance of common shares                                            11,704,929
                                                                    -----------
                                                                     10,570,430
                                                                    -----------
INVESTING ACTIVITIES
Acquisition of interest in mining properties                         (7,948,961)
Acquisition of fixed assets                                            (399,098)
Acquisition of marketable securities                                   (200,801)
Investment in mining syndicates and mining companies                   (217,978)
Loan receivable advance                                                (165,396)
Proceeds on gain on marketable securities and investments               313,568

                                                                     (8,618,666)
                                                                    -----------
Change in cash and term deposits                                      1,640,675
CASH AND TERM DEPOSITS, BEGINNING OF PERIOD                               6,793
                                                                    -----------
CASH AND TERM DEPOSITS, END OF PERIOD                                 1,647,468
                                                                    ===========

</TABLE>











                                        F-6



<PAGE>



DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________



1.   NATURE OF OPERATIONS

     The Company,  directly  and through  joint  ventures,  is in the process of
     exploring its mineral  properties and has not yet determined  whether these
     properties contain ore reserves that are economically recoverable.

     The  recoverability  of amounts  shown for mineral  properties  and related
     deferred costs is dependent upon the discovery of economically  recoverable
     reserves,  confirmation of the Company's interest in the underlying mineral
     claims,  the  ability  of the  Company  to obtain  necessary  financing  to
     complete the development, and future profitable production or proceeds from
     the disposition thereof.


2.   SIGNIFICANT ACCOUNTING POLICIES

     BASIS OF CONSOLIDATION
      The  consolidated   financial  statements  include  the  accounts  of  the
      corporation and its subsidiaries and a proportionate share of the accounts
      of joint ventures in which Diadem Resources Ltd. and its subsidiaries have
      an interest.

     FIXED ASSETS AND AMORTIZATION
      Fixed assets are recorded at cost and are amortized  over their  estimated
      useful lives using the declining  balance  method at the following  annual
      rates:

         Furniture and fixtures                  20%
         Computer and equipment                  30%
         Exploration and mining equipment        20%
         Vehicles                                30%
                                                 

     FOREIGN CURRENCY TRANSLATION
      Monetary and  non-monetary  items carried at market are  translated at the
      rate  of  exchange  in  effect  at  the  balance  sheet  date.  All  other
      non-monetary items are translated at historical rates. Revenue and expense
      items are translated at the average rate of exchange for the year.

     MARKETABLE SECURITIES
      Marketable  securities  are carried at the lower of cost and quoted market
      value.

     INVESTMENT IN MINING SYNDICATES AND MINING COMPANIES
      Investment in mining  syndicates  and a private mining company are carried
      at cost.

      Investment in Waseco  Resources  Inc. is accounted for on the equity basis
      of accounting.







                                        F-7



<PAGE>



DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________



2.   SIGNIFICANT ACCOUNTING POLICIES (Continued)

     INTEREST IN MINING PROPERTIES
      The  company's  interest  in mining  properties  is  carried  at cost on a
      property by property basis.  Costs include  capitalized  expenditures  for
      acquisition,  geological surveys, exploration and development. When shares
      of  the  company  are  issued  from  treasury  as  consideration  for  the
      acquisition  of  mining  properties,  the  market  value of the  shares is
      considered a cost of acquisition.  Costs for each property are written off
      to the  statement  of  income  if  future  recovery  is  determined  to be
      unlikely.

      Property costs are reviewed for impairment  whenever  events or changes in
      circumstances indicate that the carrying amount of these assets may not be
      recoverable.  These  procedures  include,  but are  not  limited  to,  the
      following:

         a)  determining that the value of the recoverable, marketable resources
             does not justify continuance;

         b)  experiencing  a significant  adverse  change in legal factors or in
             the business climate that could affect the property's  value, or an
             adverse  action or assessment by a government  unit or  regulation;
             and

         c)  evaluating  prospects for success.  Inasmuch as the advancements of
             mining efforts, based on a predetermined  timetable,  are a clearer
             prediction  than  anticipated  cash flows,  progress  towards  that
             success is the basis for  determining  impairment.  The use of cash
             flows  would be utilized to  determine  impairment  at a much later
             stage in the established mining property's life cycle.

      All capitalized  costs for each property will be amortized as depletion to
      the  statement  of  income  when  commercial  production  commences.   The
      units-of-depletion  method will be applied  based upon proven and probable
      reserves. Possible reserves will be excluded.

3.   MARKETABLE SECURITIES
                                                                1997       1996
                                                                 $          $

             Marketable securities                            135,601     55,491
                                                              =======     ======


     The estimated  market value of the  marketable  securities is $178,601 (May
     31, 1996 - $246,991).

     Included in marketable  securities are 100,000  shares of Noront  Resources
     Limited  which are carried at $14,000.  The current  market value as at May
     31,  1997 is $30,000.  These  shares were  received  from Noront  Resources
     Limited pursuant to an agreement  whereby the company optioned a portion of
     its interest in certain mining claims.  Since these mining claims have been
     terminated,  the company may have to return the shares to Noront  Resources
     Limited. Included in accounts payable is $14,000 which is equivalent to the
     carrying value of the shares.




                                        F-8

<PAGE>



DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________



4.   INTEREST IN MINING PROPERTIES

     Interest in mining properties is comprised of the following:
<TABLE>
<CAPTION>

                                                                                         1997              1996
                                                                                          $                 $
<S>                                                                                 <C>                <C>      
       Acquisition costs
             Fletcher Lake, Northwest Territories   (NOTE 4B)                           10,355            10,355
             Rancheria, California   (NOTE 4C)                                         652,733           652,733
             Leek Springs, California   (NOTE 4D)                                    2,788,711           254,711
             Crystal Valley Region, Quebec   (NOTE 4E)                                  72,500            72,500
             Dihourse Permit, Quebec   (NOTE 4A)                                        -                 49,200
             Pekan River and Sarah Lake, Quebec   (NOTE 4F)                            179,400            54,400
             Mercury Permit, Quebec   (NOTE 4G)                                        216,300            56,300
             Nicaragua (NOTE 4H)                                                       773,238            -
             Belitung Island and Kalimantan Island, Indonesia   (NOTES 4A AND 4I)      253,000           103,000
                                                                                    ----------         ---------
                                                                                     4,946,237         1,253,199


       Deferred exploration costs
             Fletcher Lake, Northwest Territories                                       84,627            64,512
             Rancheria, California                                                     690,308           539,477
             Leek Springs, California                                                2,481,928           292,127
             Crystal Valley Region, Quebec                                             168,616           167,597
             Dihourse Permit, Quebec (NOTE 4A)                                          -                 52,156
             Pekan River and Sarah Lake, Quebec                                      1,742,761           621,458
             Mercury Permit, Quebec                                                     46,943            23,515
             Nicaragua                                                                 710,288            -
             Belitung Island and Kalimantan Island, Indonesia                        1,137,388           111,010
             Tewah, Indonesia   (NOTE 4J)                                               43,457            47,322
                                                                                    ----------         ---------
                                                                                     7,106,816         1,919,174
                                                                                    ----------         ---------
                                                                                    12,053,053         3,172,373
                                                                                    ==========         =========
</TABLE>


(a)  EXPIRATION OF MINING INTERESTS

     During the year ended May 31, 1995,  the company  relinquished a portion of
     the  Fletcher  Lake  property  (see  note 4b) and,  accordingly,  wrote off
     $57,545 of accumulated acquisition and deferred exploration costs.















                                         F-9



<PAGE>



DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________



4.   INTEREST IN MINING PROPERTIES (Continued)

     During the year ended May 31,  1996,  the mining  rights to the property in
     The  Republic  of  Namibia  were  not  renewed.   Accordingly,   the  total
     accumulated deferred exploration in the amount of $35,382 was written off.

     During the year ended May 31, 1997, the company  relinquished  its interest
     in the Dihourse  property with accumulated  acquisition  costs and deferred
     exploration and development  costs totalling  $119,285,  written off to the
     income statement.  An additional $118,367 in accumulated  acquisition costs
     and deferred  exploration and  development  costs related to the Kalimantan
     Island  properties  in  Indonesia  were written off during the current year
     [see note 4(i)].

(b)  FLETCHER LAKE, NORTHWEST TERRITORIES

     The company holds an option with Noront Resources Ltd. to earn a 60% mining
     interest in a 100,000 acre property in the Northwest Territories.  In order
     to exercise this option, the company was originally required to:

     1)   issue  200,000  shares of its capital stock to Noront  Resources  Ltd.
          which  were  issued  during the years  ended May 31,  1994 and May 31,
          1995;

     2)   complete $1,000,000 in work prior to February 12, 1999.

     The original  stakers of the property retain a royalty of 3% on any diamond
     production  and a 1.5%  net  smelter  royalty  on any  base  metal  or gold
     production.

     The company and Noront  Resources  Ltd. then entered into an agreement with
     Pure Gold Resources Inc.  whereby Pure Gold Resources Inc. would earn a 40%
     undivided  interest in the property by issuing 100,000 common shares of its
     capital  (60,000 to the company) and incurring  $500,000 of expenditures on
     the  property  prior to February 12, 1996 and  maintaining  the property in
     good  standing  to March 15,  1996.  The company  received  30,000 of these
     shares  during  the year ended May 31,  1994 when the  market  value of the
     shares was $18,000 in aggregate and an additional  30,000 shares during the
     year ended May 31,  1995 when the market  value of the shares was $6,600 in
     aggregate.  The company  reduced its carrying  value of the property by the
     market value of the shares of Pure Gold Resources Inc. received.

     During  the  year  ended  May 31,  1995,  sufficient  assessment  work  was
     completed to ensure that  approximately  15,000 acres of the 100,000  acres
     were in good standing  until March 11, 1996. The company  relinquished  any
     interest in the remaining 85,000 acres. Accordingly, a charge to the income
     statement  in the amount of $57,545 was  recorded in the year ended May 31,
     1995. This charge was calculated as 85% of accumulated acquisition costs.

     The company then had no financial  obligations with respect to the property
     until the completion of Pure Gold Resources Inc.'s work. However, Pure Gold
     Resources Inc. failed to complete the work and, accordingly, several of the
     claims were forfeited.  In order to mitigate  damages,  Pure Gold Resources
     Inc.  restaked some of the lost claims which resulted in the  reacquisition
     of certain

                                      F-10



<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________


4.   INTEREST IN MINING PROPERTIES (Continued)

     of the claims.  Noront  Resources  Limited and the company have now entered
     into an amending  agreement  whereby the company may earn a 60% interest in
     the claims  maintained  and in  additional  staked  claims by  spending  an
     aggregate of $250,000 of additional expenditures by March 15, 1999.

(c)  RANCHERIA, CALIFORNIA

     The  company  has  obtained  an option to acquire up to a 60%  interest  in
     mining claims in the Rancheria  area of Amador County in  California.  This
     option was granted by Silverstone Prospecting Syndicate which will continue
     to hold  the  remaining  unearned  interest  in the  property.  Silverstone
     Prospecting Syndicate has registered 13 claims.

     During the year ended May 31, 1995, the company  acquired a 15% interest in
     these claims by paying the sum of U.S.  $50,000 to Silverstone  Prospecting
     Syndicate and issuing to Silverstone  Prospecting  Syndicate 150,000 common
     shares of the company, valued at $0.30 per share.

     During the year ended May 31, 1996,  the company  increased its interest in
     the  property  to 30% by  paying  the sum of U.S.  $50,000  to  Silverstone
     Prospecting Syndicate, issuing to Silverstone Prospecting Syndicate 150,000
     common shares valued at $0.60 per share and spending a cumulative amount of
     approximately $690,000 on the property.

     The company also issued to Silverstone  Prospecting Syndicate an additional
     150,000  common shares valued at $2.48 per share during the prior year as a
     step  to  increasing  its  interest  to  45%.  In  order  to  complete  the
     acquisition of 45% in the property, the company must complete the following
     by February 28, 1999:

     1)   pay an additional $100,000 U.S. to Silverstone  Prospecting Syndicate,
          and

     2)   complete $1,000,000 U.S. in cumulative expenditures on the property.

     In order to increase  its  interest to 60%, the company will be required to
     complete  $2,000,000  U.S. in  cumulative  expenditures  on the property by
     February 28, 1999.

     The agreement  also provides that if Silverstone  Prospecting  Syndicate is
     successful in acquiring additional claims in the subject area, these claims
     will also be included  in the  agreement.  The company  will be entitled to
     earn a 60% interest in each additional  claim without payment of additional
     consideration except for the reimbursement of the actual costs of acquiring
     these additional claims.

(d)  LEEK SPRINGS, CALIFORNIA

     The  company has  obtained an option to acquire up to a 55%  interest in 56
     unpatented  mining claims  covering  approximately  1,120 acres in the Leek
     Springs area of Eldorado County in California. This option was also granted
     by  Silverstone  Prospecting  Syndicate  which  will  continue  to hold the
     remaining unearned interest in the property.

     During the prior year, the company earned a 10% interest in the property by
     paying the sum of U.S.  $50,000 to  Silverstone  Prospecting  Syndicate and
     issuing to Silverstone  Prospecting  Syndicate 150,000 common shares valued
     at $1.24 per share.

                                        F-11



<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________


4.   INTEREST IN MINING PROPERTIES (Continued)

     During the current year,  the company  earned an  additional  30% interest,
     thereby  increasing its interest to 40% by paying the sum of U.S. $200,000,
     issuing  200,000 common shares valued at $6.45 per share,  issuing  200,000
     additional  common shares valued at $4.85 per share, and by completing U.S.
     $500,000 of cumulative  exploration  expenditures.  As at May 31, 1997, the
     company had completed  approximately  $2,484,000 in cumulative  exploration
     expenditures.

     To earn the final 15%  interest in the  property,  thereby  increasing  its
     interest to 55%, the company must complete the following by August 2, 1998:

     1)   pay an additional $100,000 U.S. to Silverstone Prospecting Syndicate;

     2)   issue  200,000  additional  common shares to  Silverstone  Prospecting
          Syndicate; and

     3)   complete $5,000,000 U.S. of cumulative exploration expenditures.

(e)  CRYSTAL VALLEY REGION, QUEBEC

     The  company  has  acquired  a  100%  interest  in 144  registered  claims,
     totalling 5,036 hectares, in the Crystal Valley Region near Montreal in the
     Province of Quebec.  To acquire the mining rights,  the company made a cash
     payment of $12,500 and issued  200,000  common shares when the market value
     of the shares was $0.30 per share.  The  agreement  also  provides that the
     company will pay a royalty of 2% of gross proceeds for the sale of diamonds
     recovered from the property.  The claims are in good standing until October
     12, 1998.

(f)  PEKAN RIVER AND SARAH LAKE, QUEBEC

     The company entered into an option agreement which enables it to purchase a
     90% mining  interest in 5,000  hectares of property in Quebec  known as the
     Pekan River  Prospect.  This option was granted by Beaver  Syndicate  which
     will continue to hold the remaining  unearned  interest in the property.  A
     further  agreement  was reached  with Beaver  Syndicate  to also acquire an
     interest  in an  additional  property  in Quebec  known as the  Sarah  Lake
     Project.  This second property is included in the earlier  agreement for no
     additional  consideration  other than a fee of $5,200.  The original  Pekan
     River permit holder will retain a 1.5% net smelter return on production.

     During the prior year,  the company earned a 51% interest in the properties
     by  paying  the sum of $9,200 to Beaver  Syndicate  and  issuing  to Beaver
     Syndicate 80,000 common shares valued at $0.50 per share.


     During the current year,  the company  earned an  additional  29% interest,
     thereby increasing its interest to 80%, by issuing a total of 55,587 common
     shares  valued at a total of $120,000,  by  completing  the current  year's
     assessment work and by paying the annual renewal fees.

     The company can earn an additional  10% interest,  thereby  increasing  its
     interest to 90%, up to May 30, 1998, by issuing to Beaver Syndicate $60,000
     worth of common  shares  or by paying  $60,000  in cash,  at the  company's
     option.

                                       F-12



<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________


4.   INTEREST IN MINING PROPERTIES (Continued)

     The company has been advised that the Pekan River permit is valid until May
     23, 2000 and is in good standing  until May 23, 1998, at which time renewal
     fees must be paid and suitable assessment work filed. The Sarah Lake permit
     is valid until October 25, 2000 and remains in good standing  until October
     25, 1998,  at which time renewal  fees are payable and  assessment  work is
     due.

(g)  MERCURY PERMIT, QUEBEC

     The company has entered into an agreement with Beaver Syndicate to purchase
     a 90% mining  interest in 11,500  hectares  of  property in Quebec.  Beaver
     Syndicate  will  continue to hold the  unearned  interest and will retain a
     1.5% net smelter return on production.

     During the prior  year,  the  company  earned a 51% mining  interest in the
     property  by paying the sum of $16,300 to Beaver  Syndicate  and issuing to
     Beaver Syndicate 80,000 common shares valued at $0.50 per share. A total of
     $23,515 was expended on the property during the current year.

     During the current year,  the company  earned an  additional  29% interest,
     thereby  increasing  its interest to 80% by issuing  62,899  common  shares
     valued at $160,000, by completing the current year's assessment work and by
     paying the annual renewal fees.

     The company can earn an additional  10% interest,  thereby  increasing  its
     interest to 90%, up to May 16, 1998, by issuing to Beaver Syndicate $80,000
     worth of common  shares  or by paying  $80,000  in cash,  at the  company's
     option.  Beaver  Syndicate has advised the company that the permit is valid
     to May 11, 2000 and the property is in good standing until May 11, 1998, at
     which time renewal fees will be payable and assessment work will need to be
     filed.

(h)  NICARAGUA

     The  company  has  entered  into an option  agreement  which  enables it to
     acquire a 68.25%  mining  interest in a 200 hectare  property in Nicaragua,
     known as "La  Mestiza".  This  option  was  granted  by Archon  Prospecting
     Syndicate  which would hold a 1.75%  interest if the company earns a 68.25%
     interest in the  property.  The  remaining 30% will be held by a Nicaraguan
     joint  venturer.  The agreement  requires the  following  cash payments and
     common shares to be issued from treasury to Archon Prospecting Syndicate by
     the noted dates:


                                 Payment    
                                  Cash            Shares
         Date                     US $            Issued
         ----                     ----            ------
                                            
                                            
         January 9, 1997          50,000         100,000
         June 3, 1997             -              100,000
         November 25, 1997        75,000         200,000
         April 24, 1998          100,000         200,000
         September 6, 1999       125,000         200,000
                                 -------         -------
                                 350,000         800,000
                                 =======         =======

                                            
                                        
                                       F-13


<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________



4.   INTEREST IN MINING PROPERTIES (Continued)

     The  company  will earn a 13.16%  mining  interest  in the  property  as it
     completes each of five distinct  exploration  phases.  At the completion of
     the fifth phase,  the company  will have earned a 65.8% mining  interest in
     the property.  The company was required to make a payment of U.S.  $110,000
     to reimburse the co-venturer for prior  expenditures.  A further payment of
     U.S.  $110,000 is required  prior to December  20, 1997.  In addition,  the
     company is required to fund all exploration  and  development  expenditures
     leading to the commencement of commercial production.

     The company can increase  its  interest  from 65.8% to 68.25% by paying the
     sum of U.S.  $200,000  within two years after the date of  commencement  of
     commercial production.

     During the  current  year,  the company  made the initial  payments of U.S.
     $50,000 and U.S.  $110,000,  issued 100,000 common shares at a market value
     of $4.20 per share and issued  100,000  common  shares at a market value of
     $1.34 per share.

(i)  BELITUNG ISLAND AND KALIMANTAN ISLAND, INDONESIA

     The company has entered into agreements to acquire mining interests in five
     separate properties in Indonesia.  Three of these properties are located on
     Belitung Island while two are located on Kalimantan Island. The company has
     a 30%  interest  in each of the  properties.  Effective  May 8,  1997,  the
     company  assumed  the   responsibility  as  the  operator  for  exploration
     activities on the  properties.  Subsequent to the year end, the company and
     its two  non-Indonesian  joint  venturers  gave  notice  to the  Indonesian
     partner that they were  withdrawing  from the  Kalimantan  joint  ventures.
     Accordingly,   all  work  ceased  on  these   properties   and  no  further
     expenditures  will  be  incurred.  A total  of  $118,367  which  represents
     cumulative  amounts that have been funded  relating to the  acquisition and
     exploration  of the  Kalimantan  properties  has  been  written  off to the
     statement of income.

(j)  TEWAH, INDONESIA

     The company  entered into an agreement to  participate  with an  Indonesian
     mining company for the  exploration and development of gold property in the
     Kahayan  River Valley in  Indonesia.  The  agreement  allows the company to
     acquire a 60% interest for an expenditure of the greater of U.S. $1,500,000
     or the cost of completing a full feasibility study on the property.

     The company  then  entered into an  agreement  with Waseco  Resources  Inc.
     whereby  Waseco  Resources  Inc.  could earn the company's  interest in the
     property  by  spending  the U.S.  $1,500,000  on the  property  and issuing
     treasury  shares to the company.  The acquisition was to be accomplished by
     Waseco Resources Inc. whereby it has three separate options to purchase 20%
     at each option date, satisfied by spending U.S. $500,000 in exploration and
     development  expenditures  by  each  date  and  issuing  to the  company  a
     cumulative  7,000,000  common  shares from  treasury.  As at May 31,  1997,
     Waseco   Resources  Inc.  had  spent  in  excess  of  U.S.   $1,000,000  of
     expenditures on the property and had earned a 40% interest in the property.

     The  balance as at May 31, 1997  relates to  expenditures  on the  property
     which to date have not been reimbursed by Waseco Resources Inc.

                                        F-14



<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________



5.   INVESTMENT IN MINING SYNDICATES AND MINING COMPANIES


                                                     1997        1996
                                                      $           $

         Investment in mining syndicate             80,000      40,000
         Investment in private mining company      137,978     137,978
                                                   -------     -------
                                                   217,978     177,978
                                                   =======     =======


     The  company  participated  in a private  placement  during  the prior year
     whereby it purchased 10,000 ordinary shares of Randgold  Resources  Limited
     at a cost of $137,978.  The company  holds less than 1% of the  outstanding
     shares.  Randgold  Resources Limited is involved in the exploration of gold
     mining properties in Africa.  These shares were sold subsequent to the year
     end for cash proceeds of $224,548.

     Investment in mining syndicates consists of 4.0 units (1996 - 4.0 units) in
     Silverstone  Prospecting Syndicate with a cost of $20,000 (1996 - $20,000);
     2.0 units (1996 - 2.0) in Beaver  Syndicate  with a cost of $20,000 (1996 -
     $20,000);  2.0 units (1996 - nil) in Crystal Valley  Prospecting  Syndicate
     with a cost of $20,000;  and 4.0 units  (1996 - nil) in Archon  Prospecting
     Syndicate  with a cost of $20,000.  Silverstone  Prospecting  Syndicate  is
     currently exploring  properties in the United States,  Beaver Syndicate and
     Crystal Valley Prospecting  Syndicate are exploring  properties in Northern
     Labrador  and  Quebec  while  Archon  Prospecting  Syndicate  is  exploring
     properties in Central America.  As at May 31, 1997, the company holds 8% of
     the outstanding units in each of these syndicates. The company has acquired
     mining  rights from certain of these mining  syndicates as outlined in note
     4.

     In addition,  the company holds 5,000,000 common shares of Waseco Resources
     Inc. This represents  approximately  40% of the outstanding  shares.  These
     shares were  acquired  pursuant to the transfer of the mining option rights
     in the Tewah,  Walang,  Tikukur,  and Seruyan  properties  in  Indonesia to
     Waseco  Resources  Inc.  No value has been  attached  to these  shares  for
     accounting  purposes as the company had not incurred any costs in obtaining
     these option rights which were transferred in exchange for the shares.


6.   LOAN RECEIVABLE

     The loan receivable is equivalent to U.S.  $120,000,  bears interest at the
     rate of 2.5% per month and is due from the Nicaraguan co-venturer in the La
     Mestiza  Project  [see note  4(h)].  Subsequent  to the year end, a further
     advance  of U.S.  $120,000  was made  increasing  the loan  balance to U.S.
     $240,000.  The borrower has granted the company a security  interest in the
     borrower's share of all gold produced by the project.







                                        F-15



<PAGE>


DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________


7.   FIXED ASSETS


                                                   ACCUMULATED   1997    1996
                                            COST   AMORTIZATION   NET     NET
                                              $         $          $       $

       Furniture and fixtures               31,199    26,250      4,949   6,186
       Computer and equipment               28,099     8,933     19,166  19,262
       Exploration and mining equipment    227,585       753    226,832  -
       Vehicles                            143,562    21,534    122,028  -
                                           -------    ------    -------  ------
                                           430,445    57,470    372,975  25,448
                                           =======    ======    =======  ======

8.   RELATED PARTY INFORMATION

     During the current year, the company incurred fees totalling $7,893 (1996 -
     $73,141, 1995 - $27,395),  related to exploration work charged by a company
     in which a  director  holds a 49%  interest.  A balance  of $1,730  (1996 -
     $4,966)  related  to these  fees is  included  in  accounts  payable at the
     current year end date. The company leases registered head office space from
     the same company at a cost of $400 per month. In addition,  a company which
     is wholly owned by a director, charged $48,150 (1996 - $56,640, 1995 -$nil)
     in  consulting   fees  related  to  exploration   and  investor   relations
     activities.  The company paid $24,000 (1996 - $17,000, 1995 - $nil) in fees
     to a director for exploration activities.

     These  transactions are in the normal course of operations and are measured
     at the exchange amount which is the amount of consideration established and
     agreed to by the related parties.

9.   CAPITAL STOCK

     (a)  Authorized capital
            Authorized  capital  stock of the company  consists of an  unlimited
            number of special  shares,  redeemable  and  retractable  at paid-up
            value and an unlimited number of common shares.

     (b)  Issued and outstanding shares
            Details of issued and outstanding common shares are as follows:
<TABLE>
<CAPTION>
                                                                1997                      1996
                                                Shares           $       Shares            $
<S>                                           <C>           <C>         <C>           <C>      
         Balance, beginning of year           21,916,256    8,001,389   12,399,581    3,562,799

         Issued pursuant to:
         Public offering                       1,000,000    5,750,000         --           --
         Warrants exercised by shareholders         --           --      7,841,600    3,136,640
         Shares issued related to the
         purchase of mining properties           742,295    3,244,000      740,075      871,000
         Exercise of share options               185,000      147,200      585,000      290,950
         Exercise of promoter's options             --           --        350,000      140,000
                                              ----------   ----------   ----------   ----------
                                              23,843,551   17,142,589   21,916,256    8,001,389
                                              ==========   ==========   ==========   ==========
</TABLE>


                                        F-16


<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________


9.   CAPITAL STOCK (Continued)

            The weighted  average  number of shares  during the current year was
            approximately 22,934,000 (1996 - 15,083,000, 1995 - 6,315,000).

     (c)  Public Offering
            During the current year, the company completed a public offering for
            the issuance of 1,000,000  Special  Warrants at a price of $5.75 per
            Special  Warrant.  Each  Special  Warrant  entitled the holder to be
            issued one common share and one-half of a common share  warrant at a
            price of $6.75 per share  until May 17,  1997.  The  expiry  date of
            these  warrants was later  extended to November  17, 1997.  To date,
            none of these warrants has been exercised.

            The  total  gross  proceeds  of  $5,750,000  are  included  in share
            capital.  The total costs of $647,910  associated  with the offering
            have been charged to retained earnings. The broker handling the sale
            of the offering was issued a Brokers  Warrant  which  entitled it to
            purchase  on or before  May 17,  1997,  50,000  common  shares at an
            exercise price of $6.75 per share. The expiry date of these warrants
            was later  extended to November  17,  1997.  To date,  none of these
            warrants has been exercised.

     (d)  Share Option Plan
            The company has a share option plan under which  options to purchase
            common shares may be granted by the board of directors to directors,
            officers,   employees   and  eligible   service   providers  of  the
            corporation  for  terms  up to five  years  at a price  equal to the
            market price prevailing on the date of the grant. The maximum number
            of options available for grant under the plan is 5,500,000,  subject
            to the  approval  of the  shareholders  at the next  annual  general
            meeting.

            The  following is a summary of the  outstanding  options  which have
            been granted by the board of directors:

                  Expiry Date         Option Price        Number of Shares
                                           $

            June 5, 2000                 0.62                  440,000
            November 28, 2000            1.27                   30,000
            January 26, 2001             1.86                  200,000
            June 7, 2001                 5.50                   90,000
            October 18, 2001             6.50                   10,000
            October 21, 2001             6.80                    5,000
            October 21, 2001             8.00                    2,500
            February 20, 2002            6.00                    5,000
            February 20, 2002            5.30                   15,000
            July 16, 2002                1.30                  800,000
            July 16, 2002                1.40                  300,000
            September 29, 2002           1.00                  100,000
                                                             ---------
                                                             1,997,500
                                                             =========






                                        F-17



<PAGE>


DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________



9.   CAPITAL STOCK (Continued)

         Included in the above are the following  options which will not vest in
         favour  of the  recipients  until the  shareholders  have  approved  an
         increase in the maximum  number of share  options  available  under the
         plan from 2,190,000 to 5,500,000:

              Expiry Date             Option Price         Number of Shares
                                          $

            July  16, 2002               1.30                  800,000
            July 16, 2002                1.40                  300,000
            September 29, 2002           1.00                  100,000


10.  INCOME TAXES

     As at May 31,  1997,  the  company  had  accumulated  income  tax losses of
     $1,793,000 which may be applied against future taxable income. These losses
     expire as follows:

                       Fiscal Year Ending In:                     $

                                         1998                  114,000
                                         1999                  339,000
                                         2000                   30,000
                                         2001                   84,000
                                         2002                  220,000
                                         2003                  176,000
                                         2004                  830,000
                                                             ---------   
                                                             1,793,000
                                                             =========


     In addition,  the company has deferred  exploration  expenditures which are
     deductible for tax purposes in the amount of approximately $6,200,000 which
     have been capitalized for accounting purposes.


11.  GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES

     The consolidated financial statements have been prepared in accordance with
     generally accepted accounting  principles ("GAAP") in Canada,  which differ
     in  certain  material  respects  from GAAP in the  United  States.  Had the
     company followed GAAP in the United States, the consolidated  balance sheet
     would have been reported as follows:











                                        F-18



<PAGE>


DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________



11.  GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
     (Continued)

<TABLE>
<CAPTION>
                                                                                 1997             1996
                                                                                  $                $
<S>                                                                          <C>              <C>      
      CURRENT ASSETS

      Cash and term deposits                                                 1,647,468        2,863,181
      Cash held in escrow   (NOTE 11A)                                          -             5,297,500
      Marketable securities   (NOTE 11C)                                       178,601          246,991
      Prepaid expenses and sundry receivables   (NOTE 11A)                     109,413           92,675
                                                                            ----------       ----------
                                                                             1,935,482        8,500,347
      INTEREST IN MINING PROPERTIES                                         12,053,053        3,172,373
      INVESTMENT IN MINING SYNDICATES AND MINING
      COMPANIES                                                                217,978          177,978
      LOAN RECEIVABLE                                                          165,396           -
      FIXED ASSETS                                                             372,975           25,448
                                                                            ----------       ----------
                                                                            14,744,884       11,876,146
                                                                            ==========       ==========

      CURRENT LIABILITIES

      Accounts payable and accrued liabilities   (NOTE 11A)                    832,776          425,363

      SHAREHOLDERS' EQUITY

      Capital stock   (NOTE 11B)                                            16,009,525       12,654,140

      Deficit incurred prior to development stage activities   (NOTE 11E)     (968,527)        (968,527)
      Deficit accumulated during the development stage   (NOTE 11E)         (1,155,890)        (356,330)
      Difference between cost and market value of
      marketable securities   (NOTE 11C)                                        27,000          121,500
                                                                            ----------       ----------
                                                                            14,744,884       11,876,146
                                                                            ==========       ==========
</TABLE>


     CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION

     During the year,  the company issued 742,295 common shares (1996 - 740,075,
     1995 - 410,000) of its share capital as  consideration  for the acquisition
     of mining  properties in the amount of $3,244,000 (1996 - $871,000,  1995 -
     $135,000).  These amounts have been included in the consolidated  statement
     of changes in financial  position as financing  and  investing  activities.
     Under GAAP in the United States, these non-cash transactions would not have
     been shown in the consolidated statement of changes in financial position.










                                        F-19



<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________


11.  GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
     (Continued)

     Accordingly, the U.S. GAAP subtotals are reconciled as follows:
<TABLE>
<CAPTION>
                                                                 1997          1996          1995
                                                                   $             $             $
<S>                                                           <C>         <C>           <C>      
        CASH USED IN OPERATIONS PER CANADIAN GAAP                41,917      (192,632)     (148,839)

        Increase in net change in non-cash working capital
        capital balances related to operations   (NOTE 11A)    (159,595)      159,595        -
                                                             ----------     ---------     ---------
        CASH USED IN OPERATIONS PER U.S. GAAP                  (117,678)      (33,037)     (148,839)
                                                             ----------     ---------     ---------
        CASH USED FOR
        INVESTING ACTIVITIES PER CANADIAN GAAP               (9,753,420)   (2,634,560)     (554,379)

        Issuance of shares for the acquisition of
        mining properties included above                      3,244,000       740,075       410,000
                                                             ----------     ---------     ---------
        CASH USED FOR
        INVESTING ACTIVITIES PER U.S. GAAP                   (6,509,420)   (1,894,485)     (144,379)
                                                             ----------     ---------     ---------
        CASH PROVIDED BY FINANCING ACTIVITIES
        PER CANADIAN GAAP                                     8,495,790     4,425,930     1,933,515

        Issuance of capital stock   (NOTE 11A)               (5,137,905)    5,137,905        -

        Issuance of shares for the acquisition of
        mining properties included above                     (3,244,000)     (740,075)     (410,000)
                                                             ----------     ---------     ---------
        CASH PROVIDED BY FINANCING ACTIVITIES
        PER U.S. GAAP                                           113,885     8,823,760     1,523,515
                                                             ----------     ---------     ---------

        CHANGE IN CASH AND CASH EQUIVALENTS
        UNDER U.S. GAAP                                      (6,513,213)    6,896,238     1,230,297

        Cash held in escrow   (NOTE 11A)                      5,297,500    (5,297,500)       -
                                                             ----------     ---------     ---------
        CHANGE IN CASH AND CASH EQUIVALENTS
        UNDER CANADIAN GAAP                                  (1,215,713)    1,598,738     1,230,297
                                                             ==========     =========     =========
</TABLE>












                                        F-20



<PAGE>



DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________



11.  GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
     (Continued)

     The net change in non-cash  working capital  balances related to operations
     under Canadian and U.S. GAAP is comprised of the following:
<TABLE>
<CAPTION>
                                                                     1997        1996       1995
                                                                      $           $          $

<S>                                                                <C>         <C>        <C>     
        Prepaid expenses and sundry receivables                    (16,738)    (57,268)   (29,463)

        Accounts payable and accrued charges                       461,413     236,469    (15,650)
                                                                   -------     -------    ------- 
                                                                   444,675     179,201    (45,113)
                                                                   =======     =======    ======= 


        CONSOLIDATED LOSS PER SHARE   (NOTE 11F)                     1997        1996       1995
                                                                      $           $          $

        Primary loss per share as per GAAP in Canada                  .03         .01        .03

        Primary loss per share as per GAAP in the United States       .03         .01        .02
</TABLE>

     (a)  CASH HELD IN ESCROW

     Under U.S.  GAAP,  the cash held in escrow as at May 31, 1996 in the amount
     of $5,297,500 related to the public offering which closed subsequent to the
     fiscal  1996  year  end  would  be  included  on  the  balance  sheet.  The
     adjustments  related to these funds would include the following,  as at May
     31, 1996:

     -    An increase  in capital in the amount of  $5,137,905  (gross  proceeds
          less costs of issuance of $612,095)

     -    A decrease in prepaids of $35,494

     -    An  increase  in  accounts  payable  related to  outstanding  expenses
          related to the offering in the amount of $124,101

     (b)  SHARE ISSUE EXPENSES

     Share issue  expenses are shown as an increase of deficit as provided under
     GAAP in Canada.  Under GAAP in the United States,  these expenses are shown
     as a reduction of share capital.

     (c)  INVESTMENTS IN SHARES OF PUBLIC COMPANIES

     Under GAAP in the United  States,  the company's  investments  in shares of
     public  companies  would be  classified  as available for sale and would be
     carried at fair market  value.  Changes in the market value of  investments
     are included as a component of shareholders' equity.

                                        F-21



<PAGE>


DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________



11.  GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
     (Continued)

     (d)  INCOME TAXES

     Deferred  tax  assets  under  U.S.  GAAP  which are  offset by a  valuation
     allowance are comprised of the following at May 31:

                                                            1997        1996
                                                             $           $

         Net loss carryforwards                           800,000     560,000
         Exploration and development expenditures       2,800,000   1,130,000
         Costs of raising capital                         310,000     400,000
                                                       ----------  ---------- 
                                                        3,910,000   2,090,000
         Less:  Valuation allowance                    (3,910,000) (2,090,000)
                                                       ----------  ---------- 

                                                           -           -
                                                       ==========  ========== 



     (e)  DEVELOPMENT STAGE COMPANY DISCLOSURE

     Under U.S. GAAP the company would be considered a development stage company
     commencing in the year ended May 31, 1993 when it ceased its investment and
     consulting  operations  and  became  a  mining  development  company.  As a
     development  stage  company,  the  company is required to provide an income
     statement and statement of cash flow on a cumulative basis from the date it
     became a development  stage company which are included  separately in these
     financial statements.

     In addition the  cumulative  loss as a  development  stage company would be
     included as a separate portion of the balance sheet as "deficit accumulated
     during the development  stage." The  accumulated  deficit of the company at
     the  commencement  of its  operations  as a  development  stage company was
     $968,527.

     The  capital  stock  issued  during the period  that the company has been a
     development stage company is as follows:














                                        F-22



<PAGE>


<TABLE>
<CAPTION>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
_________________________________________________________________________________________________________________

11.     GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
        (CONTINUED)

Date                      Shares Issued      Description                                                   $
<S>                         <C>              <C>                                                    <C>    
YEAR ENDED MAY 31, 1993

Opening balance               9,900,000                                                                  990,101

January 31, 1993              1,500,000      Private placement for $150,000 cash                         150,000

April 26, 1993                   32,105      Issued in exchange for publicly traded shares of
                                             Frankfield Consolidated Corporation based on the
                                             estimated market value of the shares received                13,484
                             ----------                                                                ---------

Cumulative                   11,432,105                                                                1,153,585

YEAR ENDED MAY 31, 1994

June 17, 1993                   100,000      Issued in exchange for consulting assistance                 10,000
                                             related to Frankfield take-over bid based on
                                             agreed upon fee of $10,000

December 23, 1993               100,000      Issued pursuant to option to acquire a 60%                   62,500
                                             interest in Fletcher Lake property based upon
                                             agreed upon price of $62,500

During the year                   1,829      Exercise of warrants issued pursuant to                         914
                                             Frankfield take-over bid at $0.50 per share
                             ----------                                                                ---------


Cumulative                   11,633,934                                                                1,226,999

YEAR ENDED MAY 31, 1995

September 23, 1994           (6,980,353)     Consolidation of shares on a one post-consolidation            -
                                             share for each two and one-half pre-consolidation
                                             shares pursuant to Articles of Amendment

February 28, 1995 through
   May 5, 1995                7,236,000      Initial public offering at $0.30 per share                2,170,800
                             ----------                                                                ---------

Balance forward              11,889,581                                                                3,397,799
                             ----------                                                                ---------















                                       F-23



<PAGE>  


DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________________________________________


11.     GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
        (CONTINUED)

Date                      Shares Issued      Description                                                         $
<S>                         <C>              <C>                                                        <C>    
Subtotal from prior
  page                       11,889,581                                                                     3,397,799

March 3, 1995                   100,000      Private placement at $30,000 cash                                 30,000

March 6, 1995                   150,000      Shares issued pursuant to acquisition of interest                 45,000
                                             in Rancheria property in California based on
                                             price of shares issued to public

March 14, 1995                  200,000      Shares issued pursuant to acquisition of interest                 60,000
                                             in Crystal Valley property in Quebec based on
                                             price of shares issued to public

April 18, 1995                   60,000      Shares issued pursuant to acquisition of interest                 30,000
                                             in Fletcher Lake property based on the market
                                             value of shares on date of agreement
                             ----------                                                                     ---------
                             12,399,581                                                                     3,562,799

YEAR ENDED MAY 31, 1996

September 19, 1995              150,000      Shares issued pursuant to acquisition of interest in              90,000
                                             Rancheria property in California based on the market
                                             value of shares on date of exercising of option

January 18, 1996                150,000      Shares issued pursuant to acquisition of interest in             186,000
                                             Leek Springs property in California based on the market
                                             value of shares on date of exercising of option

January 19, 1996                160,000      Shares issued pursuant to acquisition of interest                 80,000
                                             in Pekan River and Mercury Permit, Quebec properties
                                             based on the market value of shares on date of
                                             agreement

January 29, 1996                 30,075      Shares issued pursuant to acquisition of interest                  
40,000
                                             in Dihourse, Quebec property based on the market
                                             value of shares on date of agreement
                             ----------                                                                     ---------
Balance forward              12,889,656                                                                     3,958,799
                             ----------                                                                     ---------






















                                                 F-24



<PAGE>   


DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
_____________________________________________________________________________________________________________________


11.     GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
        (CONTINUED)

Date                      Shares Issued      Description                                                         $
<S>                         <C>              <C>                                                        <C>    
Subtotal from prior
  page                       12,889,656                                                                     3,958,799

February 27, 1996               150,000      Shares issued pursuant to acquisition of interest                372,000
                                             in Rancheria property in California based on the
                                             market value of shares on date of exercising of
                                             option

February 29, 1996               100,000      Shares issued pursuant to acquisition of interest                103,000
                                             in Belitung Island, Indonesia property based on
                                             the market value of shares on date of agreement

April 15, 1996                  350,000      Exercising of promoter's options at $0.40 per share              140,000

During the fiscal year          585,000      Exercising of share options pursuant to share                    290,950
                                             option plan at pricing ranging from $0.40 to $1.27
                                             per share

During the fiscal year        7,841,600      Exercising of warrants issued pursuant to initial              3,136,640
                             ----------      public offering at $0.40 per share                             ---------

                             21,916,256                                                                     8,001,389
                             ==========                                                                     =========

YEAR ENDED MAY 31, 1997

September 19, 1996            1,000,000      Shares issued pursuant to public offering                      5,750,000

October 22, 1996                200,000      Shares issued pursuant to acquisition of interest in           1,290,000
                                             Leek Springs property in California based on market
                                             value of shares on date of exercising of option

October 27, 1996                 23,809      Shares issued as finders fee related to acquisition of           150,000
                                             Indonesian properties based on market value of shares

November 26, 1996                25,225      Shares issued pursuant to acquisition of interest in             140,000
                                             Pekan  River  and  Mercury  Permit,
                                             Quebec   properties  based  on  the
                                             market  value of  shares on date of
                                             exercising of option

January 30, 1997                100,000      Shares issued pursuant to acquisition of interest in             420,000
                                             Nicaraguan property based on the market value of
                                             shares of date of agreement
                             ----------                                                                    ----------  
Balance forward              23,265,290                                                                    15,751,389
                             ----------                                                                    ----------
















                                                           F-25



<PAGE>



DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
_____________________________________________________________________________________________________________________

11.     GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
        (CONTINUED)

Date                      Shares Issued      Description                                                         $
<S>                         <C>              <C>                                                        <C>    
Subtotal from prior
  page                       23,265,290                                                                    15,751,389

March 18, 1997                  200,000      Shares issued pursuant to acquisition of                         970,000
                                             interest in Leek Springs, California property
                                             based on the market value of shares on date of
                                             exercising of option

May 15, 1997                     48,485      Shares issued pursuant to acquisition of interest                 80,000
                                             in Mercury Permit, Quebec property based on the
                                             market value of shares on the date of
                                             exercising of option

May 26, 1997                    144,776      Shares issued pursuant to acquisition of interest                194,000
                                             in Pekan River, Quebec property and
                                             Nicaraguan property based on the market value
                                             of shares on the date of exercising of options

During the fiscal year          185,000      Exercising of shares options pursuant to                         147,200
                                             share option plan at price ranging from
                                             $0.62 to $1.27 per share
                             ----------                                                                    ----------
                             23,843,551                                                                    17,142,589
                             ==========                                                                    ==========
</TABLE>



     (f)  Loss per share

     Under GAAP in the United States,  the  computation of primary income (loss)
     per share  considers  the  weighted  average  number of shares  outstanding
     during  the  year  plus  common  share  equivalents,  such as  options  and
     warrants.  This method  requires  that primary  income  (loss) per share be
     computed as if the common share equivalents were exercised at the beginning
     of the year or at the date of issue  and as if the funds  obtained  thereby
     were used to purchase  common shares of the company at their average market
     price during the year.


12.  COMMITMENTS AND CONTINGENCIES
     During the current year, the company funded all requests made by the former
     operator  of the  Belitung  Island  and  Kalimantan  Island  properties  in
     Indonesia  for cash  advances to fund it's  proportion  of the  exploration
     expenditures.  Subsequent to the year end, the company received a cash call
     from its  co-venturer on the five Indonesian  properties for  approximately
     U.S. $900,000  representing it's alleged unfunded share of the costs to May
     31, 1997. The company believes that the exploration  activities  carried on
     by the former operator did not follow industry  practices which resulted in
     excessive costs and less verifiable  geological  information  than would be
     expected if standard industry practices had been followed. Accordingly, the
     company has refused to make payment on the cash call and while  discussions
     have been held with the co-venturer, an agreement has not been reached. The
     company has accrued in the accounts, an amount which it believes represents
     its best  estimate of the likely  settlement,  should the  company  wish to
     reach a settlement with the co-venturer at this time.




                                        F-26



<PAGE>


DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997  (IN CANADIAN DOLLARS)
________________________________________________________________________________



13.  SUBSEQUENT EVENTS
     Subsequent to the year end, the company  completed the sale of two separate
     debentures by way of private placement offerings.

     The first sale consisted of a two-year $1.0 million unsecured debenture and
     750,000 common share purchase warrants. The debenture is convertible at the
     option of the holder into common shares of the company at any time in whole
     or in part at a  conversion  price  of $1.33  per  share.  Interest  on the
     debenture at an annual rate of 9.75% is payable quarterly in cash or at the
     company's option, in common shares. The warrants will entitle the holder to
     purchase an aggregate of 750,000 common shares of the company at a price of
     $1.33 per share until July 17, 1999.  The purchase  price for the debenture
     was satisfied by the payment of $700,000 in cash and a promissory  note for
     $300,000 due July 17, 1998.  The broker is entitled to receive a commission
     of $100,000 and a broker's warrant  entitling the broker to purchase 25,000
     common shares of the company at an exercise  price of $1.33 per share until
     July 17, 1999. The interest  payment on September 30, 1997 was satisfied by
     the issuance of 19,032 common shares.

     Subsequent  to the  closing,  $50,000  of the $1.0  million  debenture  was
     retracted and was exchanged for the issuance of 54,104 common shares of the
     company.

     The second sale consisted of a three year $500,000 unsecured debenture, and
     a right to acquire  common share  purchase  warrants upon  conversion.  The
     debenture is  convertible at the option of the holder into common shares of
     the company at any time on or after  November 26, 1997, in whole or in part
     at a conversion  price equal to the ten-day  average  trading  price of the
     common  shares traded on The Montreal  Exchange at the time the  conversion
     rights are exercised.  Interest on the debenture at an annual rate of 8% is
     payable  semi-annually  in cash,  or at the  company's  option,  in  common
     shares.  The warrants will entitle the holder to purchase  common shares of
     the company at a price of $1.07 per share,  in a quantity to be  determined
     in conjunction with the determination of the conversion price, as described
     above,  until August 29, 1999. The broker  received a commission of $50,000
     and a broker's  warrant  entitling  the broker to  purchase  12,500  common
     shares of the company at an exercise  price of $1.07 per share until August
     29, 1999.





                                        F-27