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
                            Toronto, 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.
                                      None
                                (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.
                            25,887,586 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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                                GLOSSARY OF TERMS

ABITIBI BELT OF     A vast area of ancient  volcanic rocks extending from Kenora
                    to Sudbury, Ontario to

QUEBEC-ONTARIO:     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
AEROMAGNETIC        magnetic  characteristics  of rocks on and below the surface
 SURVEY:            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           A unit  of  ancient  sedimentary  rocks  in New  Quebec  and
 FORMATION:         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       Rotary drilling using diamond  impregnated bits to produce a
 HOLES:             solid continuous core sample of the rock.


DIAMONDIFEROUS:     Containing  diamond.  A volcanic vent piercing country rock,
DIATREME:           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.


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

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

ELECTROMAGNETIC     A   geophysical   method   employing   the   generation   of
(PROSPECTING):      electromagnetic  waves at the earth's surface 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
DIAMOND:            trained  observer  with  the  aid of a  10-power  magnifying
                    glass, and having a colour 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,  redepositing, 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/          A volume of  igneous  rock that was  injected,  while  still
 INTRUSIVE:         molten, into the earth's crust or other rocks.

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.


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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            A widespread  local unit of volcanic  flows and mudslides in
 (VOLCANICS):       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.

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

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


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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 are 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.

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
                    olivine.

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.


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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 4, 1998, $0.6515 (U.S.$1.00 = CDN$1.5350).

All  currency  amounts are  expressed  in Canadian  dollars  unless  otherwise
stated.


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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, Toronto, 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 El Dorado
County,  California;  Northern Quebec, 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 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 24
month period and Waseco has completed a favourable  feasibility study in respect
of its alluvial gold prospect in 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
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


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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
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.


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<PAGE>


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 event 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
activities 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.

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


                                       9

<PAGE>


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
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.
MARENA  has   approved  the  initial


                                       10

<PAGE>


environmental  impact study. 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.  This was  completed and approved by the  government  for the alluvial
gold project on the Island of Kalimantan.

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
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  Silverstone
within a  specified  area of interest  (herein,  the "Area of  Interest")  . The
property  originally  consisted of 215  unpatented  mining  claims which covered
approximately  4,300 acres. In August 1998, the Company reduced the claim number
to 125 covering 2,500 acres. These comprise the following: Adrienne (10 claims),
Judy (43), Susan (19), and Michelle


                                       11

<PAGE>


(53).  The total area  claimed  encompasses  the known  outline of the  Adrienne
lamproitic  breccia  (Adrienne  pipe).  The Company  currently 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
$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,  1999,  to (i) pay
Silverstone  an  additional  sum of $100,000  U.S.,  (ii) deliver an  additional
200,000  common shares of the Company in October 1998,  (iii) provide  technical
data and financial statements establishing cumulative expenditures of $4,000,000
U.S. by August 2, 1999, and (iv) complete cumulative  expenditures of $5,000,000
U.S. by August 2, 2000. The Company has completed cumulative expenditures of CDN
$3,362,000 (U.S.  $2,175,000) as at May 31, 1998 and delivered 200,000 shares in
October 1998.

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  Diggings  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 Cosummes 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


                                       12

<PAGE>


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
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 claims are underlain by volcanics with granite  adjacent
to the claim area.  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
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


                                       13

<PAGE>


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,  aluminum  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.

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.

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.


                                       14

<PAGE>


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  recommended  further  exploration to discover
additional  pipes on the property.  Following his  recommendations,  the Company
carried out geological mapping and an airborne magnetometer survey to follow-up.
Dr. George Wahl interpreted the results of the airborne  magnetometer survey. He
identified  three  probable  diatremes  believed to be the major  volcanic vents
through which ash-flow breccia was erupted. One diatreme lies in close proximity
to the diamond drill holes which returned diamonds on caustic dissolution of the
core.  It is  circular,  with a diameter of 1500 feet and an area of about forty
acres. It is situated in the valley of the middle fork of the Camp River.

Another  diatreme  with a positive  magnetic core and a negative rim is situated
immediately  south of Podesta Camp.  The core is about 1000 feet in diameter and
the rim has a width of about 1000 feet.  This anomaly  covers  almost 160 acres.
The  magnetic  pattern is similar  that  mapped over the Mwadui Pipe in Tanzania
with the volcanic neck (positive) and its flanks of volcanic ejecta (negative).

The third inferred diatreme is similar to the one described above in that it has
a positive  core and a negative  rim. The diameter of its positive core is about
1200 feet with a 400 foot negative rim. This anomaly covers almost 46 acres.  It
lies near Singleton Springs at the headwaters of Cosummes River.

The next plan of work calls for the investigation of these diatremes by a ground
magnetic survey, and sampling of outcrops,  followed by drilling.  This work has
been delayed pending financing.


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.


                                       15

<PAGE>


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
68.25%  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  and  deliver  to Archon
100,000 shares of the capital of Diadem and within 175 days of December 11, 1996
pay 100,000 shares.  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 balance of U.S.$70,000 is to
be paid on or before  June 25,  1999.  The  Company  was  scheduled  to pay U.S.
$100,000  and issue  200,000  shares by April 19, 1998.  An  extension  has been
granted  to pay the  funds  and the  shares  were  issued  on May 12,  1998.  By
September  6,  1999,  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 67%  interest.  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.  Archon would
hold a 1.75% interest and the remaining 30% held by Nicaraguan Joint Venturer.

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.

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 9.0 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.


                                       16

<PAGE>


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.

The Company has  received a proposal  from the Sheridan  Platinum  Group Ltd. to
establish  a 50  ton/day  mill on the La Mestiza  gold  property.  Assuming  the
economics of the project appear  feasible for further  expansion,  Sheridan will
expand the facilities in stages to 500 tons/day.


CANADA

PEKAN RIVER AND SARAH LAKE, QUEBEC

Location and Access

The Pekan  River  Prospect  covering  1800  hectares  is located  in  Courchesne
Township,  50 kilometres south of the nearest town,  Fermont,  Quebec. The Sarah
Lake Project,  1600 hectares,  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
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


                                       17

<PAGE>


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  delivering 80,000 shares, 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.  Renewal fees and assessment work were
delivered.

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.  This was not  delivered  and the Company
retains an 80% interest in both  properties.  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
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.


                                       18

<PAGE>


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
geophysical survey over this area showed a strong magnetometer response from the
ultramafic sill,  extending for 4,100 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.

Geophysical 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.


                                       19

<PAGE>


The Sarah Lake Peridotite

The Sarah Lake Permit, 1,600 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.


OTHER INTERESTS

During the fiscal  year-end May 31, 1998 the Company  abandoned its interests in
the Mercury  permit,  Quebec  property and the Lac de Gras area  property in the
Northwest Territories.  The claims were allowed to lapse and the properties were
written off the balance sheet.


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.

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


                                       20

<PAGE>


"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
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 KPs 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.


                                       21

<PAGE>

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
STAGE                INITIAL PERIOD (+ EXTENSIONS YEARS)                      CUMULATIVE PERCENTAGE OF ORIGINAL
                                                                                   AREA TO BE RELINQUISHED %
------------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>                                            <C>
General Survey                  1 (+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.
------------------------------------------------------------------------------------------------------------------------------------
Operating                       30 (2)                                                  ----
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


(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
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  Coordinating 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
lodged,  which  replaces the former  performance  bond of U.S.  $100,000 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


                                       22

<PAGE>


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.

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 $1,000,000  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,  the joint venture has earned a 90% 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  government 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 and the Company does
not intend to allocate  any  exploration  funding for this  project  until a new
joint venture  relationship is formed. The Company has reached an agreement with
the receiver for Bresea,  Pricewaterhousecoopers  to purchase  Bresea's interest
for 600,000 common shares of Diadem,  subject to Montreal Exchange approval.  As
part of the  agreement  Bresea will  provide  U.S.  $21,000 to carry part of the
maintenance costs of the property.

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.  Bresea has agreed
to withdraw  from these  applications.  The Company is  currently  looking for a
joint  venture  partner(s)  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.


                                       23

<PAGE>


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 agreement  between the Company and AMBM provided that the Company could earn
its 60%  interest  in the shares of AMBM by  completing  a bankable  feasibility
study.  An option of this interest was  transferred to Waseco in exchange for up
to 7,000,000 common shares of Waseco, and completion of the feasibility study or
a minimum expenditure of U. S. $1,500,000 by 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.$1,500,000 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.$136 per ounce.  With the  recovery of zircon as a  by-product  this
cost is reduced to U.S. $93 per ounce.

It is  recommended  that  initially a dredge capable of treating 3.6 million cu.
metres per year be installed  to commence  production  immediately  at a capital
cost of U.S.$8 million.  Subsequently, in year two, a second dredge capable of 5
million cu. metres should be installed, thus producing 50,000 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.  Two projects were  subsequently  acquired by Waseco in this fashion.
Both are hard rock gold prospects located on the Island of Java.

The Company has received 7,000,000 shares of Waseco. The Company has disposed of
1,000,000  of its Waseco  shares in private  and open market  transactions  with
third  parties.  The proceeds of sale were loaned to Waseco to finance  payables
relating to the  completion  of the  feasibility  study and for working  capital
urposes.  Diadem paid a finders  fee of 250,000  common  shares to parties  that
introduced  Diadem to Waseco.  Diadem  currently holds 5,750,000  common shares,
representing  approximately  38% 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 five members,  two of whom are directors
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, 1998,  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:

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


Common Shares       Directors and Senior     1,539,641(1)         5.50%
                    Officers as a group
                    (eight persons)


                                       24

<PAGE>


(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
4th Quarter, 1997                   1.18                   0.33                   3,960,546
1st Quarter, 1998                   0.90                   0.38                   2,122,746
2nd Quarter, 1998                   0.70                   0.32                   1,552,353
3rd Quarter, 1998                   0.70                   0.12                   2,896,485
October, 1998                       0.35                   0.20                     743,091
November, 1998                      0.50                   0.20                   1,659,007
December 1 - 10, 1998               0.35                   0.21                     576,477
</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
Flevels,  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.


                                       25

<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:

          (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


                                       26

<PAGE>


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
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.


                                       27

<PAGE>


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
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

     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."


                                       28

<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                            As at May 31,    As at May 31,     As at May 31,       As at May 31,     As at May 31,
                                          1998 or the Year  1997 or the Year 1996 or the Year    1995 or the Year   1994 or the Year
                                             then Ended       then Ended        then Ended          then Ended        then Ended
------------------------------------------------------------------------------------------------------------------------------------

                           [Canadian Dollars and Share Numbers in Thousands except per share amounts]
------------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>              <C>                <C>                 <C>              <C>
Working Capital                              $   (886)        $  1,706           $  2,616            $  1,249         $     60
------------------------------------------------------------------------------------------------------------------------------------
Cash and Term Deposits                             86            1,647              2,863               1,264               34
------------------------------------------------------------------------------------------------------------------------------------
Mineral Properties                             13,877           12,053              3,172                 507               82
------------------------------------------------------------------------------------------------------------------------------------
Share Capital                                  17,992           17,142              8,001               3,563            1,227
------------------------------------------------------------------------------------------------------------------------------------
Deficit                                        (5,086)          (3,257)            (1,810)             (1,755)          (1,193)
------------------------------------------------------------------------------------------------------------------------------------
Net Loss for the Year                          (1,828)            (800)               (42)               (160)            (114)
------------------------------------------------------------------------------------------------------------------------------------
Interest Income                                   117              188                 55                  16             --
------------------------------------------------------------------------------------------------------------------------------------
Administrative Expenses                         1,175              785                270                 122              101
------------------------------------------------------------------------------------------------------------------------------------
Property Write Downs                              879              238                 35                  58               23
------------------------------------------------------------------------------------------------------------------------------------
Gain on Marketable Securities
and Investments                                   113                8                208                   4                9
------------------------------------------------------------------------------------------------------------------------------------
Net Loss per Share                           $  (0.07)        $  (0.03)          $  (0.01)           $  (0.03)        $  (0.02)
------------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding                             25,888           23,844             21,916              12,400            4,654
------------------------------------------------------------------------------------------------------------------------------------
Fully Diluted Shares Outstanding               31,367           26,389             23,391              21,022            4,894
------------------------------------------------------------------------------------------------------------------------------------
Total Assets                                   15,466           14,702              6,423               1,927              194
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

     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".

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                      As at May 31,         As at May 31,         As at May 31,     As at May 31,    As at May 31,
                                     1998 or the Year     1997 or the Year     1996 or the Year  1995 or the Year   1994 or the Year
                                        then Ended           then Ended            then Ended        then Ended        then Ended
------------------------------------------------------------------------------------------------------------------------------------

                                 [Canadian Dollars and Share Numbers in Thousands except per share amounts]

------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                   <C>                   <C>             <C>              <C>
Working Capital                         $   (870)             $  1,103              $  8,075        $  1,249         $    (60)
------------------------------------------------------------------------------------------------------------------------------------
Cash and Term Deposits                        86                 1,647                  8.11           1,264               34
------------------------------------------------------------------------------------------------------------------------------------
Mineral Properties                        13,877                12,053                 3,172             507               82
------------------------------------------------------------------------------------------------------------------------------------
Share Capital                             16,859                16,010                12,654           3,090            1,157
------------------------------------------------------------------------------------------------------------------------------------
Deficit                                   (2,984)               (1,156)                 (356)           (314)            (154)
------------------------------------------------------------------------------------------------------------------------------------
Net Loss for the Year                      1,828                  (800)                  (42)           (160)            (114)
------------------------------------------------------------------------------------------------------------------------------------
Interest Income                              373                   188                    54              13             --
------------------------------------------------------------------------------------------------------------------------------------
Administrative Expenses                    1,175                   785                   270             122              101
------------------------------------------------------------------------------------------------------------------------------------
Property Write Downs                         879                   238                    35              58               23
------------------------------------------------------------------------------------------------------------------------------------
Gain on Marketable Securities
and Investments                              113                     8                   208               4                9
------------------------------------------------------------------------------------------------------------------------------------
Net Loss per Share                      $  (0.07)             $  (0.03)             $  (0.01)       $  (0.02)           (0.02)
------------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding                        25,888                23,844                22,916          12,400            4,654
------------------------------------------------------------------------------------------------------------------------------------
Fully Diluted Shares Outstanding          31,267                26,389                24,941          21,022            4,894
------------------------------------------------------------------------------------------------------------------------------------
Total Assets                              15,494                14,745                11,876           1,942              199
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       29

<PAGE>


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
--------------------------------------------------------------------------------
                                    1998      1997      1996      1995      1994
--------------------------------------------------------------------------------
       End of Period               .6868     .7247     .7297     .7300     .7223
--------------------------------------------------------------------------------
       Average for Period          .7066     .7326     .7345     .7255     .7482
--------------------------------------------------------------------------------
       High for Period             .7305     .7513     .7527     .7457     .7865
--------------------------------------------------------------------------------
       Low for Period              .6832     .7151     .7224     .7023     .7166
--------------------------------------------------------------------------------

On May 29, 1998, 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 $0.6863 (US$1.00 = CDN$1.4571). As of December 4, 1998 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 $0.6515 (US$1.00 =
CDN$1.5350)

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 four-year period ending May
31, 1998 as there have been no sources of operating  revenue during this period.
Income  during the current year has been derived from  interest on bank deposits
and notes  receivable,  and on the sale of marketable  securities  that totalled
$116,713 and $112,673 respectively.

Operating  expenses  during  the  current  year were  approximately  $2,054,000.
Included in operating  expenses are costs  associated  with four properties that
are written off with the  termination  of mining  interests.  These included the
Mercury Permit and the Crystal Valley Region in Quebec, the Lac de Gras property
in the Northwest  Territories  and some of the  properties  in Indonesia,  which
totalled a write-off of $879,296.

The net loss for the  current  year was  approximately  $1,828,000  or $0.07 per
share.

LIQUIDITY AND CAPITAL RESOURCES

During the year the Company  completed the sale of three separate  debentures by
way of private placement offerings.

The first sale  consisted of a two-year  $1.0 million  unsecured  debenture  and
750,000 warrants. The debenture is convertible 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  January  17,  1999.  The  broker is  entitled  to  receive a


                                       30

<PAGE>


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  payments to May 31, 1998,  were satisfied by
the issuance of 81,890 common shares.

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.

The third sale on March 24,  1998 for  $500,000  was a two-year  debenture  with
semi-annual  interest at 9.75%.  Convertible  at $0.5252 for 952,018 shares plus
952,018 warrants exercisable at $0.5252 to March 24, 2000.

Prior to year-end  $600,000 of the debentures were retracted and exchanged for a
total of  1,520,467  shares.  Subsequent  to  year-end a further  $350,000  were
retracted for 1,190,031 shares.

In addition, the Company issued $190,000 of shares for the acquisition of mining
properties.

At the end of the fiscal  year the Company  had cash of  approximately  $86,000.
Subsequent to year-end the Company received on September 25, 1998,  $150,000 for
a promissory note due from one debenture holder.

The Company has incurred  expenses  exceeding  the cash  reserves.  The total of
current  liabilities as at May 31, 1998, is  approximately  $1,159,000.  Of this
amount,  approximately  $32,000  is owed to  directors  (past  and  present)  or
associated companies, and $200,000 has been designated to be paid by proceeds of
a private placement of 434,783 shares. Silverstone Prospecting Syndicate is owed
$61,000. The legal and audit expenses amount to approximately $70,000.

The Company  accrued  liabilities of $350,000 in anticipation of a settlement of
the claim of the former operator at Belitung,  Indonesia.  A settlement has been
reached  whereby the Company will pay  1,050,000  common shares in settlement of
the liability with an additional  600,000 common shares to be issued to purchase
Bresea's interests in the properties.

A private placement is presently being negotiated to provide  additional working
capital.

The Company has reserved the $150,000 received  September 24, 1998, to cover the
costs of the annual  meeting  including  mailing  costs,  legal and audit costs,
transfer  agent  charges,  etc.  totalling  an  estimated  $75,000 and to ensure
sufficient  funds are  available  for six  months of normal  operating  expenses
excluding  salaries.  The past  and  present  directors  and  officers  have not
received fees and expenses  since  year-end May 31, 1998. In order to compensate
the present directors and officers for their continuing efforts on behalf of the
Company 400,000 options have been allocated exercisable at $0.25.

As at May 31, 1998, the Company had approximately $15,466,000 in assets of which
the  majority,  approximately  $13,877,000  relates  to mining  properties.  The
Company has  marketable  securities in the amount of $125,544 which had a market
value of $153,103 as at the year-end.  The Company's total  investment in mining
properties  as  at  May  31,  1998  consists  of  approximately   $4,998,000  in
acquisition costs and approximately $8,879,000 in deferred exploration costs.

The  Company  holds an  investment  of  $80,000  in mining  syndicates  that are
pursuing the  exploration  of properties in Quebec,  California  and  Nicaragua.
During the current year the Company  received  income of  approximately  $29,000
from these investments.

The  Company  also  holds  5,750,000  common  shares  of Waseco  Resources  Inc.
("Waseco").  This represents  approximately 38% of the outstanding shares of the
publicly traded Waseco. Waseco has earned a 60% interest in the


                                       31

<PAGE>


Tewah  alluvial  gold  property in  Indonesia  by  completing  a positive  final
feasibility  study.  It also  owns an  interest  in  other  gold  properties  in
Indonesia.  The Company  received a total of  7,000,000  shares of Waseco,  paid
250,000 as commission and sold 1,000,000 shares through the open market.

Diadem is considering  the sale of its remaining  Waseco shares as an additional
means of providing capital to address the Company's working capital deficiency.

The Company has total shareholders' equity of approximately $12,907,000. It will
continue  to fund its  exploration  activities  with cash raised  subsequent  to
year-end.  In  addition,  joint  venture  partners  are  being  sought  for  the
properties to continue  exploration and development at the partner's cost and by
reducing the Company's  interest.  A joint venture proposal has been received to
develop the Nicaragua gold project with the installation of a gold mill.

EXPLORATION

During the fiscal year ended May 31, 1998, a total of  approximately  $2,352,000
was spent on exploration costs as compared with $5,376,000 in the previous year.
Of this total approximately $1,258,000 was spent in Nicaragua, and approximately
$780,000 in California.  The balance was spent in maintaining  but not exploring
the other properties.


Item 10. Directors and Officers of Registrant.

Directors and Executive Officers

<TABLE>
<CAPTION>

                                                                                         Principal
      Name                           Title                                               Occupation
-------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>                               <C>
Wilson Barbour*                     Director                          Financial Consultant; President of Beta Fund
                                                                      Limited; Director of Lyndex Explorations Ltd.

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

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

Paul Heney                          Assistant Secretary               Lawyer, Heney & Associates

Henry ("Harry") Hodge               Director                          Geologist, Professional Engineer; President and
                                                                      Director of Moss Resources Inc. and Greenshield
                                                                      Resources Inc.; Director of Xernac Resources Inc.,
                                                                      Storimin Resources Limited

A.C.A. Howe                         Chairman, President and           Mining Engineer and Consultant, President of the
                                    Director                          Company, President of Ateba Mines Inc. and
                                                                      President of Waseco Resources Inc.

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

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

* Member - Audit Committee


                                       32

<PAGE>


Item 11. Compensation of Directors and Officers.

     (a) For the  fiscal  year  ended  May 31,  1998,  the  aggregate  amount of
     compensation  paid by the Company and its  subsidiaries to all officers and
     directors   as  a  group  was   CDN.$154,075.00.   This   figure   excludes
     CDN$226,234.78  paid to a law firm of which the  assistant  secretary  is a
     member for legal services rendered during the period.

     (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, 1998 to the Named Executive Officers of the Company:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                                       Market Value of          
                                                                                         Securities
                                             % of Total                                   Underlying
                     Securities Under      Options/SARS                                  Options/SARS
 Name and Principal    Options/SARS     Granted to Employees   Exercise or Base        on the Date of
  Position              Granted (#)       in  Fiscal Year     Price ($/Security)            Grant              Expiration Date
----------------------------------------------------------------------------------------------------------------------------------

<S>                   <C>                   <C>                 <C>                       <C>                <C>
A.C.A. Howe (1)        50,000/NIL(2)         1.68%/NIL           50,000 @$1.40            $1.40/NIL          July 16, 2002
President,            100,000/NIL(2)         3.36%/NIL          100,000 @$0.50            $0.50/NIL          November 26, 2003
Chairman
and Chief
Executive
Officer

Daniel T. Farrell     300,000/Nil(2)        10.08%/Nil          300,000 @$0.40            $0.40/Nil          December 17, 2002(3)
(1)
Former President
and CEO
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Mr.  Howe  served  as  President,  Chairman  and CEO from  June 1,  1989 to
     December  31, 1997 and from  September  15, 1998 to the present  time.  Mr.
     Farrell served as President and CEO from January 1 to September 15, 1998

(2)  These options were granted pursuant to the company's share option plan.

(3)  These options were canceled 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, 1998 by the Named Executive  Officers,  and the
fiscal year end values of unexercised options on an aggregated basis:


                                       33

<PAGE>


<TABLE>
<CAPTION>
============================================================================================================================
                                                                                              
                                                                                Unexercised   Value of Unexercised in the   
                                                                                  Options      Money Options at May 31,     
                                                        Aggregate             At May 31,1998            1998                
Name and Principal         Securities Acquired            Value               (Exercisable/         (Excercisable/          
 Position                  on Exercise                   Realized              Unexercisable)       Unexercisable)          
----------------------------------------------------------------------------------------------------------------------------
<S>                               <C>                      <C>                  <C>                   <C>
A.C.A. Howe                       NIL                      NIL                  265,000/NIL           NIL/NIL(1)
President and Chief Executive
Officer
                                  NIL                      NIL                  300,000/NIL           NIL/NIL
Daniel T. Farrell, 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  ($0.35) on the  Montreal  Exchange on May 29,
1998,  less the exercise  price of the in the money stock options  (NIL).  Total
Amount of Options Outstanding


<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------
                                                         Number of Options Outstanding   
                                                             (Held by Directors and       Exercise Price   
 Date of Grant                Expiry Date                         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                          25,000                $1.27
                                                                   (Nil)
---------------------------------------------------------------------------------------------------------
January 26, 1996          January 26, 2001                          200,000                $1.86
                                                                   (Nil)
---------------------------------------------------------------------------------------------------------
June 7, 1996              June 7, 2001                               65,000                $5.50
                                                                    (50,000)
---------------------------------------------------------------------------------------------------------
July 16, 1997             July 16, 2002                             300,000                $1.40
                                                                   (300,000)
---------------------------------------------------------------------------------------------------------
September 25, 1997        September 25, 2002                        100,000                $1.00
                                                                   (Nil)
---------------------------------------------------------------------------------------------------------
November 26, 1997         November 26, 1997                         500,000                $0.50
                                                                   (400,000)
---------------------------------------------------------------------------------------------------------
June 26, 1998             June 25, 2003                              75,000                $0.38
                                                                    (75,000)
---------------------------------------------------------------------------------------------------------
September 29, 1998        September 28, 2003                        400,000                $0.25
                                                                   (400,000)
---------------------------------------------------------------------------------------------------------
October 14, 1998          October 13, 2003                          200,000                $0.24
                                                                   (200,000)
---------------------------------------------------------------------------------------------------------
</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 a director
and  President of A. C. A. Howe  International  Ltd. and as Chairman of A. C. A.
Howe  International  Limited,  but he is not actively involved in their business
operations.  He owns a 15% voting interest in A.C.A. Howe International Ltd. and
a 49% voting  interest in A.C.A.  Howe  International  Limited.  During the year
ended  May 31,  1998,  A.C.A.  Howe  International  Limited  invoiced  $1,256 in
aggregate fees for geological consulting services rendered during the period. No
payments  were made to A.C.A.  Howe  International  Ltd.  Mr.  Howe also  earned
compensation  indirectly in the form of professional consulting fees relating to
exploration  and  investor  relations  activities  during the year ended May 31,
1998, totaling $43,950. Some of 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.

During the year ended May 31, 1998, Mr. Silverman earned  compensation  directly
in the form of professional consulting fees totaling $27,000.

Messrs.  Howe and Bartlett  each  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 they may have a conflict of


                                       34

<PAGE>


interest.  Any decisions made by Messrs. Howe and Bartlett involving the Company
will be made in accordance with their  fiduciary  duties and obligations to deal
fairly and in good faith with the Company and Waseco.

Subsequent  to year  end,  the  Corporation  issued  200,000  common  shares  to
Silverstone  Prospecting Syndicate  ("Silverstone") as part of the conditions to
increase  its  interest  in the  Leek  Springs  Project  from  40% to  55%.  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.

During  the  year,  the  Corporation  issued  400,000  common  shares  to Archon
Prospecting  Syndicate  ("Archon")  with respect to the Nicaragua gold property.
The  Corporation  owns  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 Mines In.  ("Ateba") owns two units
or four  percent of Archon.  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 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. Ateba, the Corporation 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 voting  right on the  basis of one vote per  common  share.  The
common 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.


                                       35

<PAGE>


                                     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.

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


                                       36

<PAGE>


                              DIADEM RESOURCES LTD.

                        CONSOLIDATED FINANCIAL STATEMENTS

                                  MAY 31, 1998


<PAGE>


DIADEM RESOURCES LTD.

MAY 31, 1998






CONTENTS




Auditors' report                                                         1

Consolidated balance sheet                                               2

Consolidated statement of income and deficit                             3

Consolidated statement of changes in financial position                  4

Consolidated statement of accumulated losses as
   development stage company                                             5

Consolidated statement of accumulated cash flow as
   development stage company                                             6

Notes to consolidated financial statements                               7 to 29


<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,  1997 and May 31,  1998 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,  1998.   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 Canadian  generally accepted auditing
standards  and  United  States  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, 1997 and
May 31, 1998 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, 1998 in
accordance with generally accepted accounting principles in Canada.




Toronto, Canada                                   Green Chencinski Starkman Eles
October 15, 1998                                        Chartered Accountants


Comments by Auditor on Canada-United States Reporting Difference

United  States  reporting  standards  for  auditors  require the  addition of an
explanatory  paragraph when the financial  statements are affected by conditions
and events that cast substantial doubt on the company's ability to continue as a
going concern,  such as those  described in note 1 to the financial  statements.
Although we  conducted  our audit in  accordance  with both  Canadian  generally
accepted auditing standards and United States Standards on Auditing,  our report
to the  shareholders  dated  October 15, 1998 is  expressed in  accordance  with
Canadian reporting  standards which do not permit a reference to such conditions
and events in the auditor's  report when these are  adequately  disclosed in the
financial statements.




Toronto, Canada                                   Green Chencinski Starkman Eles
(November 25, 1998 as to note 15)                       Chartered Accountants


                                       1

<PAGE>

<TABLE>
<CAPTION>
DIADEM RESOURCES LTD.
CONSOLIDATED BALANCE SHEET
AS AT MAY 31,  (IN CANADIAN DOLLARS)                                                                 1998                   1997
                                                                                                       $                      $
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                               <C>                    <C>       
ASSETS
CURRENT ASSETS
Cash and term deposits                                                                                85,652              1,647,468
Marketable securities (note 3)                                                                       125,544                135,601
Prepaid expenses and sundry receivables                                                               61,783                109,413
                                                                                                  ----------             ----------
                                                                                                     272,979              1,892,482
INTEREST IN MINING PROPERTIES (note 4)                                                            13,876,739             12,053,053
INVESTMENT IN MINING SYNDICATES AND MINING COMPANIES (note 5)                                         80,000                217,978
LOANS RECEIVABLE (note 6)                                                                            400,680                165,396
NOTES RECEIVABLE (note 7)                                                                            450,000                   --
FIXED ASSETS (note 8)                                                                                385,689                372,975

                                                                                                  15,466,087             14,701,884

LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued charges  (notes 13 and 14)                                            1,159,423                816,776
CONVERTIBLE DEBENTURES PAYABLE (note 9)                                                            1,400,000                   --

                                                                                                   2,559,423                816,776

COMMITMENTS AND CONTINGENCIES (note 13)
SHAREHOLDERS' EQUITY
CAPITAL STOCK (note 11)                                                                           17,992,310             17,142,589
DEFICIT                                                                                           (5,085,646)            (3,257,481)

                                                                                                  12,906,664             13,885,108

                                                                                                  15,466,087             14,701,884

On behalf of the Board:



A.C.A. Howe, Director



G.C. Silverman, Director
</TABLE>


                                       2
<PAGE>

<TABLE>
<CAPTION>
DIADEM RESOURCES LTD.
CONSOLIDATED STATEMENT OF INCOME AND DEFICIT
YEAR ENDED MAY 31, (IN CANADIAN DOLLARS)                                              1998               1997               1996
                                                                                       $                  $                   $
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                  <C>                 <C>     
EXPENSES
Amortization                                                                            5,789              7,317              2,669
Business development                                                                   44,830             42,966             28,110
Capital taxes                                                                          55,097             49,928               --
Costs associated with issuing convertible debentures (note 11)                        236,160               --                 --
Expiration of mining interests (note 4a)                                              879,296            237,652             35,382
Forfeiture of deposit on mill                                                          70,953               --                 --
General                                                                                32,448             21,269             10,405
Insurance                                                                              50,477             18,726              6,215
Interest on convertible debentures                                                    111,518               --                 --
Legal, audit and accounting fees                                                      196,466            218,014             57,482
Office expenses                                                                        47,509             54,245             30,346
Salaries, management and benefits                                                     175,226             80,467             57,880
Search for new properties                                                                --                 --                1,479
Shareholder relations                                                                 119,069            274,904             62,496
Travel                                                                                 29,086             16,975             12,451
                                                                                   ----------         ----------         ---------- 
                                                                                    2,053,924          1,022,463            304,915
                                                                                   ----------         ----------         ---------- 
INCOME
Interest                                                                              116,713            188,126             54,626
Gain on marketable securities and investments                                         112,673              7,762            208,107
Foreign exchange gain (loss)                                                           (3,627)            27,015               --

                                                                                      225,759            222,903            262,733

NET LOSS                                                                           (1,828,165)          (799,560)           (42,182)
DEFICIT, BEGINNING OF YEAR                                                         (3,257,481)        (1,810,011)        (1,755,169)
                                                                                   ----------         ----------         ---------- 
                                                                                   (5,085,646)        (2,609,571)        (1,797,351)
Costs associated with issuance of shares (note 11)                                       --             (647,910)           (12,660)

DEFICIT, END OF YEAR                                                               (5,085,646)        (3,257,481)        (1,810,011)


NET LOSS PER COMMON SHARE                                                                (.07)              (.03)              (.01)
                                                                                   ==========         ==========         ========== 
</TABLE>



                                       3
<PAGE>

<TABLE>
<CAPTION>
DIADEM RESOURCES LTD.
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
YEAR ENDED MAY 31,  (IN CANADIAN DOLLARS)                                           1998                 1997               1996
                                                                                      $                    $                  $
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                 <C>                  <C>      
CASH PROVIDED BY (USED FOR):

OPERATING ACTIVITIES

Net loss                                                                         (1,828,165)           (799,560)            (42,182)
Items not affecting cash
     Amortization                                                                     5,789               7,317               2,669
     Expiration of mining interests                                                 879,296             237,652              35,382
     Gain on marketable securities and investments                                 (112,673)             (7,762)           (208,107)

                                                                                 (1,055,753)           (562,353)           (212,238)
Net change in non-cash working capital balances
     related to operations                                                          390,277             604,270              19,606

                                                                                   (665,476)             41,917            (192,632)

FINANCING ACTIVITIES
Costs associated with issuance of shares (note 11)                                     --              (645,410)            (12,660)
Issuance of common shares (note 11)                                                 849,721           9,141,200           4,438,590
Issuance of convertible debentures (note 9)                                       1,400,000                --                  --
Notes receivable                                                                   (450,000)               --                  --

                                                                                  1,799,721           8,495,790           4,425,930

INVESTING ACTIVITIES
Acquisition of interest in mining properties                                     (2,608,150)         (9,097,960)         (2,700,521)
Acquisition of fixed assets                                                        (113,335)           (377,715)            (16,812)
Acquisition of marketable securities                                                 (9,923)            (86,709)               --
Investment in mining syndicates and mining companies                                   --               (40,000)           (137,978)
Loans receivable                                                                   (235,284)           (165,396)               --
Proceeds from marketable securities and investments                                 270,631              14,360             220,751

                                                                                 (2,696,061)         (9,753,420)         (2,634,560)

Change in cash and term deposits                                                 (1,561,816)         (1,215,713)          1,598,738
CASH AND TERM DEPOSITS, BEGINNING OF YEAR                                         1,647,468           2,863,181           1,264,443
                                                                                 ----------          ----------          ----------

CASH AND TERM DEPOSITS, END OF YEAR                                                  85,652           1,647,468           2,863,181
                                                                                 ==========          ==========          ==========
</TABLE>



                                       4
<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 15)
FOR THE PERIOD FROM JUNE 1, 1992 TO MAY 31, 1998
(IN CANADIAN DOLLARS)
                                                                               $
------------------------------------------------------------------------------------
<S>                                                                        <C>
EXPENSES
Advertising and promotion                                                      1,349
Amortization                                                                  25,240
Business development                                                         123,130
Capital taxes                                                                105,025
Costs associated with issuing convertible debentures                         236,160
Expiration of mining interests                                             1,232,150
Forfeiture of mill deposit                                                    70,953
General                                                                       72,379
Insurance                                                                     93,545
Interest on convertible debentures                                           111,518
Legal, audit and accounting fees                                             508,705
Office expense                                                               164,065
Salaries and benefits                                                        399,706
Search for new properties                                                      9,088
Shareholder relations                                                        492,858
Travel                                                                        78,325

                                                                           3,724,196

INCOME
Consulting and other income                                                   29,588
Interest                                                                     373,460
Gain on securities and investments                                           337,093
                                                                           ---------

                                                                             740,141
                                                                           ---------

ACCUMULATED LOSSES DURING DEVELOPMENT STAGE                                2,984,055
                                                                           =========
</TABLE>



                                       5
<PAGE>

<TABLE>
<CAPTION>
DIADEM RESOURCES LTD.
CONSOLIDATED STATEMENT OF ACCUMULATED CASH FLOW AS DEVELOPMENT STAGE COMPANY
PREPARED UNDER UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (see Note 15)
FOR THE PERIOD FROM JUNE 1, 1992 TO MAY 31, 1998
(IN CANADIAN DOLLARS)
                                                                                 $
---------------------------------------------------------------------------------------
<S>                                                                        <C>
CASH PROVIDED BY (USED FOR):

Net accumulated losses                                                      (2,984,055)
Items not affecting cash
     Amortization                                                               25,240
     Expiration of mining interests                                          1,232,150
     Gain on marketable securities and investments                            (337,093)

                                                                            (2,063,758)
Decrease in accounts receivable                                                  1,761
Increase in prepaid expenses and sundry receivables                            (56,843)
Increase in accounts payable and accrued charges                             1,142,275
                                                                           -----------

                                                                              (976,565)
                                                                           -----------

FINANCING ACTIVITIES
Costs associated with issuance of shares                                    (1,133,064)
Decrease in advances from shareholder                                           (1,435)
Issuance of common shares                                                   12,364,650
Issuance of convertible debentures                                           1,400,000
Notes receivable                                                              (450,000)

                                                                            12,180,151

INVESTING ACTIVITIES
Acquisition of interest in mining properties                               (10,367,111)
Acquisition of fixed assets                                                   (512,433)
Acquisition of marketable securities                                          (210,724)
Investment in mining syndicates and mining companies                          (217,978)
Loan receivable advance                                                       (400,680)
Proceeds on gain on marketable securities and investments                      584,199

                                                                           (11,124,727)

Change in cash and term deposits                                                78,859
CASH AND TERM DEPOSITS, BEGINNING OF PERIOD                                      6,793
                                                                           -----------

CASH AND TERM DEPOSITS, END OF PERIOD                                           85,652
                                                                           ===========
</TABLE>



                                       6
<PAGE>


DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


1.   BASIS OF PRESENTATION

     The company has a significant working capital deficiency and is required to
     continue  to fund  expenditures  on its  various  properties  in  order  to
     maintain its interest in these properties.  These financial statements have
     been  prepared  on a  going  concern  basis  which  assumes  continuity  of
     operations  and  realization  and  settlement of  liabilities in the normal
     course of business.  Different  bases of measurement  may be appropriate if
     the going concern assumption does not prevail.

     Furthermore,  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 office 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.


                                       7
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (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.  This review includes,  but is not limited to, the
          following:

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

               b)   determining  if there is 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

                                                         1998             1997
                                                          $                 $

                   Marketable securities                125,544          135,601


          The estimated  market value of the  marketable  securities is $153,103
          (May 31, 1997 - $178,601).

          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, 1998 is $25,000.  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.


                                       8
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


4.   INTEREST IN MINING PROPERTIES

     Interest in mining properties is comprised of the following:

<TABLE>
<CAPTION>
                                                                                      1998          1997
                                                                                        $            $
<S>                                                                                <C>          <C>       
        Acquisition costs
              Fletcher Lake, Northwest Territories (note 4a)                             --         10,355
              Rancheria, California (note 4b)                                         652,733      652,733
              Leek Springs, California (note 4c)                                    2,788,711    2,788,711
              Crystal Valley Region, Quebec (note 4a)                                    --         72,500
              Pekan River and Sarah Lake, Quebec (note 4d)                            179,400      179,400
              Mercury Permit, Quebec (note 4a)                                           --        216,300
              Nicaragua (note 4e)                                                   1,124,238      773,238
              Belitung Island and Kalimantan Island, Indonesia (notes 4a and 4f)      253,000      253,000

                                                                                    4,998,082    4,946,237

        Deferred exploration costs
              Fletcher Lake, Northwest Territories                                       --         84,627
              Rancheria, California                                                   690,308      690,308
              Leek Springs, California                                              3,261,754    2,481,928
              Crystal Valley Region, Quebec                                              --        168,616
              Pekan River and Sarah Lake, Quebec                                    1,786,798    1,742,761
              Mercury Permit, Quebec                                                     --         46,943
              Nicaragua                                                             1,968,099      710,288
              Belitung Island and Kalimantan Island, Indonesia                      1,171,698    1,137,888
              Tewah, Indonesia (note 4g)                                                 --         43,457
                                                                                   ----------   ----------

                                                                                    8,878,657    7,106,816
                                                                                   ----------   ----------

                                                                                   13,876,739   12,053,053
                                                                                   ==========   ==========
</TABLE>

(a)  Expiration of mining interests

     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 year.

     During the current  year,  the company  relinquished  its  interests in the
     Fletcher Lake,  Crystal Valley and Mercury Permit  properties in Canada and
     the   Kalimantan   properties   in  Indonesia.   Accordingly,   accumulated
     acquisition  costs of $299,155 and  deferred  exploration  and  development
     costs totalling $580,141  associated with these properties were written off
     to the income statement.


                                       9
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


4.   INTEREST IN MINING PROPERTIES (Continued)

(b)  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 U.S. $100,000 to Silverstone  Prospecting Syndicate,
          and

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

     In order to increase  its  interest to 60%, the company will be required to
     complete  U.S.  $2,000,000 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.

(c)  Leek Springs, California

     The company has  obtained an option to acquire up to a 55%  interest in 125
     unpatented  mining claims  covering  approximately  2,500 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 year ended May 31,  1996,  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.


                                       10
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


4.   INTEREST IN MINING PROPERTIES (Continued)

     During the prior  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, 1998, the company had completed  approximately  $3,262,000 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:

     1)   pay an additional U.S. $100,000 to Silverstone  Prospecting  Syndicate
          by August 2, 1999;

     2)   issue  200,000  additional  common shares to  Silverstone  Prospecting
          Syndicate during the month of October 1998;

     3)   complete U.S.  $4,000,000 of cumulative  exploration  expenditures  by
          August 2, 1999;

     4)   complete U.S.  $5,000,000 of cumulative  exploration  expenditures  by
          August 2, 2000.

(d)  Pekan River and Sarah Lake, Quebec

     The company entered into an option agreement which enables it to purchase a
     90% mining  interest in 1,600  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 year ended May 31,  1996,  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 prior  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 year's  assessment
     work and by paying the annual renewal fees.

     The company  relinquished  its right to earn the final 10% interest  during
     the current year;  therefore,  its interest in the property is now fixed at
     80%.


                                       11
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (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, 1999, 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.

(e)  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           Shares
                                              Cash             to be
             Date                             US $             Issued


             January 9, 1997                  50,000           100,000
             June 3, 1997                      --              100,000
             November 25, 1997                 --              200,000
             April 24, 1998                    --              200,000
             June 25, 1999                   175,000             --
             September 6, 1999               125,000           200,000

                                             350,000           800,000

     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  made a payment  during the prior year of U.S.
     $110,000 to reimburse the  co-venturer  for prior  expenditures.  A further
     payment of U.S.  $110,000  was required  prior to December  20, 1997.  This
     requirement  was met during the current year by  offsetting  U.S.  $110,000
     against  the loan  receivable  due from the  co-venturer  (see  note 6). In
     addition,  the company is required to fund all  exploration and development
     expenditures leading to the commencement of commercial production.


                                       12
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


4.   INTEREST IN MINING PROPERTIES (Continued)

     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 prior  year,  the  company  made the  initial  payment  of U.S.
     $50,000,  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.

     During the current  year,  the company  issued  200,000  common shares at a
     market value of $0.49 per share and 200,000 common shares at a market value
     of $0.46 per share.  In addition,  the company made a U.S.  $5,000  payment
     against the amount due in June 1999.

(f)  Belitung Island

     The company has entered into an  agreement to acquire a mining  interest in
     this  property  in  Indonesia  on  Belitung  Island.  The company has a 30%
     interest in this property.  Effective May 8, 1997, the company  assumed the
     responsibility as the operator for exploration activities on the property.

(g)  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 accomplished by Waseco
     Resources Inc. issuing to the company a cumulative  7,000,000 common shares
     from  treasury  of which  5,750,000  are held by the  company as at May 31,
     1998. As at May 31, 1998, Waseco Resources Inc. had spent in excess of U.S.
     $1,500,000 of expenditures on the property and had earned a 60% interest in
     the property.

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


                                       13
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


5.   INVESTMENT IN MINING SYNDICATES AND MINING COMPANIES

                                                       1998             1997
                                                        $                $

         Investment in mining syndicates              80,000           80,000
         Investment in private mining company           --            137,978

                                                      80,000          217,978

     Investment in mining syndicates consists of 4.0 units (1997 - 4.0 units) in
     Silverstone  Prospecting Syndicate with a cost of $20,000 (1997 - $20,000);
     2.0 units (1997 - 2.0) in Beaver  Syndicate  with a cost of $20,000 (1997 -
     $20,000);  2.0 units (1997 - 2.0) in Crystal Valley  Prospecting  Syndicate
     with a cost of $20,000;  and 4.0 units  (1997 - 4.0) 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, 1998, 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.

     The shares in the private  mining company were sold during the current year
     for cash proceeds of $224,548 resulting in a gain on disposal of $86,570.

     In addition,  the company holds 5,750,000 common shares of Waseco Resources
     Inc. This represents  approximately  37% 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. (see note 4(g)). 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.     LOANS RECEIVABLE                             1998                1997
                                                     $                    $
             La Mestiza loan (a)                  186,030              165,396
             Belitung Island loan (b)             214,650                --
             Waseco loan (c)                        --                   --

                                                  400,680              165,396

(a)  La Mestiza loan

     The loan  receivable  bears interest at 2.5% per month, is unsecured and is
     due from the  Nicaraguan  co-venturer  in the La Mestiza  project (see note
     4(e)). The total amounts advanced are U.S. $240,000 including U.S. $120,000
     advanced  during the current  year.  During the current  year, a payment of
     U.S.  $110,000  was  required  to be made by the company to  reimburse  the
     co-venturer for prior  expenditures on the property.  (see note 4(e)).  The
     company has taken the position that this payment can be offset  against the
     loan receivable reducing the net receivable to U.S. $130,000.


                                       14
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


(b)  Belitung Island loan

       The loan  receivable  is  non-interest  bearing and due on August 8, 1999
       from the Indonesian  co-venturer in the Belitung Island project. The loan
       is  secured  by the  hypothecation  of  75,000  common  shares  of Diadem
       Resources Ltd. which are owned by the debtor.

(c)  Waseco loan

     During the  current  year,  the  company  advanced  Waseco  Resources  Inc.
     ("Waseco") approximately $220,000 in funds which were the net proceeds from
     the sale by the company of common shares of Waseco.  The loan receivable is
     evidenced by a note receivable which bears interest at prime plus 4% and is
     secured  by  one-third  of the  interest  that  Waseco  holds in the  Tewah
     property in  Indonesia  (see note  4(g)).  The funds were used by Waseco to
     complete the feasibility study on the Tewah property.

     The current  collectibility  of the loan receivable is in question based on
     the working capital deficiency of Waseco. Accordingly,  the loan receivable
     of approximately $220,000 has been written off for accounting purposes with
     the loss  offsetting the gain realized on the sale of the shares which were
     carried on the books of the company for a nominal  value.  No interest  has
     been accrued on the loan for accounting purposes.

7.   NOTES RECEIVABLE

     The company has two notes  receivable  totalling  $450,000,  bearing  9.75%
     interest per annum  associated with the issuance of convertible  debentures
     described  in note 9. The first  note in the amount of  $300,000  is due on
     January  17,  1999 while the  second  note in the  amount of  $150,000  was
     retired by the receipt of cash subsequent to the year end.

8.   FIXED ASSETS

<TABLE>
<CAPTION>
                                                                            Accumulated           1998             1997
                                                              Cost          Amortization          Net               Net
                                                                $                $                 $                $
<S>                                                          <C>              <C>               <C>              <C>    
       Furniture and fixtures                                 31,199           27,240             3,959            4,949
       Computer and office equipment                          44,520           16,901            27,619           19,166
       Exploration and mining equipment                      324,499           55,808           268,691          226,832
       Vehicles                                              143,562           58,142            85,420          122,028

                                                             543,780          158,091           385,689          372,975
</TABLE>



                                       15
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


9.   CONVERTIBLE DEBENTURES PAYABLE

                                                             1998          1997
                                                              $              $

             9.75% unsecured convertible debenture,
               interest payable quarterly (a)                900,000        --

             9.75% unsecured convertible debenture,
               interest payable semi-annually (b)            500,000        --
                                                           ---------      ------
                                                           1,400,000        --
                                                           =========      ======

(a)  9.75% unsecured convertible debenture, interest payable quarterly

     During the current year, the company  completed the sale of a two year $1.0
     million unsecured  debenture which was satisfied by the payment of $700,000
     in cash and a promissory  note for $300,000  which bears  interest at 9.75%
     and is due on July 17,  1999.  The  debenture  is  convertible  into common
     shares at the option of the holder of $1.33 per share or retractable at the
     option of the holder at a price based upon 95% of the market price over the
     previous twenty day trading period.  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 debenture holder was also issued warrants to purchase an
     aggregate of 750,000  common shares of the company at an exercise  price of
     $1.33 per share until July 17,  1999.  The broker  earned 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.

     During the current  year, a total of $100,000 in  debentures  was converted
     into 197,955 common shares.  Subsequent to the year end, a further $350,000
     in debentures were converted into 1,190,031 common shares.

     During the  current  year,  the  company  issued  81,890  common  shares in
     satisfaction  of the net interest  expense on these notes after netting the
     interest  earned on the notes  receivable  referred  to in note 7.  Through
     October  15,  1998,  a  further   79,296   common  shares  were  issued  in
     satisfaction of net interest totalling $22,999.

(b)  9.75% unsecured convertible debentures, interest payable semi-annually

     During the  current  year,  the  company  completed  the sale of a two year
     $500,000 unsecured debenture which was satisfied by the payment of $350,000
     in cash and a promissory  note for $150,000  which bears  interest at 9.75%
     per annum and is due on March 24, 2000. The debenture is  convertible  into
     common  shares at the option of the holder at a price of $0.5252  per share
     or  retractable  at the option of the holder at a price equal to the market
     price over the previous ten day trading period payable in cash or shares at
     the option of the company.  Interest on the debentures at an annual rate of
     9.75% is  payable  semi-annually  in cash or at the  company's  option,  in
     common shares. The debenture holder was also issued warrants to purchase an
     aggregate of 952,018  common shares of the company at an exercise  price of
     $0.5252 per share until March 24, 2000.  The broker  earned 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 $0.60 per share until
     March 24,  2000.  Subsequent  to the year end,  25,053  common  shares were
     issued in satisfaction of net interest totalling $9,256.


                                       16
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


10.  RELATED PARTY INFORMATION

     During the current year, the company incurred fees totalling $1,256 (1997 -
     $7,893,  1996 - $73,141),  related to exploration work charged by a company
     in which a  director  holds a 49%  interest.  A balance  of $4,119  (1997 -
     $1,730) related to these fees is included in accounts payable.  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 $43,950 (1997 - $48,150, 1996 - $56,640) in consulting fees related
     to exploration and investor relations activities.  The company paid $27,000
     (1997 - $24,000,  1996 - $17,000)  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.

11.  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>
                                                      1998                      1997
                                              Shares         $          Shares          $
<S>                                         <C>          <C>          <C>           <C>      
     Balance, beginning of year             23,843,551   17,142,589   21,916,256    8,001,389
     Issued pursuant to:
     Public offering                              --           --      1,000,000    5,750,000
     Shares issued upon retraction of
       convertible debentures                1,520,467      600,000         --           --
     Shares issued related to the
       purchase of mining properties           400,000      190,000      742,295    3,244,000
     Exercise of share options                    --           --        185,000      147,200
     Shares issued as payment of interest
       on convertible debentures               123,568       59,721         --           --
                                            ----------   ----------   ----------   ----------

                                            25,887,586   17,992,310   23,843,551   17,142,589
                                            ==========   ==========   ==========   ==========
</TABLE>

     The  weighted  average  number  of  shares  during  the  current  year  was
     approximately 24,573,000 (1997 - 22,934,000, 1996 - 15,083,000).


                                       17
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


11.  CAPITAL STOCK (Continued)

     (c)  Public Offering

          During the prior 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.  These  warrants  have  expired  without  any being
          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
          50,000  common shares at an exercise  price of $6.75 per share.  These
          warrants have expired without being exercised.

     (d)  Convertible Debentures

          During the  current  year,  the  company  completed  the sale of three
          convertible debentures of which two are outstanding as at the year end
          date and are described in note 9. The third debenture in the amount of
          $500,000 was converted  during the current year into 1,322,512  common
          shares under the terms and conditions of the  agreement.  In addition,
          the  debenture  holder was granted  warrants to purchase an additional
          1,322,512  common  shares  at an  exercise  price of $1.07  per  share
          expiring  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. The debenture  holder was issued 41,678 common shares
          in settlement of interest earned in the amount of $15,485.

          The costs  associated with the issuance of the convertible  debentures
          were written off to the statement of income.

          The following is a summary of the outstanding  warrants  granted under
          the terms of these debentures:

             Expiry Date               Exercise Price       Number of Shares

             July 17, 1999                  1.33                775,000
             August 29, 1999                1.07              1,335,012
             March 24, 2000                 0.5252              952,018
             March 24, 2000                 0.60                 12,500

                                                              3,074,530

     (e)  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.


                                       18
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


11.  CAPITAL STOCK (Continued)

          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                 25,000
             January 26, 2001               1.86                200,000
             June 7, 2001                   5.50                 65,000
             July 16, 2002                  1.40                300,000
             September 29, 2002             1.00                100,000
             November 26, 2002              0.50                500,000
             June 25, 2003                  0.38                 75,000
             September 28, 2003             0.25                400,000
             October 14, 2003               0.24                200,000
                                                              ---------
                                                              2,305,000
                                                              =========

12.  INCOME TAXES

     As at May 31,  1998,  the  company  had  accumulated  income  tax losses of
     $3,004,000 which may be applied against future taxable income. These losses
     expire as follows:

           Fiscal Year Ending In:                                  $

             1999                                               339,000
             2000                                                30,000
             2001                                                84,000
             2002                                               220,000
             2003                                               176,000
             2004                                               735,000
             2005                                               993,000

                                                              2,577,000


     The company has accumulated  Canadian and foreign deferred  exploration and
     development  expenses in the amount of approximately  $14,200,000 which can
     be utilized to offset future taxable mining projects.


                                       19
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


13.  COMMITMENTS AND CONTINGENCIES

     During the prior 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 its  proportion  of the  exploration
     expenditures.  During the current  year,  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,  a formal  agreement  has not been
     reached. The company has accrued $350,000 in the accounts.  The company has
     received  an offer to settle the  outstanding  amounts by the  issuance  of
     common  shares.  Such  settlement for shares would be subject to regulatory
     approval.

     The  co-venturer  of the Nicaraguan  property has made certain  allegations
     regarding  the  company's  progress  towards  completing  the five distinct
     exploration phases which will allow the company to earn its interest in the
     property  as  outlined  in  note  4(e).   The  parties  have  initiated  an
     arbitration  procedure  in an  attempt  to settle  their  differences.  The
     outcome of this procedure is not determinable at this time.

14.  SUBSEQUENT EVENTS

     Subsequent  to the year end, the company  issued  370,370  common shares in
     satisfaction  of a due diligence  fee payable to a potential  investor that
     was  investigating  the possibility of completing a private  placement with
     the company.

     The company has reached an agreement with a supplier of geological services
     to settle  $200,000 in  liabilities  with the  issuance  of 434,783  common
     shares.  The  transaction  is subject  to  regulatory  approval,  which the
     company has requested.

15.  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:


                                       20
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


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

<TABLE>
<CAPTION>
                                                                             1998          1997
                                                                              $              $
<S>                                                                       <C>            <C>       
     CURRENT ASSETS

     Cash and term deposits                                                   85,652      1,647,468
     Marketable securities (note 15c)                                        153,103        178,601
     Prepaid expenses and sundry receivables                                  61,783        109,413
                                                                         -----------    -----------

                                                                             300,538      1,935,482
     INTEREST IN MINING PROPERTIES                                        13,876,739     12,053,053
     INVESTMENT IN MINING SYNDICATES AND MINING
     COMPANIES                                                                80,000        217,978
     LOANS RECEIVABLE                                                        400,680        165,396
     NOTES RECEIVABLE                                                        450,000           --
     FIXED ASSETS                                                            385,689        372,975
                                                                         -----------    -----------

                                                                          15,493,646     14,744,884
                                                                         ===========    ===========


     CURRENT LIABILITIES

     Accounts payable and accrued liabilities                              1,170,423        832,776
     Convertible debentures payable                                        1,400,000           --

     SHAREHOLDERS' EQUITY

     Capital stock (note 15b)                                             16,859,246     16,009,525

     Deficit incurred prior to development stage activities (note 15e)      (968,527)      (968,527)
     Deficit accumulated during the development stage (note 15e)          (2,984,055)    (1,155,890)
     Difference between cost and market value of
     marketable securities (note 15c)                                         16,559         27,000

                                                                          15,493,646     14,744,884
</TABLE>


     Consolidated statement of changes in financial position

     During the year,  the company issued 400,000 common shares (1997 - 742,295,
     1996 - 740,075) of its share capital as  consideration  for the acquisition
     of mining  properties in the amount of $190,000 (1997 - $3,244,000,  1996 -
     $871,000).  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.



                                       21
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


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

        Accordingly, the U.S. GAAP subtotals are reconciled as follows:

<TABLE>
<CAPTION>
                                                             1998          1997          1996
                                                               $             $             $
<S>                                                       <C>           <C>            <C>      

     CASH USED IN OPERATIONS PER CANADIAN GAAP              (665,476)       41,917      (192,632)

     Increase in net change in non-cash working capital
     capital balances related to operations (note 15a)          --        (159,595)      159,595
                                                          ----------    ----------    ----------
     CASH USED IN OPERATIONS PER U.S. GAAP                  (665,476)     (117,678)      (33,037)

     CASH USED FOR
     INVESTING ACTIVITIES PER CANADIAN GAAP               (2,696,061)   (9,753,420)   (2,634,560)

     Issuance of shares for the acquisition of
     mining properties included above                        190,000     3,244,000       740,075

     CASH USED FOR
     INVESTING ACTIVITIES PER U.S. GAAP                   (2,506,061)   (6,509,420)   (1,894,485)

     CASH PROVIDED BY FINANCING ACTIVITIES
     PER CANADIAN GAAP                                     1,799,721     8,495,790     4,425,930

     Issuance of capital stock (note 15a)                       --      (5,137,905)    5,137,905

     Issuance of shares for the acquisition of
     mining properties included above                       (190,000)   (3,244,000)     (740,075)
                                                          ----------    ----------    ----------
     CASH PROVIDED BY FINANCING ACTIVITIES
     PER U.S. GAAP                                         1,609,721       113,885     8,823,760


     CHANGE IN CASH AND CASH EQUIVALENTS
     UNDER U.S. GAAP                                      (1,561,816)   (6,513,213)    6,896,238

     Cash held in escrow (note 15a)                             --       5,297,500    (5,297,500)

     CHANGE IN CASH AND CASH EQUIVALENTS
     UNDER CANADIAN GAAP                                  (1,561,816)   (1,215,713)    1,598,738
                                                          ==========    ==========    ==========
</TABLE>


                                       22
<PAGE>


DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


15.  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>
                                                       1998             1997              1996
                                                        $                $                 $

<S>                                                   <C>              <C>              <C>     
        Prepaid expenses and sundry receivables        47,630          (16,738)         (57,268)

        Accounts payable and accrued charges          342,647          461,413          236,469

                                                      390,277          444,675          179,201
</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.


                                       23
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


15.  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:

                                                          1998           1997
                                                           $              $

     Net loss carryforwards                             1,200,000       800,000
     Exploration and development expenditures           2,100,000     1,600,000
     Costs of raising capital                             305,000       310,000
                                                       ----------    ----------

                                                        3,605,000     2,710,000
     Less:  Valuation allowance                        (3,605,000)   (3,910,000)

                                                          NIL            NIL

     (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:


                                       24
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


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

<TABLE>
<CAPTION>
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                   13,484
                                             Frankfield Consolidated Corporation based on the
                                             estimated market value of the shares received                            

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 fiscal 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
</TABLE>


                                       25
<PAGE>


DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


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

<TABLE>
<CAPTION>
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
</TABLE>

                                       26

<PAGE>


DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


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

<TABLE>
<CAPTION>
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
                    -------------------                                                             ------------------
</TABLE>



                                       27
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)


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

<TABLE>
<CAPTION>
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
Year ended May 31, 1998

September 23, 1997               54,104      Retraction of convertible debentures including                     50,814
                                             accrued interest based on market value of
                                             shares

September 30, 1997               13,022      Payment of quarterly interest on convertible                       13,023
                                             debentures based on market value of shares

November 25, 1997               200,000      Shares issued pursuant to acquisition of interest                  98,000
                                             in Nicaraguan property based on market value of
                                             shares

December 31, 1997                79,192      Payment of quarterly and semi-annual interest on                   29,563
                                             convertible debentures based on market value of
                                             shares

January 16, 1998                312,674      Retraction and conversion of convertible debentures               100,854
                                             including accrued interest based on market value of
                                             shares                                                                   
                    -------------------                                                             ------------------
Balance forward              24,502,543                                                                     17,434,843
                    -------------------                                                             ------------------
</TABLE>



                                       28
<PAGE>

DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998  (IN CANADIAN DOLLARS)



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

<TABLE>
<CAPTION>
Date                        Shares Issued    Description                                                          $
<S>                          <C>             <C>                                                            <C>
Subtotal from prior
  page                       24,502,543                                                                     17,434,843
January 21, 1998              1,159,393      Conversion of convertible debentures including                    451,041
                                             accrued interest based on market value of
                                             shares

March 31, 1998                   25,650      Payment of quarterly interest based on market                      14,426
                                             value of shares

May 12, 1998                    200,000      Shares issued pursuant to acquisition of interest                  92,000
                                             in Nicaragua property based on market value of
                                             shares                                                                   
                    -------------------                                                             ------------------
                             25,887,586                                                                     17,992,310
                    ===================                                                             ==================
</TABLE>


                                       29