__________



Securities and Exchange Commission







FORM 20-F/A-1







[ ]

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934.



OR



[X]

ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.



For the fiscal year ended August 31, 2004.

....



OR



[ ]

TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.



For the transition period from .....





Commission File Number: 0-29976







CRYSTAL GRAPHITE CORPORATION



________________________________________________________________________

(Exact name of registrant as specified in its charter)



Not Applicable

(Translation of registrants name into English)



British Columbia, Canada

(Jurisdiction of incorporation or organization)



Suite 1750  999 W. Hastings St., Vancouver, British Columbia, Canada, V6C 2W2

(Address of principal executive offices)

__________





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II









Securities to be registered pursuant to Section 12(b) of the Act.



None.



Securities to be registered pursuant to Section 12(g) of the Act.



Common shares without par value.

(Title of Class)



Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.



None.



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.



44,383,681 common shares (as at the financial year ended August 31, 2004)



44,421,671 common shares (as at February 22, 2005)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes:

Not applicable.

No:

Not applicable.



Indicate by checkmark which financial statement item the registrant has elected to follow:



Item 17:ü.

Item 18:   __.

__________



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i





FORM 20-F INDEX





Item

Page No.



GLOSSARY

1



FORWARD LOOKING STATEMENTS

2



PART I

2



ITEM 1  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND

ADVISERS

2



ITEM 2  OFFER STATISTICS AND EXPECTED TIMETABLE

2

A.

Offer Statistics

2

B.

Method and Expected Timetable

2



ITEM 3  KEY INFORMATION

2

A.

Selected Financial Information

2

Exchange Rates

3

B.

Capitalization and Indebtedness

4

C.

Reasons for the Offer and Use of Proceeds

4

D.

Risk Factors

4



ITEM 4  INFORMATION ON THE COMPANY

9

A.

History and Development of the Company

9

B.

Business Overview

12

Cash Resources and Liquidity

13

Stated Business Objectives

13

Principal Products

27

Environmental Regulation

33

C.

Organizational Structure

34

D.

Property, Plants and Equipment

34

Office Space

34

Mineral Property

34

Plants

37

Equipment

37



ITEM 5  OPERATING AND FINANCIAL REVIEW AND PROSPECTS

38

A.

U.S. and Canadian GAAP differences

38

B.

The Company

38



ITEM 6  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

50

A.

Directors and Senior Management

50

Aggregate Ownership of Securities

54

Other Reporting Issuers

54

Individual Bankruptcies

54

Conflicts of Interest

54

Other Information

55





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ii





Item

Page No.





B.

Compensation

55

The Companys Executive Compensation

55

Compensation of the Companys Directors

59

C.

Board Practices

60

The Company

60

D.

Employees

60

E.

Share Ownership

62

Directors and Officers

62

Public and Insider Ownership

63



ITEM 7  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

63

A.

Major Shareholders

63

B.

Related Party Transactions

64

C.

Interests of Experts and Counsel

67



ITEM 8  FINANCIAL INFORMATION

67

A.

Consolidated Statements and other Financial Information

67

B.

Significant Changes

67



ITEM 9  THE OFFERING AND LISTING

67

A.

Offer and Listing Details

67

B.

Plan of Distribution

68

C.

Markets

68

D.

Selling Shareholders

68

E.

Dilution

69

F.

Expenses of the Issue

69



ITEM 10  ADDITIONAL INFORMATION

69

A.

Share Capital

69

B.

Memorandum and Articles of Association

69

Disclosure of Interest of Directors or Officers

69

Shareholdings of Directors

69

Rights, Preferences and Restrictions attaching to each class of

shares

70

Changing the Rights of Holders of the Companys Stock

70

Annual General Meetings and Extraordinary General Meetings

70

Annual General Meeting

70

Notice

70

Quorum

71

Limitations on the rights to own securities

71

C.

Material Contracts

71

D.

Exchange Controls

73

E.

Taxation

74

F.

Dividends and Paying Agents

75

G.

Statement by Experts

75

H.

Documents on Display

75

I.

Subsidiary Information

75



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iii









Item

Page No.





ITEM 11  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT

MARKET RISK

76



ITEM 12  DESCRIPTION OF SECURITIES OTHER THAN EQUITY

SECURITIES

76

A.

Debt Securities

76

B.

Warrants and Rights

76

C.

Other Securities

76

D.

American Depositary Shares

76



PART II

77



ITEM 13  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

77



ITEM 14  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY

HOLDERS AND USE OF PROCEEDS

77



ITEM 15  CONTROLS AND PROCEDURES

77



ITEM 16A  AUDIT COMMITTEE FINANCIAL EXPERT

77



ITEM 16B  CODE OF ETHICS

77



ITEM 16C  PRINCIPAL ACCOUNTANT FEES AND SERVICES

78



ITEM 16D  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT

COMMITTEES

78



ITEM 16E  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND

AFFILIATED PURCHASERS

78



ITEM 17  FINANCIAL STATEMENTS

79



ITEM 18  FINANCIAL STATEMENTS

79



ITEM 19  EXHIBITS

80

(A)

Financial Statements

80

(B)

Exhibits

80



SIGNATURES

109



EXHIBIT INDEX

110

__________







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GLOSSARY





Unless other stated, in this Annual Report the following terms shall have the following meanings:



Graphite is a natural form of carbon and is the final metamorphic stage of all carbon minerals. Natural graphite is a non-metallic (industrial) mineral, which is relatively soft (1-2 on the Mohs hardness scale), opaque, flexible, moderately light (SG=2.36), and occurs principally in a small flake form.  Three types of graphite occur in nature; flake, crystalline, and a microcrystalline form known as amorphus.  Graphite is an excellent conductor of heat and electricity and has a high melting temperature of 3500 degrees Celcius.  In addition, it is resistant to corrosion, chemically inert, sectile (cuts smoothly) and is highly refractorive.  Graphite is also artificially manufactured from petroleum but is physically inferior to natural graphite because of its porosity, small flakes, and less desirable carbon.



Bi-polar plate  a bi-polar plate is a graphite-polymer composite either molded or milled which separates the fuel and widening agent in a PEM type fuel cell.



Industrial Mineral a rock or mineral of a non-metallic nature and of which is not a fuel.



Regolith the loose, incoherent mantle of rock fragments, soil, brown sands, etc. which rest on solid rock.









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2







FORWARD LOOKING STATEMENTS



Crystal Graphite Corporation (the Company) cautions readers that certain important factors (including, without limitation, those set forth in this Form 20-F) may affect the Companys actual results and could cause such results to differ materially from any forward-looking statements that may be deemed to have been made in this Form 20-F annual report (the Annual Report), or that are otherwise made by or on behalf of the Company.  For this purpose any statements contained in this Annual Report that are not statements of historical fact may be deemed to be forward-looking statements.  Without limiting the generality of the foregoing, words such as may, except, believe, anticipate, intend, could, estimate or continue, or the negative or other variations of comparable terminology, are intended to identify forward-looking statements.





PART 1





ITEM 1  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS



Not Applicable





ITEM 2  OFFER STATISTICS AND EXPECTED TIMETABLE



Not Applicable



A.

Offer Statistics



This Annual Report does not relate to any offering of the Companys shares.  Therefore, this section is not applicable to the Company.



B.

Method and Expected Timetable



This Annual Report does not relate to any offering of the Companys shares.  Therefore, this section is not applicable to the Company.





ITEM 3  KEY INFORMATION





A.

Selected Financial Information



The following summarizes certain selected financial information with respect to the Company and is qualified in its entirety by reference to the financial statements of the Company and the Notes thereto; a copy of which is attached to this Annual Report:











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3







Year Ended Aug 31/04Year Ended
Aug. 31/03Year Ended
Aug. 31/02Year Ended
Aug. 31/01Year Ended
Aug. 31/00Net Sales$449,427$ -$ -$ -$ -Net Loss from Continuing OperationsCanadian GAAP$ (2,991,438)$ (1,446,929)$ (1,913,120)$ (2,379,069)$ (273,947)US GAAP$ (12,222,567)$ (2,198,021)$ (2,791,524)$ (4,655,285)$ (722,375)Net Loss from Continuing Operations per ShareCanadian GAAP(1)$ (0.09)$ (0.06)$ (0.09)$ (0.11)$ (0.03)US GAAP$ (0.38)$ (0.08)$ (0.12)$ (0.21)$ (0.10)Total AssetsCanadian GAAP$ 19,283,957$ 8,700,127$ 8,862,973$ 11,056,070$12,491,178US GAAP$ 3,042,885$ 1,690,184$ 2,604,122$ 6,061,698$ 9,773,022Long Term ObligationsConvertible Debentures$ -$ 68,333$ -$ -$ 31,641Long-term Debt$ 10,525Asset Retirement
Obligations$ 159,500$ -$ -$ -$ -Weighted Average Common Shares OutstandingCanadian GAAP32,500,49122,839,09822,354,71421,895,9087,323,277US GAAP32,500,49122,839,09822,354,71421,895,9087,323,277






Notes:

(1)

Net Loss per share is calculated based on the weighted average number of shares outstanding during the year.  Fully diluted loss per share has not been disclosed as it is anti-dilutive.



Exchange Rates



In this Annual Report, unless otherwise specified, all dollar amounts are expressed in Canadian dollars.  Since June 1, 1970 the Government of Canada has permitted a floating exchange rate to determine the value of the Canadian dollar against the U.S. dollar.  The high and low exchange rates, the average rates (average of the exchange rates on the last day of each month during the period) and the end of the period rates for Canadian dollars, expressed in U.S. dollars, from September 1, 2000 to August 31, 2004, based on the noon buying rate in New York City for cable transfers payable in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York, were as follows:



U.S. Dollars per $1.00 (CDN.)

Year ended August 31

|              | 2004  | 2003  | 2002  | 2001  | 2000 
|------------- | ----- | ----- | ----- | ----- | -----
|High          | .7880 | .7492 | .6619 | .6783 | .6969
|Low           | .7158 | .6272 | .6200 | .6333 | .6629
|Average       | .7518 | .6770 | .6354 | .6537 | .6805
|End of Period | .7595 | .7220 | .6416 | .6461 | .6793



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4













|     | February 15, 2005 | January 2005 | Dec. 2004 | Nov. 2004 | Oct. 2004 | Sept.
2004 | August 2004
|---- | ----------------- | ------------ | --------- | --------- | --------- | ---------- | -----------
|High |                   | .8346        | .8435     | .8493     | .8201     | .7906      | .7714      
|Low  |                   | .8050        | .8064     | .8155     | .7858     | ,7651      | .7506      
|     | .8106             |              |           |           |           |            |            





Conversion Table



For ease of reference the following conversion factors are provided:



1 mile = 1.6093 kilometres1 metric ton = 2,205 pounds1 foot = 0.305 metres1 troy ounce = 31.103 grams1 acre = 0.4047 hectare1 imperial gallon = 4.546 litres1 long ton = 2,240 pounds1 imperial gallon = 1.2010 U.S. gallons






B.

Capitalization and Indebtedness



This is an Annual Report, and therefore, this information is not applicable.



C.

Reasons for the Offer and Use of Proceeds



This Annual Report does not relate to any offering of the Companys shares.  Therefore, this section is not applicable to the Company.



D.

Risk Factors



The following risk factors are those concerned with the business of the Company.



Graphite and Pumice Prices



The profitability of the mining operation in which the Company has an interest will be significantly affected by changes in the price of graphite and volcanic aggregate.  Graphite and pumice prices can fluctuate and are affected by numerous factors beyond the Companys control.  The level of interest rates, the rate of inflation, world supply of graphite and pumice and the stability of exchange rates, among other factors, can cause significant fluctuations in graphite and pumice prices.  Such external factors are in turn influenced by changes in international investment patterns and monetary systems and political developments.





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5





Cash Flow and Requirements for New Capital



The Companys current operation is not generating a positive cash flow.  Although it is anticipated that positive cash flow will be generated in the future, there can be no assurance that this will occur.  The leases and licenses which the Company holds, as well as shareholder and joint venture agreements to which the Company is a party to, impose financial obligations on the Company which may utilize capital to maintain.  There can be no assurance that additional funding will be available to allow the Company to fulfil such obligations.



Further exploration and development of the various mineral properties in which the Company holds an interest depends upon the Companys ability to obtain financing through the joint venturing of projects, debt financing, equity financing or other means.   Failure to obtain additional financing on a timely basis could cause the Company to forfeit all or parts of its interests in some or all of its properties or joint ventures and reduce or terminate its operations.



Exploration Risks



Exploration for graphite is speculative in nature, involves many risks and is frequently unsuccessful.  Any graphite exploration program entails risks relating to the location of economic ore deposits, development of appropriate beneficiation processes, receipt of necessary governmental approvals and construction of mining and processing facilities at any site chosen for mining.  The commercial viability of a mineral deposit is dependent on a number of factors including the price of graphite, exchange rates, the particular attributes of the deposit, such as its size, grade and proximity to infrastructure, as well as other factors including financing costs, taxation, royalties, land tenure, land use, water use, power use, importing and exporting graphite and environmental protection.  The effect of these factors cannot be accurately predicted. Only a portion of the Black Crystal Project has either a measured, inferred or indicated resource (as per the AMEC Technical Report).



Lack of Operating History and Operational Control



The Company has only a small source of revenue and its ultimate success will depend on its ability to generate profits from its properties.  The Company currently has only a minor producing property primarily in the development stage and operates at a loss.  The Companys commercial viability is largely dependent on the successful commercial development of its properties. While all indicators are that this will be a significant industry, the Company has no control over when the graphite requirements will have reasonable growth.





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6





Political Regulatory Risks



Any changes in government policy may result in changes to laws affecting ownership of assets, mining policies, taxation, rates of exchange, environmental regulations, labour relations, repatriation of income and return on capital.  This may affect both the Companys ability to undertake exploration and development activities in respect of present and future properties in the manner currently contemplated, as well as its ability to continue to explore, develop and operate those properties in which it has an interest or in respect of which it has obtained exploration and development rights to date.  The possibility that future governments may adopt substantially different policies, which might extend to expropriation of assets, cannot be ruled out.



Calculation of Resources and Recovery



There is a degree of uncertainty attributable to the calculation of reserves, resources and corresponding grades being dedicated to future production.  Until resources or reserves are actually mined and processed, the quantity of resources or reserves and grades must be considered as estimates only.  In addition, the quantity of reserves or resources may vary depending on graphite prices.  Any material change in the quantity of reserves, resource grade or stripping ratio may affect the economic viability of the Companys properties.  In addition, there can be no assurance that mineral recoveries in small scale laboratory tests will be duplicated in large tests under on-site conditions or during production.



Dependence on Key Personnel



The Company is dependent on a relatively small number of key personnel, the loss of any one of whom could have an adverse affect on the Company.  In addition, while certain of the Companys officers and directors have experience in the exploration and operation of mineral producing properties, the Company will remain highly dependent upon contractors and third parties in the performance of its exploration, development and production activities.  There can be no guarantee that such contractors and third parties will be available to carry out such activities on behalf of the Company or be available upon commercially acceptable terms.



Title Matters



The Company has investigated its rights to explore, exploit and develop its various properties and, to the best of its knowledge, those rights are in good standing.  No assurance can be given that such exploration and mining authorities will not be challenged or impugned by third parties.  In addition, there can be no assurance that the properties in which the Company has an interest are not subject to prior unregistered agreements, transfers or claims and title may be affected by such undetected defects.



Currency Risk



Currency fluctuations may affect the cash flow, which the Company may realize from its operations, since graphite is sold in a world market in U.S. dollars.  The Companys costs are incurred primarily in Canadian dollars and secondly in U.S. dollars.



Tax



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7







Amendments to the current taxation laws and regulations that alter tax rates and/or capital allowances could have a material adverse impact on the Company.



Lack of Mineral Exchange for Graphite and Pumice



Industrial minerals such as graphite as well as pumice/volcanic aggregate, as opposed to commodity minerals such as copper, gold or silver, do not have a metals exchange or an open market upon which to trade and therefore prices are not set in an open market or publicly traded market.  As prices are set with private buyers it is difficult to predict what market prices may be at the time of sale of the graphite or aggregate.  Companies selling graphite or aggregate, as the case may be, must negotiate prices with individual buyers and therefore must convince the buyers to purchase the companys product over other products, taking into consideration quality, quantity, time sufficiency and longevity and therefore a company may have marketing problems unless it can convince buyers that its products are equal or superior to other similar products.  There can be no guarantees that the Company will be able to sell its product in a profitable manner.  With respect to graphite, due to the lack of available high purity graphite, prices currently are high and it is anticipated that prices will remain high yet stable for the foreseeable future.



Need to Hire Employees



The Company depends upon recruiting and maintaining other multi-skilled qualified personnel to staff its operations.  The Company has recruited and believes that other such personnel currently are available at reasonable salaries and wages in the geographic area in which the Company intends to operate.  There can be no assurance, however, that such personnel will always be available in the future.  In addition, it cannot be predicted whether the labour staffing at any of the Companys projects will be unionized, resulting in potentially higher operating costs.



The Company is subject to Government Regulations and Environmental Matters



The Companys activities are subject to extensive federal, provincial and local laws and regulations controlling not only the mining of and exploration for mineral properties, but also the possible effects of such activities upon the environment.  Permits from a variety of regulatory authorities are required for many aspects of quarry and plant operation and reclamation (see Environmental Regulations under Item 4  Information on the Company  Property, plants and equipment).  Future legislation and regulations could cause additional expense, capital expenditures, restrictions and delays in the development of the Companys property, the extent of which cannot be predicted.  In the context of environmental permitting, the Company must comply with known standards, existing laws and regulations, which may entail greater or lesser costs and delays depending on the nature of the activity to be permitted and how stringently the regulations are implemented by the permitting authority.  While it is possible that the costs and delays associated with the compliance of such laws, regulations and permits could become such that the Company would not proceed with the development or operations of a quarry, the Company is not aware of any material environmental constraint affecting it that would preclude the economic development or operation of the Companys property.





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8





Exploration and Development Liability Insurance



The Company currently has liability insurance.  The Company may become subject to liability for pollution or 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 funds available for exploration and development and would have a material, adverse effect on the Companys financial position.  The directors of the Company know of no such liability pending or otherwise at this time.





Reserves and Production Risk



No assurances can be given that the intended production schedules or the estimated direct operating cash costs will be achieved.  In addition to engineering, operating and capital cost factors, production from the Plant will depend on the success and the extent to which operating and expansion plans are achieved.



Any figures for resource and ore reserves presented in this annual report are estimates and no assurance can be given that the anticipated tonnages and grades will be achieved or that the indicated level of recovery will be realized.  Market fluctuations in the price of graphite may render ore reserves uneconomical.  Moreover, short-term operating factors relating to the ore reserves, such as the need for orderly development of the ore bodies or the processing of new or different ore grades, may cause a mining operation to be unprofitable in any particular accounting period.



Competitive Risk



The graphite business is competitive.  The Company still faces competition from existing companies, which are capable of mining and producing graphite and graphite materials.  Many of these companies are larger companies with greater financial resources than the Company, which companies are more able to withstand price volatility, should the price of graphite significantly decrease.



Risk of Penny Stock



The Companys common shares may be deemed to be penny stock as that term is defined in Regulation Section 240.3a51-1 of the Securities and Exchange Commission (the SEC).  Penny stocks are stocks: (a) with a price of less than U.S. $5.00 per share; (b) that are not traded on a recognized national exchange; (c) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ - where listed stocks must still meet requirement (a) above); or (d) in issuers with net tangible assets of less than U.S. $2,000,000 (if the issuer has been in continuous operation for at least three years) or U.S. $5,000,000 (if in continuous operation for less than three years), or with average revenues of less than U.S. $6,000,000 for the last three years.



Section 15(g) of the United States Securities Exchange Act of 1934, as amended, and Regulation Section 240.15g(c)2 of the SEC require broker dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investors account.  Potential investors in the Companys common shares are urged to obtain and read such



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9





disclosure carefully before purchasing any common shares that are deemed to be penny stock..



Moreover, Regulation Section 240.15g-9 of the SEC requires broker dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor.  This procedure requires the broker dealer to: (a) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (b) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (c) provide the investor with a written statement setting forth the basis on which the broker dealer made the determination in (ii) above; and (d) receive a signed and dated copy of such statement from the investor confirming that it accurately reflects the investors financial situation, investment experience and investment objectives.  Compliance with these requirements may make it more difficult for investors in the Companys common shares to resell their common shares to third parties or to otherwise dispose of them.



Potential Product Liability  CPCs Products



A risk of product liability claims and related negative publicity is inherent in the development of products for commercial use and Canada Pumice Corporation (CPC), our wholly owned subsidiary, faces business level uncertainties related to its products.  Personal liability insurance is expensive, its availability is limited, and may not be available on terms acceptable to CPC, if at all.  The commercialization of its potential products could be inhibited or prevented by an inability to maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims.  A product liability claim against CPC or the Company or the withdrawal of a product from the market could have a material adverse effect upon it and its financial condition.  A claim against the Company or recall or withdrawal of a product from the market could have a material adverse effect on the Companys reputation and financial condition.





ITEM 4  INFORMATION ON THE COMPANY





A.

History and Development of the Company





Incorporation



Crystal Graphite Corporation (the Company) was incorporated on November 27, 1979, under the laws of the Province of British Columbia under the name Bear Ridge Investments Inc.  On July 2, 1980, the Company changed its name to Gamin Resources Inc. and on May 23, 1989, the Company changed its name to Mineral Park Mining Corp.  On March 2, 1994, the Company consolidated its shares on a 4.5 old shares to 1 new share basis, increased its authorized capital to 25,000,000 common shares and changed its name to I.M.P. Industrial Mineral Park Mining Corp.  In October, 2000 the Company held an Extraordinary Meeting and the shareholders approved the name change to Crystal Graphite Corporation and increased authorized capitalization



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10





from 25,000,000 to 250,000,000 common shares.  Effective on November 06, 2000 the Companys name was changed to Crystal Graphite Corporation.



Corporate Information



The Companys business address and executive offices are located at Suite 1750  999 W. Hastings St., Vancouver, British Columbia, V6C 2W2.  The Companys telephone number is (604) 681-3060 and the Companys fax number is (604) 682-4886.  The Companys agent for service in Canada is Devlin Jensen, Barristers & Solicitors, who are located at Suite 2550, 555 West Hastings Street, Vancouver, British Columbia, V6B 4N5, and who can be contacted at (604) 684-2550 or via facsimile at (604) 684-0916.



The Companys common shares trade on the Canadian National Quotation System (the CNQ) under the symbol CYTG, and on the Over-the-Counter Bulletin Board (the OTCBB) under the symbol CYTGF.



Black Crystal Property



Pursuant to an earning option agreement dated January 10, 1995, as amended on September 24, 1995, entered into between the Company and Black Crystal Resources Ltd. (BCRL) (a private company wholly owned by Paul Schiller, the President and a director of the Company at that time), the Company has acquired a 50% interest in and to the following mineral claims located in the Slocan Mining Division of the Province of British Columbia in consideration for expending an aggregate of $3,063,400 on the mineral claims and issuing 800,000 common shares of the Company to BCRL:



Claim NameTenure NumberClaim TypeUnitsNumber of
HectaresMolly 13051452POST125Molly 23051462POST125Molly 33051472POST125Molly 43051482POST125PB - 1318625GRID20400PB  2318626GRID20500PB  3318627GRID20500PB  4318628GRID20500




which claims are commonly referred to as the Black Crystal Property.



Pursuant to an option agreement dated May 17, 2000, between the Company and BCRL, BCRL granted the Company the option to acquire the remaining 50% interest in the Black Crystal Property in consideration of the payment of $200,000 CDN within ten (10) business days of August 23, 2000 (the First Payment), the payment of $100,000 CDN on or before the first anniversary of the First Payment, and an amount of twenty (20%) percent of gross profit (the Royalty) derived from all timber, water, ores, gravel, sand, soils, metals and minerals sales of the Black Crystal Property for a period of ten (10) years commencing the date of the First Payment to a maximum of $1,700,000 CDN.



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11





According to the option agreement, the Company has the option to prepay the Royalty at any time.



See Item 4  Information on the Company  Property, plants and equipment below for further information on the Black Crystal Property.  See also Figure 1  Location Map.





Acquisition of Canada Pumice Corporation



On April 28, 2004, the Company completed a two-phased acquisition of Canada Pumice Corporation (CPC), which is now a wholly-owned subsidiary of the Company by the purchase of 100% of the issued shares of CPC from Mr. Brian Wear in consideration for the issuance of an aggregate of 15,345,000 common shares of the Company.  At the time of acquisition, CPC had two wholly-owned inactive subsidiaries, Volcanic & Industrial Minerals Inc. and Cariboo Lava Corp.  As a result of the acquisition, the Company owns certain mineral rights and tenures within properties known as the Klara claims comprising approximately 3,000 acres (48 units) including and surrounding an extinct volcano referred to as the Nazko Cone, located in the proximity of Quesnel, British Columbia.  In conjunction with these claims, the Company holds two 30-year renewable mine leases with a quarry permit for the life of the quarry  which allows it to extract up to 100,000 metric tons of volcanic aggregate per year from the Nazko Cone deposit.





Mineral Property Agreement  DeSheng Graphite Plant and Property



On August 18, 2004, the Company signed a mineral property agreement with Bao Zi Wan (BZW), a local county government under the laws of the Peoples Republic of China, pursuant to which the Company acquired the right to mine, process and market all graphite and tailings at the Da Tong DeSheng graphite plant and property, which is in production (and has been since 1938) and is located 23 kilometres north of the City of Da Tong in northern Shanxi Province, China.  A formal lease agreement is subject to satisfactory due diligence and Board approval of the Company.  If a formal lease agreement is entered into between the parties, such lease shall be for a term of 30 years with an option to renew for another 30 years.



Due diligence work was commenced in October 2004 and is expected to be completed by November 30, 2005.  In order to facilitate its due diligence work in China, the Company has opened a regional office in Beijing and has obtained a registration certificate from the Chinese government, which allows the Company to conduct business in China.  This registration certificate is valid for three years.  The Company is using its British Columbia operations to test the DeSheng concentrates.



Agreements in Principle



On October 29, 2004, the Company entered into an Agreement in Principle with Beijing Xinlong Corporation (Xinlong) of Room 610, Tower C, Soho Newtown, Jianguo Road, Chaoyang District, Beijing, P.R. China, to be effective November 1, 2004, for the proposed marketing of Xinlongs geofabric products by CPC to Canadian, United States, Mexican and European markets.  Xinlong has agreed to allow CPC to be the



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exclusive and sole distributor of all its products into the North American and European markets.  Under this Agreement in Principle, CPC shall have each of Xinlongs products sample tested by an independent Canadian laboratory and shall supply Xinlong with the certified analyses.  Furthermore, CPC is willing to appoint Xinlong as its sole supplier for industrial geotextiles for the constructions and landscape industry contingent on competitive pricing and the product meeting applicable specifications.  A firm agreement for the exclusive and sole distributorship for North America is to be finalized within 90 days of the signing of this agreement.



On October 29, 2004, the Company entered into an Agreement in Principle with Clay Industrial Minerals, Ltd. (Clay) of JianPing, Qingfengshan, Jianping County, Liaoning Province, P.R. China, to be effective November 1, 2004, for the proposed marketing of Clays VOLROCK (bentonite) products by CPC to Canadian and United States markets.  Clay has agreed to allow CPC to be the exclusive and sole distributor of all its bentonite products into the North American market.  In addition, Clay would also give CPC a first option in any business arrangement for production expansion.  Under this Agreement in Principle, CPC shall have each of Clays products sample tested by an independent Canadian laboratory and shall supply Clay with the certified analyses.  CPC has agreed to bear research and development costs for new products resulting from material combinations of VOLROCK and CPCs products, and shall supply Clay with all technical results.  A firm agreement for the exclusive and sole distributorship for North America is to be finalized within 90 days of the signing of this agreement.



On October 29, 2004, the Company entered into an Agreement in Principle with Tri-star Activated Carbon Corporation (Tri-star) of East of Sha Ling County, DaTong City, Shanxi Province, P.R. China  037004, to be effective November 1, 2004, whereby Tri-star agrees: (i) to allow CPC to be the exclusive and sole distributor of all its activated carbon products into the Canadian market, and (ii) to exclusively allow CPC to market its products into the United States market via Canada.  Under this Agreement in Principle, CPC shall have each of Tri-stars products sample tested by an independent Canadian laboratory and shall supply Tri-star with the certified analyses.  CPC has agreed to bear research and development costs for blending and combinations of Tri-star activated carbon and CPC volcanic material products, and shall supply Tri-star with all technical results.  A firm agreement for the exclusive and sole distributorship is to be finalized within 90 days of the signing of this agreement.





B.

Business Overview



The Company is an industrial mineral exploration and development company based in Vancouver, British Columbia, Canada, with a regional office in Beijing, China.  From 1994 to present, the Company has been principally engaged in the exploration and development for production of mineral properties.  The Company owns the Black Crystal Property which is located near the City of Nelson in southeastern British Columbia and the Companys wholly-owned subsidiary, CPC, owns the Klara claims, known as the Nazko Cone Property, located near Quesnel, British Columbia.  In addition, the Company has an option to acquire the right to mine, process and market all graphite and tailings at the DeSheng graphite plant and property located near Da Tong, Shanxi Province, China.



The Companys first priority is developing and expanding its pumice and graphite operations on the Nazko Cone Property and the Black Crystal Property, respectively.



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Concurrent with this, the Company is completing due diligence work with respect to the DeSheng project in China.



On July 4, 2002, the Company received Mining Permit No. M-211 from the British Columbia Ministry of Energy and Mines, which was issued pursuant to Section 10 of the Mines Act R.S.B.C. 1996, c293.  This permit contains the requirements of the Ministry of Energy and Mines for the work systems and reclamation, and is compatible with the requirements of other provincial ministries.  The implementation of the Mining Permit allows the Company to process flake graphite products at its Koch Creek plant to a maximum feed rate of 250,000 tonnes per year.  During fiscal 2004 the Company commenced production of high purity flake graphite and has developed three marketable graphite products ranging in prutiy from 96.0% to 99.5% graphitic carbon.  Shipments are being processed on a continuous basis to fuel cell bi-polar plate manufacturers.



CPCs priority is the continued production of volcanic aggregate and the continued manufacturing of pumice products for commercial sales.  CPC was granted a controlled water license (No. 102300) in 1993, which allows for the removal of 13,500 litres of water per day; an environmental assessment (EA) approval certificate was issued in 1996 (No. M96-01) which limits production to 100,000 tonnes per year; and a full permit was issued for the Nazko quarry on April 6, 1998.  Accordingly, production was ongoing on CPCs property at the time that the Company acquired CPC.  CPC produces and markets pumice or volcanic aggregate for commercial use.  In addition, CPC manufactures products made from its volcanic aggregate and sells these products for commercial use.



Cash Resources and Liquidity



As of August 31, 2004, the Company had cash and term deposits of $20,898 and a working capital deficiency of $3,355,621.



Stated Business Objectives



The overall strategic mission of the Company is threefold:



(i)

to establish a low cost, high performance operating company processing high purity flake graphite products, primarily for the international fuel cell bi-polar plate market, from its Black Crystal deposit located near Nelson, British Columbia.



(ii)

the production of various pumice products from CPCs Nazko Cone property located in the proximity of Quesnel, British Columbia.



(iii)

the completion of due diligence on the DeSheng project in China.





High quality health, safety and environmental performances are priorities for the Company, followed by quality control and productivity, while focusing on the potential contained in by products and maximizing added value.





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The following represents the Companys shortterm objectives (i.e., the next 12 months) for exploration, development and marketing.





Development Objectives



The Companys Black Crystal Property includes an open pittable flake graphite deposit and a processing plant with a capacity to process 4,100 tonnes of graphitic plant feed material per year.  The Company currently produces high purity graphite with fixed carbon content in the range of 97.0% to 99.5%.  The plant requires phased development to increase the feed material.  The Companys five-phased production expansion is as follows:



Phased Production Program




PhaseRaw Material FeedCapex Cost($Cdn)Planned
Completion DatePhase I4,100 tonnes$97,000Dec 2003 (done)Phase II25,000 tonnes$776,388late spring 2005Phase III(a)100,000 tonnes$250,000mid-2006Phase III(b)90,000 tonnes$100,000early-2007Phase IV180,000 tonnes$1,000,000early-2008Phase V250,000 tonnes$250,000early-2009




Note:  Phase  II requires an additional Cdn$250,000 operating capital.



The Company has now completed the Phase I expansion whereby it feeds graphite material to the plant at a designed rate of 4,100 tonnes per year.  The Company anticipates that its property will operate as a graphitic sand quarry for approximately the first five years before shifting to a hard rock simplified drill and blast operation.  During the next 12 months, the Company anticipates completing Phase II of its production expansion program.





Exploration Objectives



Black Crystal Property



The Company plans to proceed with further exploration work to define the extent of a promising flake graphite discovery made in year 2001.  The discovery is located in close proximity to the processing plant.  Although this discovery and other promising new occurrences are at a preliminary stage of evaluation, they do represent the potential to reduce haulage operating costs because of their proximity to the processing facilities.  Moreover, the new discovery is located at a lower elevation relative to the main resource area (1,800 metres ASL), which opens up the possibility of year-round quarrying activities thus enhancing the potential production of high purity graphite throughout the year.





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Klara Property



Exploration is not anticipated on the historical Klara Claims as they are well documented and the resource and reserve identified.  However, a geological report for exploration and development is planned to be prepared in 2005 on six new mineral claims that were staked adjacent to the CPCs Nazko Cone Property and the Klara claims.  These six new mineral claims are south  and southwest of CPCs Klara Claims and cover a total area of approximately 2,438.14 hectares (6,024.64 acres).



DeSheng Option



During the next 12 months, the Company intends to complete its due diligence on the DeSheng project in order to determine whether to proceed with negotiating a formal lease of the project.  A formal agreement is subject to satisfactory due diligence and approval of the Companys Board of Directors.





Marketing Objectives



Graphite Sales



The Company has determined that its deposit consists of high purity crystalline flake graphite, therefore the marketing strategy has been to determine the market for high purity crystalline flakegraphite.  The target market has been determined to be the high technology sector which includes bi-polar plate-manufacturing, which is an integral component of the fuel cell industry.  85% of the Companys production is planned to be directed to the high technology industry and the balance to be directed to the, carbon brush, and friction plate industries.



There are no open markets to facilitate the trading of graphite products and accordingly the market for graphite operates on a contractual basis between supplier and end-user.  Accordingly, the Company is required to develop a market in advance of production.  The Company has produced material for several orders for fuel cell plate production and has shipped several samples to various end users testing the product. Companies using or testing the Companys product include Graftec, Dupont Canada, and T.D.M. (who supply numerous companies with bi-polar plates).  Throughout 2002 and 2003, the Company has supplied graphite samples to North American and European customers for production runs and end-user testing.



The Company is continuing with its marketing research into graphite markets.  The Company is in advanced discussions with several potential strategic partners that manufacture graphite products in the advanced energy sector.  The Companys goal is to work in partnership with several manufacturers in the fuel cell sector.





Pumice/Volcanic Aggregate Product Sales



Volcanic aggregate is used in many products which are produced and sold by CPC (see Principal Resources and Products below for a description of same).  CPC already has a loyal customer base for these products.  To expand the market share of CPC the Company is participating in trade shows and seminars where end users and specifiers



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attend.  The shows are geared toward the horticulture, agriculture and landscape industry. The Company is also networking with distributors whose product lines compliment CPC products.  CPC has made inroads with these groups and currently has sales and orders from them.  CPC will pursue the big box stores for its retail products and the large nursery chain store groups for its bulk business.  For CPCs construction and industrial products the Company has found its best success to sales by dealing with the engineering community and specifiers, putting on seminars and giving presentations.  This ultimately has allowed CPC to be recognized and placed on an accepted suppliers list which CPC is specified in tender documents as the supplier of its product.  In addition, CPC continues to expand its membership in the different trade group associations where it advertises and is provided with full membership contacts where CPC then sends out its literature and brochures, and where CPC receives many leads and sales.  Furthermore, the Company receives many new customers and sales from word of mouth and referrals.





Description of the Business



(1)

Black Crystal Property



The Company has a 100% undivided interest in the Black Crystal Project located near Nelson in southeastern British Columbia, Canada.  The Black Crystal Project is an advanced project that includes an open pittable flake graphite deposit and a processing plant with a capacity to process 4,100 tonnes of graphitic plant feed material per year.  The Company is planning to expand the processing capacity of the plant once the demand dictates a further expansion (see Development Objectives above).



The Company is currently producing high purity graphite on a continual basis under its mining permit.  The Companys mining permit, which was received in July 2002, allows it to process 250,000 tonnes of graphitic material per year (this equates to an annual in-situ extraction rate of 300,000 in-situ tonnes per year).   An application can be made to the Provincial Government to increase this permitted tonnage annual rate. The Company has developed three marketable graphite products ranging in purity from 97.0% to 99.5% graphitic carbon and intends to continue producing graphite in the high purity range.



Development Plan



Since obtaining its mining permit, the Company has been producing high purity graphite for the fuel cell industry and is currently specified into production models at several different fuel cell manufacturers. Producers within the fuel cell sector have reported favourably on the graphite supplied to date.



The processing plant requires phased development to increase the feed material and the Companys five-phased production expansion is set out above under Development Objectives



At a design capacity of 250,000 plant feed tonnes per year, the plant will have the potential to produce approximately 6,375 tonnes of high purity graphite (assuming a recovery of 85% and a long term feed grade of 3.0% graphitic graphite).





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With the issuance of the mining permit the Company has taken the next steps towards advancing the project into full production.  Recently, the Company has successfully completed the Phase I expansion whereby it will be feeding graphitic material to the plant at a designed rate of 4,100 tonnes per year.  It is anticipated that the Black Crystal Project will operate as a graphitic sand quarry for approximately the first 5 years before shifting to a hard rock simplified drill and blast operation (identical to Chinese graphite operations) in the sixth year.  Selective underground mining using roadreaders and ramcars is considered within 10 years.  The shallow dip or geometry of the deposit approximates the slope of the mountain side thus making it advantageous to directly remove the mineralized material to a depth of approximately 30 metres rather than developing a conventional open pit.  Quarrying, screening, and haul services will be done under contract with local operators and the quarry will be operated on a seasonal/market demand basis.



The Company plans to proceed with further exploration work to define the extent of a promising flake graphite discovery made in year 2001.  The discovery is located in close proximity to the processing plant.  Although this discovery and other promising new occurrences are at a preliminary stage of evaluation, they do represent the potential to reduce haulage operating costs because of their proximity to the processing facilities.  Moreover, the new discovery is located at a lower elevation relative to the main resource area (1,800 metres ASL), which opens up the possibility of year-round quarrying activities thus enhancing the potential production of high purity graphite throughout the year.  The discovery has been exposed for study purposes by the Companys equipment during the year 2003.



The Company has produced material for several orders for fuel cell plate production and has shipped several samples to various end users testing the product.  Throughout 2002 and 2003, the Company has supplied graphite samples to North American and European customers for production runs and end-user testing.





Mining



The Black Crystal Property will be mined by open pit quarry methods in the first several years of the project.  For the most part, the Regolith Zone is deeply weathered and not expected to require blasting.  The material will be ripped and loaded using excavators into 40-tonne capacity truck & trailer units then transported 29 kilometres to the plant site.  Quarrying, haulage, crushing and screening will continue to be done under contract.  Quarrying activities will be restricted to a maximum 150-day period commencing in June and ending in October for the Black Crystal location.  With processing capacity of 250,000 tonnes of graphitic material per year, as limited by its mining permit, nominal rates of quarrying will be 2,000 tonnes per day assuming that the Black Crystal deposit is the only mineralized zone that the Company produces from.



Under the current mine plan, as the quarrying resources near depletion, the Company will shift to an underground mining method at the Black Crystal location.  Based on information to date, a selective room and pillar retreat mining method appears most suitable given the configuration of the deposit.  The Company plans to use trackless mechanized equipment and road headers for mining.  The room and pillar method should provide for selective mining, thereby optimizing the plant feed grade. During the underground mining phase, it may be possible to operate year-round.



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Processing



The processing plant at the Black Crystal Property is operating and has recently completed Phase One Expansion increasing plant capacity feed rate to approximately 4100 tonnes per year.  The process initially sizes and sorts the unconsolidated material using screens and separators.  The material is pumped in a slurry form to a bank of standard flotation cells, after being conditioned with an organic reagent (pine oil), in order to separate the graphite from fine non-graphite material.  Graphite has excellent flotation characteristics and floats on the top of the slurry where it is skimmed and removed from the circuit for later additional processing and drying.



The Companys processing system has produced 4 tonnes of product per day at 96% graphitic carbon grade concentrate.  The system becomes slow and complex for grades at +96% graphitic carbon.



To increase processing plant feed material during the First Quarter, an additional 1,300 tonnes of graphitic sands were excavated at the Hoder Creek Black Crystal Deposit and transported to the Companys stockpile area adjacent to the processing plant.  There are approximately 10,000 tonnes of material in inventory at the end of the Second Quarter.  The graphitic deposit adjacent to the plant was also stripped of overburden and the Company has a permit to extract 10,000 tonnes from this exposure.  The Company also has 75 tonnes of product bagged or in super-sacs waiting for final processing.



Research and Development continued at the Company laboratory and processing plant with emphasis on recycling waste heat from the dryers for decreasing hydrochoric acid leach time from eight to two hours.  The Company is presently trying to determine how to increase graphitic carbon content of the fines from 96 to 98%.





Plant Addition



For the Companys project to increase its production to a profitable level, an addition to the existing plant is required.   This addition is needed for: 1) drying, 2) screening, 3) bagging, 4) product heated storage 5) chemical storage, 6) sample preparation area, 7) weather protection for existing equipment and structures, and 8) production expansion capabilities.



The plant addition would be a pre-engineered structure eventually being 532 square metres attached at the northeast end of the existing plant.  It would have a sloped roof, which would cover the existing buildings (laboratory & geology office) with central columns separating the drying, screening and bagging from the storage & sample prep areas.  For Phase II, a two room 235 square metre additions is planned with the remaining 297 square metres being added during Phase IV.  One of the rooms will be dedicated to dry screening, bagging and storage at such a controlled temperature, which will ensure the graphite product is bone-dry before shipping.



A prototype electric vertical rotary disk dryer has been designed and constructed, and tested by the Company employees with excellent success to ensure a required bone-



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dry product.  A three-metre long diesel fired pre-heat rotary dryer has been added for Phase One.



The current hydrochloric acid leach circuit has a capacity of 1.5 tonnes per eight hours. The Phase Two expansion, which will be in the existing plant area, will require four leach tanks (the Company presently owns one). The tanks will be closed plastic water/sewage tanks with built in agitators. The major purchase for Phase Four is a $625,000 substation along with a feed grinding circuit and the remaining building addition.  Phase V costs are primarily for a flotation section addition and another thickener.



Production Rates for Phased Development



On December 31, 2003, the Company completed a capital expenditure of $97,000, thereby raising the high purity product to a production level of 0.75 tonnes per day (known as Phase I Upgrade).  Phase II Expansion is based upon a production product rate of 4 tonnes per day of which approximately 3.4 tonnes are of high purity graphite and 0.6 tonnes of fine graphite (-150 mesh).   Four 12-hour shifts are planned per week with one weekday down for maintenance and two days for the weekend.  The other 12 hours in a day are reserved for future expansion based on market conditions; this is known as Phase III (a) for a 24 hour 4 day per week operation and Phase III (b) for a 24 hour 7 day per week operation.



On an annual basis, Phase II capital expansion results in a theoretical feed requirement of 27,726 tonnes.  In reality there will be unscheduled delays (breakdowns, power outage, weather, etc.) estimated at a worst case of 10% of the time, which results in a level of 24,960 tonnes of feed per year.  The amount of product would be 748.8 tonnes per year of which 636.5 tonnes would be of high purity fuel cell type grade.



The plant would then be in position for Phase III (a) & (b) expansion which would be a continuous operation.  The production level could then reach 87,360 tonnes of feed per year at a product level of 2,620.8 tonnes of which 2,227.7 tonnes would be of high purity fuel cell type grade.  Unit costs at this production level would also take a major drop plus capital is not required for this expansion.



Phase IV expansion would be to increase the feed rate to 180,000 tonnes of feed per year(5040 tonnes of product) followed by a Phase V at 250,000 tonnes of feed per year(6250 tonnes of product).  The proposed new addition to the plant could handle the drying, screening, packaging and storage to the Phase V production level.



Property Description and Location



The Black Crystal Graphite Property is located within the Slocan Mining Division in British Columbia.  The area of greatest interest on the property is roughly centred at UTM coordinates 5513800N, and 444700E.  It is found approximately 51 kilometres north of Castlegar, or approximately 27.5 kilometres northwest of the village of Passmore.  The property is located in the Valhalla Range of the southern Selkirk Mountains, and is displayed on NTS map 82F/13, or Trim maps 082F071, 072 and 082.  The processing plant and quarry site are accessible by road and less than a 50 minute drive from the City of Nelson, which has a regional population of 26,000 people.





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The Black Crystal Graphite Property consists of 81 square kilometres (20,032 acres) of claims held by the Company in the regional deposit area. The deposit of present focus (Molly 1 to 4) is located approximately three kilometres south of the Valhalla Wilderness Provincial Park boundary and between Arrow Lake and Slocan Lake.



The Company has finalized tenure for a two square kilometre 30-year mineral lease where its graphite material beneficiation (flotation) plant, office, and related structures are located. This location is near the boundary of Koch Creek and the Little Slocan River; 14 kilometres west from Provincial Highway 6 on a maintained two-lane gravel forest service road. The Hoder Creek deposit is a further 29 kilometres to the north also accessed on a well maintained forestry service road. The nearest settlement on Highway 6 of any size is Slocan Park, which is 4 kilometres to the south from the intersection. The cities of Nelson and Castlegar are within a 50-minute drive from the plant site.  On 4 July 2002, the Company received its Mining Permit (No. M-211) for the Black Crystal deposit, which meets the requirements of the BC Ministry of Energy & Mines. The project presently has all of its permits in place to operate the quarry and processing plant.



The property consists of groups of claims that are non-contiguous.  The claim group to the north covers the area of graphite mineralization and the group to the south holds exploration claims and the plant site infrastructure.  The north block of claims has four two-post mineral claims, and six four-post mineral claims for a total of 10 claims.  This block of claims contains 114 claim units.  The four twopost mineral claims are entirely enveloped by one of the overlying Modified Grid four-post mineral claims.  The block of claims to the south has ten two-post and twelve four-post mineral claims for a total of twenty two claims.  This block of claims contains an internal set of claims (330607 & 330606) that are not part of the Companys land package.   The southern claim block contains a total of 200 claim units.  The office and plant facilities are covered with the Mill #1 and Mill #2 claims (now on the two square kilometre 30-year mineral lease  No. 392322), which also includes a deposit of graphitic mineralization.



The Company holds a 100% interest in all of these claims.  An application was made to the Crown to convert all of the four twopost mineral claims, which cover the deposit area, to mining lease; this was approved in July 2002 (No. 390937).



A registered legal surveyor has surveyed the twopost mineral claims, and the position of the common Legal Corner Post for the PB1, 2, 3, and 4 claims.  All of the claims can be found on B.C. Energy and Minerals Division, Mineral Titles Branch, Mineral Titles Reference Maps 082F071, 082F072, and 082F082.



All of the claims are presently in good standing, and the pertinent data is provided in the table in Item 4  Property, Plants, and Equipment  Mineral Property.



In the past three years the Company has commissioned reports to study the area covered by the proposed quarry operation.  The nature of these studies has involved environmental, First Nations and archaeological concerns, water availability for the project area, terrain stability, road transportation, ground water, flora and fauna and socio-economic impact.  Copies of some of these reports are available for viewing at www.crystalgraphite.com/private.





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Timber harvesting on the two operations areas is covered by a license from the Ministry of Forests.  This license was issued in 2002 and expires in 2007.



The Company has also received a bulk sample permit to allow extraction of a 10,000 tonne sample of graphitic material discovered adjacent to the plant facilities.



There is a 20% gross profit royalty for a period of 10 years on Molly claims #1 through #4 and PB claims #1 through #6, ending August 2010 to a maximum of $1.7 million.   The royalty is defined as 20% of the gross receipts from sales received from the product of the property, less direct operating costs.



The Black Crystal Graphite project is not subject to any environmental liabilities.  There is a potential for acid generation from the quartz unit; however, because it is the footwall to the graphite mineralization, excessive exposure of the quartz unit will be minimized through mine planning.



Since the graphite deposit is regional, which is typical for this type of deposit; graphite mineralization is observed in numerous locations within the claims.  The primary area of interest is the large outcrop at Hoder Creek on Molly 1 to 4 claims (now a mineral lease), and the recently discovered mineralization adjacent to the processing plant.



There is tailings storage in a dry form within 50 metres of the processing plant.  Most tailings have been used as road building material and concrete additive. The waste from quarrying has been used for in-pit dumping resulting in only very temporary waste dumps.



The climate at the processing plant area is mild with annual temperatures varying from 15 to +40 degrees Celsius.  Annual snowfall averages a depth of approximately 0.5 metres with 600 mm of annual rainfall.   Because the Hoder Creek deposit area receives an annual average snowfall of three metres, quarry production is only scheduled as a five-month operation thereby producing in excess of twice the tonnage rate than the plant throughput.  The short summers can be somewhat rainy, although conditions are normally quite favourable for performing geological fieldwork and quarrying during this time.



Power for processing is obtained from a 63kv power line 500 metres from the plant.  This power line is entirely dedicated for the Companys use and is fed directly from a dam on the Kootenay River.  The Company also has diesel generated back-up power.  Power and water supply are not necessary for the quarry site.  The plant site has two wells and a spring for supply water plus a water use permit for the pumping of water from the nearby Koch Creek.  Skilled and semi-skilled personnel have been available locally with all contractors, consultants, and employees residing within 70 travel minutes of the plant.  The Company uses contractors for quarrying and hauling material.  The plant site has telephone communication with Telus via repeaters, global satellite telephones, and satellite internet services.



The potential tailings storage area has a capacity of 125 years operating at 250,000 tonnes of tailings per year.





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The Black Crystal Graphite Deposit is located in an area of complex granitic and metamorphic rocks known as the Valhalla Range of the southern Selkirk Mountains.  The Valhalla Range consists of high, steep-walled, serrated, east-west trending ridges.  Local relief varies from 535 to 2800 metres in elevation with mountain valley relief from 1000 to 1500 metres.  There is a succession of inward-facing cliffs rising steeply to gently curving ridges.  Each successive cliff is followed by long, gentle, outward slopes that are succeeded in turn by more inward facing cliffs.



The vegetation at the Black Crystal deposit is classified as sub-alpine.  Immature Engleman Spruce, Alpine Fir and abundant slide alder cover the area of investigation.  Mature pine, cedar, and fir grow in the plant site lease area.



History



The Black Crystal area has been the focus of considerable exploration work, especially within the past several years.  The property was originally staked in the 60s by Mr. Steve Paszty of Castlegar, BC, but was allowed to lapse before long.  The property lay dormant until 1992, when it was restaked by Mr. Paszty, who subsequently optioned it in July 1993 to Industrial Mineral Park Mining Corporation (IMP).  Immediately after optioning the property, four modified grid four-post claims were staked, which enveloped the four original two-post mineral claims.  Two modified grid four-post claims were eventually staked to further increase IMPs holdings in the immediate area.  In November of that year, DDH Geomanagement Ltd. conducted a preliminary sampling/assessment program in the area of the main Black Crystal showing.  Two samples of unknown quantity were submitted to Process Research Associates Ltd. of Vancouver for initial bench flotation scoping tests and size distribution studies, while a further 25 samples were taken from four discrete locations.



In 1994 a six-hole reverse circulation (RC) drilling program totalling 250 metres of 4.5" borehole was conducted by DDH Geomanagement Ltd. on the property.  During the same period, some preliminary surficial geological mapping was done, and a 440 kg bulk sample was extracted in the vicinity of the RC-94-1 collar.  The unconsolidated material from this bulk sample was subjected to flotation testing.



In 1995, a 13-hole diamond drilling program was conducted on the property by D.A. Howard of DDH Geomanagement Ltd.  All holes were logged by L. Demczuk.  In total, 577 metres of NQ diameter drill hole were drilled between March 29th and April 22ndof that year.  These holes were drilled in two strings:

one which ran along the bottom access road from the Hoder Creek valley floor, and the other, which ran along the road to the present day pit area.  The depths for these holes ranged between 29.6 and 92.0 metres.  In the fall of 1995, a 3,000-tonne bulk sample was excavated from the same general area as the 1993 bulk sample and hauled to the Koch Creek plant site for eventual beneficiation.



To determine the optimum method of drilling and sample analysis, a comparison was made using the data from the 1994 reverse circulation drill program and diamond drill holes from 1995, which twinned some of the 1993 RC holes.  A comparison was also made between the results obtained utilizing the Leco method, versus those obtained using the  Double Loss on Ignition (DLOI) method.  DDH Geomanagement Ltd. concluded that diamond drilling produced the most reliable data.





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No formal surveying was completed on the location of the drill hole collars from either the 1994 or 1995 drill programs.  The collar locations were reported on the drill log relative to (1) the intersection of the road they occurred on, and (2) the northern boundary of the Molly claims.  These locations were likely measured using a hip chain.



Some metallurgical work was conducted on area samples by Process Research Associates Ltd. of Vancouver and by Quinto Technology Inc.s (a related company) metallurgical facility in Lumby, BC.



A further diamond drilling campaign was undertaken in 1997, under the direction of G. Addie.  Twenty-seven NQ diameter holes were drilled, for a total of 913.8 metres.  The core produced from this work was split and bagged, but only four of the samples produced were analyzed.  While several of the holes drilled in this program replicated locations that were drilled during the 1995 program, a number of new locations were tested.  All drill collars were surveyed by Timberland Consultants Ltd. of Nelson, BC using a differentially-capable GPS with a reported accuracy to within one metre.  Elevations of collars were taken from a map provided by Timberland.



In 1998, J. Snell conducted a scoping study on the property and used field observations to outline the surface trace of the calc-silicate host horizon and calculate the underlying resource.  In addition to this resource definition work, a bulk sample of unknown size was taken from an exposure of friable graphite mineralized calc-silicate material located on the main access road immediately above the Hoder Creek Valley.  Also, a handheld auger drilling program was reportedly undertaken in which 90 holes (or 675 metres) were drilled on a 100 x 100 foot grid in the main area of previous investigation.  The material taken from this drilling was composited and submitted as one sample for flotation testing, along with the bulk sample mentioned previously, to International Metallurgical and Environmental Inc. in Kelowna, BC.



The Black Crystal graphite deposit originated in geological time in an island arc, marine basin environment where limestone, calcareous argillites and intermittent volcanics, all of which contained carbon to a high degree, were deposited over a long period of geologic time in the Triassic-Jurassic Period (approx. 225 million years ago).  During the late Jurassic Period (approx. 150 million years ago) there was the intrusion of batholithic granites.  This resulted in great heat and pressure, which metamorphosed the sedimentary carbon within the intruded marine assemblage to crystalline graphite of inferred economic grade.  The host rocks were metamorphosed primarily from limestone to marble of other limey metasediments.  The granites within the batholith were metamorphosed to hybrid or mixed gneisses.  This calc-silicate metasediment is regional (typical of flake graphite deposits) with numerous occurrences graphite exposed in the Hoder Creek and Little Slocan River Valleys.







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(2)

Klara Claims



Through the acquisition of CPC, the Company acquired certain mineral rights and tenures within properties known as the Klara claims comprising approximately 3,000 acres (48 units), including and surrounding an extinct volcano referred to as the Nazko Cone, located in the proximity of Quesnel, British Columbia.  In May,2004, the Company announced that its wholly owned subsidiary CPC was expanding its production equipment at its quarries in both Nazko and Quesnel, British Columbia.  CPC is currently quarrying the Nazko Cone volcanic rock and shipping the product to various markets with 42 tonne capacity Super B-train trucks.



On January 14, 2005, CPC acquired six large mineral claims adjacent to its Nazko Cone Property and Klara Claims and its active mineral leases located 100 kilometres west of Quesnel, British Columbia.  These six new mineral claims are south and southwest of CPCs Klara Claims with a new total area of approximately 2.438.14 hectares (6,024.64 acres) or 24.3814 square kilometres.  Adding this new claim area to the Klara Claims property gives a total of 3,368.14 hectares (9,095.36 acres).



Property Description and Location



The Klara claims are located near Nazko in central British Columbia, about 110 kilometres west of the City of Quesnel.  The claims are located approximately at latitude 52°56N and longitude 123°43W on the National Topographic Series 93B/13.  The property consists of twelve contiguous mineral claims with a total area of 1200 hectares.



The Klara claims can be accessed from Quesnel by heading west on the asphalt paved road to the Nazko General Store (approximately 10 km south-southeast of Nazko), then taking 3900 Road for 9.5 kilometres and turning on 4000 Road and driving for 4.5 kilometres.  The road from the Nazko General Store to the quarry is a gravel road that is maintained year-round and does not require a 4WD vehicle unless adverse weather conditions prevail.  The nearby City of Quesnel has a population of approximately 11,000 people and is located on Highway 97 between the cities of Prince George and Williams Lake.



The volcano property is held under two leases and ten claims.  The Schedule of Mining Leases and Claims notes that the two leases, Klara 1C (#316265) and Klara 1B (#329933) are both 30 year terms with an annual rental of $2,000 each.  Klara 1C requires renewal in 2023 and Klara 1B in 2025.  The ten mining claims are all two-year tenures with a work value of $400 per unit and a recording fee of $20 per unit.  Eight of the claims are each one unit and two are each 20 units, resulting in work values of $8,000 each and recording fees of $400 each.  During the original mining operations, Mining Permit MX-10-115 was granted and $24,500 was posted as the security bond.  In 1998, the MX permit was upgraded to a new 30 year Ministry of Energy and Mines permit Q-205.  The bonding was simply transferred to the new permit as there was no material change in the operation at that time.  Any environmental issues would be dealt with under the terms of the EA permit and Q-205 bonding.  Currently, the Klara claims are not subject to any environmental liabilities.  There are no royalty issues or back in rights, payments or other agreements and encumbrances on the property.  All of the claims are presently in good standing.





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25





Full permitting for the Nazko quarry has been in place since April 6, 1998.  This includes a 30 year renewable mine permit (Permit No. Q-205); a full environmental assessment (EA) approval certificate (No. M96-01), issued in 1996; and a Controlled Water License (No. 102300) granted in 1993 allowing for the removal of 13,500 litres of water per day.  The existing surface rights are suitable for present and proposed expansion of quarry operations.  The EA and Mines permits allow for all manner of activities associated with the current operations of the mine.  Power is still portable and water consumption is reportedly well below permitted values.  Extra mining personnel will be added to the quarry site as required, but that total has not yet been determined.  There are no tailings at the quarry site as all materials can be used in products.  A new processing plant will be built in Quesnel and as such does not fall under the concerns of the quarry license.



The area has a continental climate with severe, snowy winters and relatively warm, moist, short summers.  The average annual snowfall is 166 cm/year, while the average annual rainfall is 36 cm/year.  The average temperature is typically below 0°C for four to five months of the year, and above 10°C for two to five months.  Long-term data suggest that total precipitation ranges from 440 to 990 mm per year of which approximately 25% to 50% is snow.  To date, the quarry operating season is twelve months per year for stock pile removal.  All processing is limited to spring, summer and fall.



Located in the Interior Plateau of British Columbia, the northern section of the Klara claims area is gently rolling and has large areas of undissected uplands.  A large part of the plateau is underlain by flat or gently dipping late Miocene or Pliocene olivine basalt flows.  Covering the majority of the plateau is glacial till.  With a bio-geoclimatic zone of Sub-Boreal Spruce, the majority of the claim area was logged and has since re-vegetated with second growth trees.



The Klara Claims area encompasses a volcanic rock and ash deposit.  These deposits include three distinct units and are Quaternary in age.  The deposit consists of a composite pyroclastic cone that includes a subaerial basalt flow, subaqueous tuff breccia and quenched basalt, and a subaerial pyroclastic cone.  Bounding the deposit is glacial till strata.





Mining



The Nazko Quarry is being mined by open pit quarry methods.  There are currently two main active production sites, one in the black tephra deposit and one in the red and brown tuff breccia.  The black tephra is mined in a fashion similar to a standard dry gravel pit with free caving materials.  No explosives are necessary in the current mining process.  Most of the stripping and stockpiling of thin cover was accomplished during the opening of the quarry.  This material is being sold as topsoil.  The tuff breccia volcanic products are well exposed on the open working faces of the quarry and blasting is not required since this reddish tone scoriacious material is simply ripped using caterpillar equipment and pushed a vertical distance of 150 metres down the outer flank or slope of the cone.  The products are then dry screened and stockpiled on the quarry floor by commodity type.





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26





CPC is presently permitted to produce up to 100,000 tonnes of plant feed materials each year.  CPC is licensed to remove 13,500 litres of water per day, but this exceeds present requirements as the screening and stockpile operations use no water.  Excavation and processing activities are best left for spring, summer and fall operations, but the shipment of stockpiled materials presently occurs year round.  CPC is intending to reach the 100,000 tonne threshold by next year but this will be dictated by market demands.



Processing



The processing of CPCs volcanic aggregate products is through simple ripping and/or excavation.  The sizing and development of product lines is accomplished only with a standard screening circuit.  Larger custom selected pieces are collected and crated by hand for direct shipment to landscape supply facilities.



No water is required for the production of the materials and all products are chemically inert.  No specialized health and safety requirements need to be instituted and any potential wind borne transfer of material from the quarry site is actually beneficial to the surrounding areas as it enhances plant growth.  (Tephra products are used in soil replacement mediums in greenhouse operations and as aquarium gravels.)



History



The volcanic deposits covered by the Klara claims were originally staked in early 1986 by Mr. Brian Wear, President of the Companys wholly-owned subsidiary, CPC.  Mr. Wear also conducted and/or contracted out bulk sampling, preliminary marketing and quality testing in that same year.  The Klara claim boundaries were surveyed for LRC Reserves Ltd. (LRC) of Vancouver, British Columbia, by Hickman & Gook (British Columbia Land Surveyors) in 1987.  LRC had an interest in purchasing and developing the present claim area in 1987; however, an agreement with Mr. Brian Wear/CPC was not attained.



An investigation of the study site was conducted in 1987 by G. Salazar & Associates Ltd. (GSSAL).  The objectives of GSSAL investigation were to evaluate the chemical environment and the potential size of volcanic deposit.  Estimates of the potential size of volcanic deposit were based on aerial photographs, a site visit and the average specific gravity of the deposits.  Potential reserves were calculated by estimating the aerial coverage of the deposits and using an average specific gravity of 1.4 for the ash (tephra) and 1.84 for the scoria (tuff breccia) to convert volumes into metric tonnes of potential reserves.  GSSAL estimated the scoria flows near Lava Lake to be at least 5 metres above pre-flow terrain and the ash deposits to be at least 3 metres deep.  This resulted in 14,705,280 tonnes of scoria and 3,874,500 tonnes of ash.  Considering the morphology of the area, it was noted that the thickness of the deposits may be much greater and that the tonnage estimates were likely conservative.  Although no direct indication was made in their report, it is believed that the weathered mantle of the deposit was included in the volumetric estimate of ash (tephra).  This weathered material (the uppermost layer of tephra deposit), ranging in thickness from 0.1 to 0.5 metres, is reportedly currently being removed and stockpiled for future sales as topsoil.



In 1987, Souther et al. described the geology of Nazko Cone and provided detailed information on petrography, chemistry, age of the units, quaternary



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27





environments, regional geology and petrogenesis.  They identified at least three periods of Quaternary volcanic activity.  A whole rock K-Ar date of 0.34 ± 0.03 million was obtained for basalt associated with the oldest volcanic activity.  Radiocarbon dating on the peat deposit immediately below and above the tephra deposit, associated with the most recent volcanic activity, yielded a result of about 7,200 years before present (BP).



Between May 6 and May 10, 1997, test pits in the tephra deposit were excavated using backhoes and shovels.  Between February 17 and 24, 1998, a geophysical survey by Geotronics Surveys Ltd. (GSL) of Vancouver, British Columbia was undertaken.  Between February 17 and February 20, 1998, a topographical survey by R. Gook & Associates Ltd. (RGAL) of Quesnel, British Columbia was undertaken.





Principal Resources and Products





(1)

Flake Graphite



The Company's material graphite product is an industrial mineral known as "flake graphite".  The graphite was formed by carbon-containing limestone, which was deposited in shallow waters, which ultimately became buried many kilometres below surface(1).  Heat, pressure and time caused the re-crystallization of

the carbon into coarse graphite flakes contained within limestone-now metamorphosed into marble and calc-silicate gneiss.  Geological forces eventually pushed the graphite containing formations back to the surface where they are today exposed.  Substantial drilling over a limited area has defined several million tonnes with much more obviously exposed at surface.  It is expected that little over-burden will have to be removed in order to quarry the initial graphite containing ore.  For the initial years of quarrying, drilling and blasting will not be required as the marble and calc-silicate has been decrepitated for many metres below surface by erosional forces and can be easily loaded into trucks by excavators.



For usage and marketing, graphite is divided into amorphous or microcrystalline, crystalline vein, and crystalline flake.  These are distinctions only on the size and packing of the crystals.  Very high purity graphite can compete with artificial graphite for high-end usage.



Graphite is essential for modern industry.  The largest use of natural graphite is in the following refractory uses: bricks, crucibles, shrouds, parts, and plastic.  It is a dry lubricant that has high electrical and heat conductivity, which is slow to burn and retains its strength at high temperatures.



Technology impacts the graphite market in three areas.  First, traditional uses require higher-grade graphite to either increase product life span or quality.  Second, engineering is allowing for the use of finer, higher-grade graphite to replace the large, less pure graphite.  Finally, the markets for products that require high-grade graphite are themselves
increasing.





(1)Barrett E.G. Sleeman, E.M., P.Eng., Memorandum Re Summary - Black Crystal Graphite, July 13, 1998.







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28





[annual002.gif]

Figure 1

Crystal Graphite Corporation

Black Crystal Project Location





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The end product quality is becoming critical for many graphite uses including steel, refractory bricks, and other traditional consumers.  This has caused a recent trend toward the use of higher quality graphite.  Contaminates in graphite added to steel as a carbon source play significant roles in the quality of that steel.  This has forced premium steel producers to use higher carbon content graphite.  The same is true for electrodes and batteries.  The higher graphite contents last longer and have better thermal and electrical conductivity.



Recently, a high-pressure technique has been developed that allows the use of smaller graphite flake for the production of many graphite parts such as electrodes.  However, these flakes must be of high quality in terms of grade and expandability.  Since these smaller flakes have traditionally been cheaper refractory blocks, longer life can be made for the same cost as the larger, more impure graphite and with longer life spans.



With respect to competition from artificially manufactured graphite, because the starting point for this product is petroleum, the final product is inherently more costly.  In addition, the final product, while chemically fairly pure, is a great deal inferior physically despite extensive research to alleviate the problem.  Artificially manufactured graphite is more porous, has smaller flakes and contains considerable undesirable non-graphite carbon.  Products which use this material suffer accordingly in quality, and thus it is expected that major consumers of the end product would readily switch to natural high physical and chemical quality graphite if it were available, which it is currently not, in any sizable quantity.



There has been much work done on the metallurgy of the Company's deposit utilizing part of the bulk sample taken in the years 1997, 2000, and 2001 at a pilot plant located 150 kilometres from the site, at Kelowna, B.C., at the IME laboratory at Kelowna, B.C., and at the Companys pilot plant.  A very pure (plus 97%) product has been produced of coarsely crystalline flake graphite, which indicates that a highly marketable product can be produced with off-the-shelf plant equipment.  Even higher purities (98.5% and 99.5%) have been achieved.



In summary, the extensive work to date gives the Company a degree of confidence that with the quarrying of a relatively small 180,000 tonnes per year of graphitic material, the plant, once fully equipped, should initially produce approximately 5400 tonnes per year of high quality graphite product.  The processing plant has been designed for phased production levels so that the produced product matches the marketing demand thus reducing the Companys capital risk.





(2)

Graphite Salt and Graphite Foil



Graphite salt is a simple acidification or alkalising of coarse flake graphite with either mineral acid or sodium hydroxide chemically introduced water molecules between the molecular layers of graphite to form graphite salt.  This change in molecular structure allows the graphite to exfoliate, i.e., the layers expand voluminously on heating due to the vaporization, expansion and expulsion of the inter-layered water.





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Graphite salt expands like popcorn when exposed to heat, which makes it an excellent fire retardant due to its rapid expansion when exposed to heat.  This actually inhibits the spread of fire.  It can be added to paints and can replace asbestos.



The exfoliated graphite has exceptional insulating properties as is and furthermore, it can be recompressed to form graphite sheet or foil for use as gaskets, with insulating and high temperature high tech applications.





(3)

Pumice - Volcanic Aggregate



Pumice is the common name for a very lightweight rock, or volcanic aggregate, that displays a lower specific gravity than water.  Compared to traditional materials such as sand and gravel used for many geotechnical and construction applications, volcanic aggregate is a natural, lightweight, low density product ideal for trench-fill, back-fill, road base, concrete and other construction applications.





(4)

Tephralite Products



While maintaining the support and strength of traditional materials, the Nazko volcanic aggregate is lighter with greater insulation and drainage characteristics while requiring minimum compaction.  These characteristics make it ideal for use in poor soil conditions and where cold weather causes traditional materials to expand and contract which, in turn, causes roadways to heave and sidewalks to crack.  The insulation properties of volcanic aggregate mitigate these actions while increasing insulation.  CPC markets these products as Tephralite.  Applications include masonry concrete, lightweight concrete for high-rise buildings, pre-cast and pre-stressed concrete, bulkheads and retaining walls, backfill for ground conditions that have poor bearing characteristics, bridge decks, a variety of road bases, waterfront structures, enveloping underground conduits and pipelines (trench fill), and land fill drainage systems, to name a few.  The key characteristics of materials for this market are products that are structurally strong, stable, durable and inert, yet also lightweight and insulating.  The Nazko deposit is a naturally occurring source of lightweight aggregate.  CPC has registered the trade name Tephralite for this line of products.  CPC has made in-roads into a number of these markets, and as the advantage of Tephralite over traditional lightweight materials is established, it is projected this market will grow at more than 200 percent annually.  Direct marketing to engineering firms has already begun and met with favourable results.  This is expected to dramatically increase sales of the bulk products as it is specified by the consulting engineer groups.  Other uses of Tephralite include use as a fire retardant and for noise reduction when used as a remedial exposed concrete covering or in new concrete construction.



An additional benefit of significant weight reduction is realized when volcanic aggregate is used in cement or cinder block construction.  Not only is this an advantage in handling, it is critical for construction in earthquake prone areas, or where foundation conditions have poor bearing characteristics.  Similar benefits can be achieved only through the use of expanded clay aggregates, a manmade product with a complex manufacturing process that increases cost and is a less environmentally pure alternative with inferior durability and reactivity properties.





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(5)

Tephrago Products



The lightweight and low-density nature of volcanic aggregate is proving beneficial in horticulture and agriculture as a replacement for traditional soil amendment, growing mediums and filtration mediums.  These volcanic type products have been used in Holland for years.  CPCs Tephragro products have been tested in Holland by one of the worlds leading testing laboratories with positive results.





(6)

Tephrafilter Products



The Nazko volcanic aggregate, under the trade name of Tephrafilter, can be used for water, fuel and oil filtration, wet land sewage treatment, municipal effluent ponds, and industrial sludge settling ponds.  It has properties common to known filter media such as activated carbon, silica sand, diatomite and perlite.  Advantages of volcanic aggregate include neutral pH weather and chemical resistance, compaction resistance, and a natural ability to absorb odours.  A singular use is with residential and industrial solid waste where it has demonstrated ability as a support medium, allowing methane gas to flow horizontally through landfill sites regulating pressure where it is drawn off and used either as an energy source or safely flared off.  This product also removes the unpleasant odour when incorporated with a bio-filter and potential fire or explosion hazards inherent in landfill sites.  As the number of landfill sites grows, so will the market for this product.  Tephrafilter demonstrates advantages as a filtration medium for re-circulating irrigation water used in large hydroponic vegetable growing operations and green houses.  It also allows engineers to design filtering ponds using a uniform lateral flow method that cannot be achieved in any other medium.  Similar characteristics make it an environmentally friendly material for absorbing oil, gas and other liquid spills as well as being resistant to chemicals.



(7)

Anti-Slip



Volcanic aggregates offer long lasting abrasive characteristics, ideal where longwearing, high traction surfaces are required.  Applications include use as an environmentally friendly winter abrasive and an alternative to a salt and sand mixture.  The aggregate does not destroy roadside vegetation, is easier to handle than sand and salt mixtures, and does not attract wild life.  This reduces the growing concern of road kill and its attendant dangers to drivers.  There is also a substantial saving to the public in windshield and headlight damage (estimated by the Insurance Corporation of British Columbia to be approximately fifty million dollars per year in claims).  The aggregate does not have the same damaging ballistic characteristics as regular road gravel due to its lower mass.  This product is marketed by CPC under the trade name Anti slip.  The market for this product includes bulk commercial use for highways and in the large retail consumer market as a bagged product sold through retail chains.  It is also being sold in bags directly to school districts, care homes, feed stores, airports, hospitals, building management groups and other commercial/retail markets.







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(8)

Landscaping Products - Lavascape



Volcanic rock has been used for ground cover for many years.  It is harder, more durable and more colourful than its competition.  The Nazko deposit naturally occurs in a number of colours (red, black, grey, purple, calico and rainbow).  It is very clean, available in a variety of sizes, retains its natural colour, does not bleed or fade, does not deteriorate and requires low to no maintenance once in place.  The largest market is for the home and garden landscaping market, which desires bags of the products as opposed to bulk purchases.  Many large retail chains offer a variety of landscaping products, including lava rock, and some CPC customers now carry wash colour of the product.  Distribution agreements with these chains offer a lucrative annuity.  The main driver is price and dependability in service of the source.  CPC has trademarked Lavascape and has already established a loyal market presence.  Landscape uses include: decorative coloured rock for landscaping and groundcover, larger rocks for gardens, ponds, rock walls and feature rocks in Japanese gardens, pathways and driveways, and rooftop landscaping.





(9)

Ceramic Briquettes  Lava King



CPC is also planning to manufacture its own ceramic briquettes.  This market is for a bagged product distributed through large retains chains.  Price and dependability of product are the two major determining factors of successful sales of the product.  CPC has trademarked Lava King and has already established a loyal market presence.





(10)

Lava King Sand



CPC has acquired the rights to a unique binding agent that, when combined with the fine volcanic aggregate from the Nazko deposit (Lava King infield sand), results in an extremely versatile and durable playing surface.  CPC has developed industry-leading expertise in this field and has a number of successful projects, including show rings and riding arenas for equestrian events at the Pacific National Exposition (PNE).  CPC has provided its Lava King red infield sand to the premiere North American baseball facility SoftBall City in Surrey, B.C.  CPC currently provides material to many facilities hosting the annual summer games, a large number of municipalities and schools, professional track and field facilities, and other private sports facilities.  This is a large and growing market.  To date, sales have been through word of mouth and referrals from loyal user groups whose maintenance managers and groundskeepers network at workshops and field days for turf and recreational facility suppliers.  CPC currently works closely with a sport architect who has specified Lava King sands into a number of projects.





(11)

Industrial Ceramics



The inherent characteristics of volcanic aggregate suggest it is an ideal product for the development of industrial ceramics, particularly where highly inert and non-conductive products are required.  The creation of these products requires a sophisticated production process.  As well as providing the raw material, the Nazko deposit is located in a resource rich area with abundant hydropower, low cost land and labour.  This line of



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products will require significant additional capital and offers long term potential for worldwide markets.  A joint venture program with CPC, NRC and AGRA is underway to evaluate this industry.





Environmental Regulation



The Company is subject to the following environmental regulations set out by the Ministry of Energy, Mines and Petroleum Resources, Land Management and Policy Branch  Kootenay Division:





Mass Wastings & Surface Erosion

Roads & Bridges

Slope and terrain stability



Northern Goshawk Nesting Site



Deer Winter Range



Impact on Bears



Traffic Management



Environmental Monitoring



Reclamation Program



Re-vegetation and Use of Suitable Growth Medium



Watercourses



Trenches



Drilling & Major Excavations



Disposal of Fuels & Toxic Chemicals



Safety Provisions



Monitoring Programs set in place to ensure that the above regulations are being met



The Company was required to meet the above criteria before being issued a Mineral Exploration Reclamation Permit on June 15, 1995.  The Company remains in compliance of the relevant environmental regulations.



The Companys future operations may be affected from time to time in varying degree by changes in environmental regulations, including those for future removal and site restoration costs.  The Company is unable to predict the likelihood of new regulations and their overall effect on the Company.  The Companys policy is to meet those standards set out by relevant legislation by application of technically proven and economically feasible measures.



Environmental expenditures that relate to ongoing environmental and reclamation programs are charged against earnings as incurred or capitalized and amortized depending on their future economic benefits.  Estimated future removal and site restoration costs, when the ultimate liability is reasonably determinable, are charged against earnings over the estimated remaining life of the related business operation, net of expected recoveries.





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CPCs operations and activities are covered by mine leases and an approved permit for work system and reclamation programs signed by the Minister of Mines and the Chief Inspector of mines at that time.  In addition, CPC has a Project Approval Certificate from the Environmental Assessment office.  CPC follows the criteria as set out in these permits as well as adhering to the Mines Act (British Columbia).  Inspectors from these agencies perform periodical inspections and CPC has received numerous safety awards for its safe working record at its operations as well as never having any disputes or letters of problems from the governing ministries that oversee its activities.





C.

Organizational Structure



On April 28, 2004, the Company purchased a British Columbia company named Canada Pumice Corporation (CPC) and its two inactive subsidiaries, Volcanic & Industrial Minerals Inc. and Cariboo Lava Corporation.  CPC is now a wholly owned subsidiary of the Company by the acquisition of 100% of the issued and outstanding shares of CPC in exchange for 15,345,000 shares of the Company.





D.

Property, Plants and Equipment





Office Space



The Company utilizes about 1,441 square feet of office space in Vancouver, British Columbia, under an office lease for a term expiring on November 13, 2006.  The landlord is Bank Vontobel AG.  The Companys monthly rent in 2003 was $4,847.89.  In addition, the company has a 580 square foot operations office adjacent to its pilot plant site.



In addition, the Company has opened an office in Beijing, P.R. China.  This office space is approximately 159 square meters located at Suite 12056, Building 2, Jianwai Soho, 39 Dongsanhuan Zhonglu Road, Chaoyang District, Beijing, P.R. China  100022.  The Company has entered into a lease agreement for this office space for a term of three (3) years expiring on August 31, 2007, and having a rental deposit of approximately US$6,209 and a monthly rental payment of approximately US$2,070.



Mineral Property



Black Crystal Graphite Project



The Black Crystal Graphite Project consists of 7,900 hectares (19,520.9 acres) of claims held by the Company in the regional deposit area. The deposit of present focus (Molly 1 to 4) is located approximately three kilometres south of the Valhalla Wilderness Provincial Park boundary and between Arrow Lake and Slocan Lake northwest of the City of Nelson in the West Kootenay District in the Province of British Columbia.



The Company has finalizing tenure for a two square kilometre mineral lease where its graphite material beneficiation (flotation) plant, office, and related structures



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are located. This location is near the boundary of Koch Creek and the Little Slocan River, 29 kilometres from the Black Crystal Property and 14 kilometres from Provincial Highway 6 and the nearest settlement of Passmore.  The Company has gone through the application stages for converting the Molly 1 to 4 claims into a mineral lease.  Both mineral leases were issued during June 2002.



The following table lists all current claims held by the Company:



Claim NameTenure NumberClaim TypeUnitsNumber of
HectaresMolly 13051452POST125Molly 23051462POST125Molly 33051472POST125Molly 43051482POST125PB - 13186254POST20500PB  23186264POST20500PB  33186274POST20500PB  43186284POST20500PB - 53716704POST20500PB - 63716714POST20500PLANT #13875884POST4100PLANT #23875894POST4100PLANT #33887584POST5150MILL  #103844442 POST125MILL  #123844462 POST125MILL  #133844472 POST125MILL  #143844482 POST125MILL  #153844492 POST125MILL #163844502 POST125MILL #173856622 POST125MILL #183856632 POST125MILL #193879694POST20500MILL #203859704POST20500MILL #213859714POST20500MILL #223859724POST16400MILL #233859734POST20500MILL #243859744POST18450MILL #253887594POST20500MILL #263887604POST20500MILL #273887614POST14350MILL 9R3897372POST125MILL 11R3897382POST125




With respect to government regulation, the Companys activities are subject to extensive federal, provincial and local laws and regulations controlling not only the



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mining of and exploration for mineral properties, but also the possible effects of such activities upon the environment.  However, the Company is not aware of any material environmental constraint affecting it that would preclude the economic development or operation of the Companys property.





Klara Claims on the Nazko Volcanic Cone



The Klara property near Nazko, British Columbia consists of twelve contiguous mineral claims with a total area of 1,200 hectares.  Mr. Brian C. Wear (Owner No. 139409) is the registered owner of the Klara claims and is the President of CPC, the Companys wholly owned subsidiary.  Full permitting for the Nazko quarry has been in place since April 6, 1998.  This includes a 30-year renewable mine permit (Permit No. Q-205), a full environmental assessment (EA approval certificate No. M96-01 issued in 1996, and a controlled water license (No. 102300) granted in 1993 allowing for the removal of 13,500 litres of water per day.  The Klara claims have been calculated to contain a total of 44,974,000 tonnes of volcanic deposits (tephra, tuff breccia and basalts).  These include:



29,265,000 tonnes of proven reserves

8,898,000 tonnes of probable reserves

6,811,000 tonnes of inferred reserves



At current license production totals of 100,000 tonnes per year, the proven component of the deposit would be in operation for roughly 290 years.  The deposit taken as a whole would be in operation for roughly 450 years.



The following table lists all current claims held by the Company:



Tenure No.Claim NameWork Recorded toStatusMining DivisionArea207382KLARA II2006.04.19Good Standing 2006.04.19Cariboo20 un207384KLARA IV2006.04.19Good Standing 2006.04.19Cariboo1 un207385KLARA V2006.04.19Good Standing 2006.04.19Cariboo1 un207386KLARA VI2006.04.19Good Standing 2006.04.19Cariboo1 un207387KLARA VII2006.04.19Good Standing 2006.04.19Cariboo1 un207388KLARA VIII2006.04.18Good Standing 2006.04.18Cariboo1 un207389KLARA IX2006.04.19Good Standing 2006.04.19Cariboo1 un207390KLARA X2006.04.19Good Standing 2006.04.19Cariboo1 un207391KLARA XI2006.04.19Good Standing 2006.04.19Cariboo1 un3162652004.08.20Good Standing 2004.08.20Cariboo200 ha3299332004.09.20Good Standing 2004.09.20Cariboo200 ha368857KLARA 11A2006.05.05Good Standing 2006.05.05Cariboo20 un5035422006.01.14Good Standing 2006.01.14Cariboo234 ha




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5035432006.01.14Good Standing 2006.01.14Cariboo488 ha5035442006.01.14Good Standing 2006.01.14Cariboo292 ha5035462006.01.14Good Standing 2006.01.14Cariboo488 ha5035482006.01.14Good Standing 2006.01.14Cariboo468 ha5035502006.01.14Good Standing 2006.01.14Cariboo468 ha






Plants



Graphite Processing Plant

As of August 31, 2001 a 4000 square metre pilot plant with flotation equipment and related in-place infrastructure was producing graphite concentrate.  This plant has been upgraded to produce a 98% to 99% fixed carbon graphite at various size fractions.  The plant includes product standard and column flotation cells, a large rod mill, leach tank, filtering system, dryers, large table, storage hoppers, and a bagging machine.  With the addition of more personnel, dryers, leach tanks, building expansion, and continuous shifts, the plant is estimated to reach a maximum production rate of 180,000 tonnes per annum.  A laboratory has been operational since June 30, 2001.  Adjacent to the plant is a settlement pond and a tailings disposal area, which have received the appropriate permits for the project. To date, most tailings have been used for road material and concrete.



As of August 31, 2003, all infrastructure is operational which includes:



1)

upgraded 14 km access road from the Provincial Highway 6;

2)

spring and well water;

3)

electrical power from a 63 kv powerline with diesel generated backup power;

4)

radio and telephone communications; and

5)

first-aid, showering, septic systems, office and lunchroom facilities.



The plant feed stockpile has been increased from August 31, 2000 to November 30, 2002 from 6000 tonnes to 23,000 tonnes.  This feed has been screened into three size fractions: +6 inch, -6 inch +1/4 inch; and  1/4 inch and is located adjacent to the plant.  To date, 2850 tonnes of feed has been processed.



In addition to the quarry operation and beneficiation plant, the Company, through its subsidiary CPC, owns a rail siding and bulk loading facility in Quesnel, where it has easy access to the Port of Prince Rupert and the Port of Vancouver.  CPC has experience in shipping bulk by rail to its customer base.  Through its distributor and its network of warehousing throughout Canada, CPC is presently shipping custom bagged product to its distribution centres in BC, Alberta, Saskatchewan, Manitoba and Ontario where they are then forwarded to retail and industrial outlets.





Equipment



The Companys mobile fleet includes:

1 - Caterpillar 235C excavator

1 - Caterpillar 980 front end loader

1 -- Caterpillar D8K crawler tractor



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1  Caterpillar D9H crawler tractor

1  966D Wheel loader

1  Turbo Chieftain Power Screen

2  M-60 conveyors

2  custom built Super B Raglan aluminum trailers

1 - Ambulance

1 - Ford 150 4x4

1 - GMC Suburban

1 - Ford loader

1 - Industrial forklift

1 GMC 15ton capacity dump truck

1 - Sand truck

1  Product forklift

1  screen for sifting and sizing graphite



The Company presently has its required equipment for the first two years of operation.



The Companys plant contained 100% of the equipment needed as a pilot plant as of August 31, 2002.  The Company is modifying the process system to improve productivity.





ITEM 5  OPERATING AND FINANCIAL REVIEW AND PROSPECTS



A.

U.S. and Canadian GAAP Differences



The financial statements have been prepared in accordance with Canadian GAAP, which conform in all material respects with those of the U.S., except as disclosed in Note 18 to the audited financial statements of the Company for the years ended August 31, 2004 and 2003.



B.

The Company



Acquisition of Canada Pumice Corporation



On April 28, 2004 the Company purchased a British Columbia company named Canada Pumice Corporation (CPC), and its two inactive subsidiaries, Volcanic & Industrial Minerals Inc. (VIMI) and Cariboo Lava Corporation (Cariboo Lava).  CPC is now a wholly owned subsidiary of the Company by the acquisition of 100% of the issued and outstanding shares of CPC from Mr. Brian Wear in exchange for 15,345,000 shares of the Company.  A finders fee of 155,000 common shares was paid to an unrelated party on this acquisition.



The purchase method of accounting has been applied with the shares issued as consideration being recorded at $6,905,250, that being the value of the shares given up after considering price fluctuations, liquidity issues and exchange rates.  In addition, all legal, financing, accounting and consulting fees relating to the acquisition have been added as part of the purchase cost.





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Details are as follows:



Shares issued to the vendor$6,905,250Shares issued for financing900,000Shares issued for finders fee93,000Legal fees77,419Financing fees57,517Accounting fees37,175Consulting fees17,945$8,088,306




At the date of the acquisition, the value of the identifiable net assets of CPC was as follows:



ASSETSCash$4,745Accounts receivable135,316Inventory434,602574,663Mineral property costs8,502,438Property, plant and equipment, at net book value115,742Reclamation deposit24,500$9,217,343LIABILITIESBank overdraft$368,173Accounts payable and accrued liabilities78,963Employee deductions payable62,143Line of credit81,706Due to related parties486,828Current portion of long-term debt13,4461,091,259Long-term debt13,278Asset retirement obligation24,500$1,129,037Total Purchase Price$8,088,306




The excess value of the consideration given up has been allocated to mineral property costs.



In the Companys unaudited interim consolidated financial statements for the nine months ended May 31, 2004, the Company reported the acquisition (Acquisition Agreement) of CPC in consideration of 15,345,000 common shares of the Company valued in accordance with managements best valuation based upon traditional valuation indices of market price of the Companys shares (then trading at about $0.55US) and



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40







valuation reports of the assets of CPC resulting in managements best agreement with the vendor of a deemed value of $0.74CDN per share.



Upon recent review of the CPC acquisition with its auditors and guidance from the Canadian Institute of Chartered Accountants (CICA) Handbook Section (HB) 1581, Business Combinations, management has accepted suggestions to reconsider the pricing mechanism and has determined that the transaction should be valued at $0.45CDN per share, this being arrived at through a CICA calculation process of considering a number of factors including price fluctuations, liquidity issues and projected three year time based discount values.



Concurrently with the acquisition of CPC, Brian Wear was engaged as Senior Vice-President and COO of the Company under contract and with a grant of 2,000,000 stock options (Stock Option) to be priced at the deemed value of the value of the shares issued for the acquisition of CPC.



The above changes have been reflected in the audited consolidated financial statements for the current year ended August 31, 2004.



The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, CPC and CPCs wholly-owned inactive subsidiaries, VIMI and Cariboo Lava.  Results of operation are included from the date of acquisition.





Adoption of Accounting Policies



During the year ended August 31, 2004, the Company adopted the following significant accounting policies:



Effective September 1, 2003, the Company prospectively adopted the CICA HB 3063 Impairment of Long-Lived Assets, which requires that an impairment loss be recognized if the carrying value of a long-lived asset exceeds its fair market value.  An estimate of fair market value is undertaken annually and the impairment loss, if any, is charged to earnings. There were no impairment losses recorded during fiscal 2004. Managements estimates of resources, inventories and reclamation costs are subject to risks and uncertainties that may affect its assessment of the recoverability of mineral property costs.



Effective September 1, 2003, the Company elected early implementation of CICA HB 3110 Asset Retirement Obligations, whereby the Company prospectively recognizes asset retirement obligations in the period in which they are incurred, if a reasonable estimate of fair market value can be made.  The asset retirement costs are capitalized as part of the carrying amount of the long-term asset to be amortized over the estimated remaining useful life of the asset and the associated liability is recorded until settlement of the obligation.  As a result of the adoption of this accounting standard, the carrying value of the Black Crystal property and the corresponding asset retirement obligation was increased by $135,000 during the year ended August 31, 2004.  The estimated closure costs of $24,500 associated with the Nazko Cone property at the time of acquisition was recognized in full as part of the acquisition cost.





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41





The Company has adopted the recommendations of CICA HB 3870, Stock-based compensation and other stock-based payments.  This Section establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services.



The new standard requires that all stock-based awards made to employees and non-employees be measured and recognized using a fair value based method.  In prior years, stock-based compensation expense was only recognized when stock-based compensation awards were made to non-employees, while pro forma disclosure was acceptable for awards made to employees.



As encouraged by CICA HB 3870, the Company has enacted prospectively early adoption of the fair value based method of accounting for awards issued to employees for the current fiscal year beginning September 1, 2003.





Year ended August 31, 2004 compared with the year ended August 31, 2003



Liquidity and Capital Resources



During the current year, the cash position increased by $35,036 resulting in a cash balance of $20,898 at August 31, 2004 compared with a negative balance of $18,883 at August 31, 2003.  As part of the acquisition of CPC, the Company also acquired $4,745 of cash on April 28, 2004, which is included in the cash position at August 31, 2004.



The Company used $1,981,650 for operating activities during the current year compared with $207,398 in the prior year.  The major increase of cash used is due to the higher level of operating expenses incurred in the year combined with the payment of large accounts payable balances.



The Company used $1,041,780 for investing activities during the current year compared with $545,750 in the prior year.  After adjusting for amortization expense and asset retirement costs, the Company incurred $445,629 on mineral property costs compared with $539,099 in the prior year.  Of the current year total, $435,341 relates to the Black Crystal property and $10,288 relates to prepaid expenditures made in relation to a mineral property agreement in China.  The full amount of the prior year balance relates to the Black Crystal property.  The cash expenditures that were added to the carrying amount of the CPC acquisition totalled $190,056.  As mentioned hereinbelow in the Results of Deferred Exploration Expenditures section, the Company focused on testing and refinement of the plant processes in the current year whereas the prior year was spent making modifications to the plant, bulk sampling and preparing technical reports.  The Company spent $406,095 on property, plant and equipment purchases during the year compared with $6,651 in the prior year.  Black Crystal equipment purchases totalled $93,739 while Nazko Cone equipment purchases totalled $312,356.



The cash resources provided by financing activities during the year was $3,058,466 compared with $563,083 in the prior year.  The bulk of this financing came as a result of debt financing obtained as part of the CPC acquisition.





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42





By a loan agreement dated 25 September 2003, the Company secured financing in the form of a demand debenture for an amount of $1,000,000 from an unrelated party, (who subsequently became a director of the Company), of which $150,000 was set up as an interest reserve to service the monthly interest instalments.  The debenture bore interest at a rate of 15% per annum, compounded monthly, and was repayable on 26 September 2004.  The Company paid a non-refundable application fee of $10,000 and issued 500,000 common shares of the Company valued at $135,500 to the lender as a non-refundable commitment and funding fee.



By a loan agreement dated 7 May 2004, the Company secured additional financing in the form of a demand debenture by cancelling the first debenture for a new debenture in the amount of $4,000,000, from a company controlled by a director, of which $600,000 was set up as an interest reserve to service the monthly interest instalments.  The debenture bears interest at a rate of 15% per annum, compounded monthly, and is repayable on 7 May 2005.  The Company paid a non-refundable application fee of $20,000 and issued 1,500,000 common shares of the Company valued at $900,000 to the lender as a non-refundable commitment and funding fee for the new debenture.  The Company also paid a three-month interest penalty of $37,500 as a result of the early redemption of the first debenture.  The new debenture provides for a first registered charge on the land and a general first floating charge on all other assets of the Company.  The application fee, the commitment and funding fee and the interest penalty have been recorded towards the acquisition of CPC as it was this funding that enabled the acquisition to complete.



Details of the demand debenture and interest reserve account as at 31 August 2004 are as follows:



Proceeds from demand debenture$4,000,000Balance of interest reserve held by the lender(410,640)$3,589,360




The Company may elect to extend the term of the debenture for a further twelve months at the option of the Lender.  The Company can pay off the debenture prior to the due date, in whole or part, subject to a three-month interest penalty.  If the Company secures new financing, 25% of the net proceeds shall be applied to the debenture.



During the year the Company paid $284,679 in interest on the two debentures in addition to the fees and penalties mentioned above.  During the same period the Company earned $4,522 on the monies held in the interest reserve account.



A portion of the above financing in the amount of $368,173 was used to pay down bank indebtedness acquired on the acquisition of CPC.  In the same manner, shareholder loans in the amount of $449,222 acquired on the acquisition were paid down with the financing received in the year.



On 28 April 2004 in conjunction with the CPC acquisition, the Company loaned the former principal of CPC and current director of the Company $263,000.  The loan is non-interest bearing, secured by 355,500 escrow shares of the Company and due after 1 October 2005.  If there is a default on the loan, the Companys only recourse is to keep



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43





the shares held in escrow.  As at 31 August 2004, the market value of the escrow shares is $202,635.



Proceeds from share capital issued for cash during the year was $588,367 as compared with only $148,250 in the prior year.



During the year, the company issued 780,045 units to two directors and a relative of a director by private placement for gross proceeds of $211,392.  Each unit consists of one common share and one share purchase warrant.  Each warrant entitles the holder to purchase one additional common share of the company at a purchase price of US$0.25 for a two-year period expiring 20 October 2005.



During the year, the company issued 1,355,000 common shares to employees, directors, officers and consultants as a result of stock option exercises for gross proceeds of $371,808.



During the year, the company issued 15,990 common shares as a result of warrant exercises for gross proceeds of $5,167.



During the period, the company paid out $16,667 plus interest to certain debenture holders and issued 236,776 units to the remaining holders.  One unit was issued for each $0.271 of outstanding debenture.  Each unit consists of one share and one share purchase warrant.  Each warrant entitles the holder to purchase one additional common share of the company at a purchase price of US$0.25 for a two-year period expiring 20 October 2005. 79,950 shares were issued to an officer and a relative of a director.



During the period, 57,144 common shares originally issued to certain debenture holders were returned to the company in exchange for the original principal amount of $20,000 plus accrued interest.



At August 31, 2004, the Company had a working capital deficiency of $3,355,621.  In the short term, the Company expects to rely on external debenture financing and private placement equity financing to fund its cash requirements.



Results of Operation



Please refer to the Companys Statement of Loss included in the audited consolidated financial statements for the fiscal year ended August 31, 2004 (current year) for a complete breakdown of the Companys activities during the fiscal year.  Following is a summary of the highlights during the current fiscal year with comparative information presented for the prior fiscal year ended August 31, 2003 (prior year).



The Company generated sales in the amount of $449,427 during the current year.  All of the sales were generated from the Companys newly acquired subsidiary, CPC and its pumice operations and represent operations from April 29, 2004 through August 31, 2004.  The cost of goods sold associated with the products sold was $336,788 leaving a gross profit of $112,639.  Crystal Graphite reported no sales in the prior year.



Operating expenses totalled $2,585,634 in the current year compared with $1,321,068 in the prior year.  This is an increase of $1,264,566.  Operating expenses are



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44





made up of wages, benefits and payments to contractors of $1,635,448 (which includes stock-based compensation expense in the amount of $964,684 booked for stock options granted to employees, directors and officers), marketing costs of $229,202 (which includes stock-based compensation expense in the amount of $7,409 booked for stock options granted to consultants), shareholder information and investor relations of $149,457, general and administrative of $129,820, legal fees of $95,842, occupancy costs of $76,720, travel of $65,928 and various other smaller expenses all under $50,000 each.



The increase in the operating expenses of $1,264,566 over the prior year is mainly attributable to an increase in stock compensation expense during the year as well as increased activity in the Company due to the acquisition of CPC as well as including the operations of CPC for the four months from the date of acquisition.  The key operating expense items that increased over the prior year were an increase in wages, benefits and subcontractors of $1,271,491 (stock compensation expense was $964,684 in the current year compared to $nil in the prior year), increase in general and administrative of $64,753, increase in legal fees of $40,712, increase in transfer agent fees of $36,070, increase in amortization of $28,328, increase in research and development of $25,492 and an increase in listing and filing fees of $6,891.  The increase of these key items was offset by decreases over the prior year in marketing of $228,808 (stock compensation expense was $nil in the current year compared to $245,900 in the prior year), decrease in shareholder information and investor relations of $16,236 and travel of $10,059.  Product marketing is currently the main focus of the company as management is searching for potential purchasers of graphite as well as pumice products and therefore reflects a large increase in cost.  Wages have increased due to the adding of two new full time staff persons in the Vancouver office and the addition of the CPC staff for the 4 months from the date of acquisition.  General and administration expenses increased due to the activity of acquiring CPC, obtaining financing and including 4 months of activity from the CPC operations.  Legal fees were higher due to the acquisition of CPC, the various financing that occurred in the period as well as applying for the listing on the CNQ.  Listing and filing fees were up significantly due to the company applying for and being listed on the Canadian Trading and Quotation System Inc (CNQ).



Other key expense items shown separately from operating expenses were interest on loans and debentures of $302,689 (which includes $12,500 of accrued interest recorded on the conversion into 236,776 shares and a reversal of $1,509 of accrued interest on the return of shares exchanged for cash) and financing fees relating to the convertible debentures and demand debenture of $195,321.  The financing fees relate directly to the demand debenture and convertible debenture funds received during the period.  There were no financing fees in the prior year and interest on debentures only amounted to $43,589.  In the prior year there were finders fees paid in the amount of $62,250.  No such fees were paid in the current year.



Overall, the Company incurred a loss of $2,991,438 for the year ended August 31, 2004 compared with a loss of $1,446,929 for the comparative period ended August 31, 2003, which represents an increase of $1,544,509 over the prior year.  The loss per share (Basic and Diluted) was $0.09 in the current year compared to $0.06 in the prior year.







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Results of Deferred Exploration Expenditures



Please refer to the Companys Schedule of Mineral Property Costs included in the audited consolidated financial statements for the fiscal year ended August 31, 2004 for a complete breakdown of the Companys mineral exploration activities during the fiscal year.  Following is a summary of the highlights during the current fiscal year with comparative information presented for prior fiscal year ended August 31, 2003.



The Company incurred expenditures on its Black Crystal Graphite Project of $728,691 for the current year compared with $751,092 for the prior year, which represents a decrease of $22,401 over the prior year.  The deferred exploration costs consisted of amortization expense of $158,350, wages, benefits and subcontractors of $159,374, asset retirement costs of $135,000, field and general of $121,912, repairs and maintenance of $50,598, transportation and hauling of $37,337 and various other smaller expenditures all under $30,000 each.



During the year, due to the Company adopting CICA HB 3110 regarding asset retirement obligations, $135,000 has been recorded to the carrying value of the property, that being managements estimate of future mine closure costs for the Black Crystal property.



The decrease in expenditures of $22,401 (plus the one time entry of $135,000 for asset retirement costs) over the prior year is mainly attributable to the fact that the Company has changed its focus to marketing over last year and due to the shortage of funding for further property development.  The current year property activities consisted of testing and experimental work on the beneficiation plant and equipment as well as testing of the laboratory and graphite quality processes.



As described above, the Company acquired CPC on April 28, 2004.  CPCs main asset is its Nazko Cone property in Quesnel, B.C.  The portion of the acquisition cost relating to the Nazko Cone property in the amount of $8,502,438 has been capitalized to mineral property costs.  As the Nazko Cone property is in production, the capitalized costs will be amortized on a unit-of-production method based on the estimated life of the proven and probable pumice reserves.  No amortization has been booked in the current year as the production in the four months from the date of acquisition compared with the proven and probable reserves results in an immaterial balance.



Risks and Uncertainties



Crystal Graphite Corporation has developed high purity graphite that is primarily targeted to the high technology sector such as bi-polar plate manufacturing for the fuel cell industry.  While all indicators are that this is expected to be a significant industry, CGC has no control over when the graphite requirements may have reasonable growth.



Crystal Graphite has limited financial resources and no assurances sufficient funding will be available to conduct further development and marketing of its product.



Currency fluctuations may affect the cash flow that the company may realize from its operations, since graphite is sold in the world market denominated in U.S. dollars.  The company's costs are incurred in Canadian and U.S. currencies.  Unless otherwise



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46





noted, it is managements opinion that the company is not exposed to significant interest, currency or credit risks arising from the financial instruments.



Research and Development, Patents and Licenses, etc.



For the year ended August 31, 2004 and up to January 31, 2005 collectively, the Company did not incur any expenditures relating to either patent and/or license development or filings.





Year ended August 31, 2003 compared with the year ended August 31, 2002



Liquidity and Capital Resources



During the year, the cash position decreased by $190,065 resulting in a negative cash balance of $18,883 consisting of cash and term deposits of $16,091 offset by cheques written in excess of funds on deposit at $34,974 at August 31, 2003 compared with $171,182 at August 31, 2002.



The Company used $207,398 for operating activities during the year compared with $2,117,225 in the prior year.  The major decrease is due to the lower level of expenses incurred in the year combined with the collection of significant Goods and Services Tax (GST) and British Columbia Mineral Exploration Tax Credit (BC METC) receivable balances and the large build-up of accounts payable at year-end.



The Company used $545,750 for investing activities during the year compared with $1,769,443 in the prior year.  After adjusting for amortization expense, the Company incurred $539,099 on mineral property costs compared with $1,040,447 in the prior year.  As mentioned in the Results of Exploration Expenditures section, the Company focused on testing and refinement of the plant processes in the current year whereas the prior year was spent making major modifications to the plant, bulk sampling and preparing technical reports.  A similar reduction in expenditures occurred with capital acquisitions.  The Company spent $6,651 on capital asset purchases during the year compared with $382,323 in the prior year.  In the prior year, the Company was obligated to put up a reclamation bond in connection with the mining permit and therefore invested $390,000 in a term deposit while recovering $46,023 from prior reclamation bonds for a net outlay of $343,977.  There was no such expenditure in the current year.



The cash resources provided by financing activities during the year were $563,083 compared with $118,262 in the prior year.



In December 2002, the Company completed a convertible debenture private placement of 350,000 debenture units at a price of $0.50 per unit for total proceeds of $175,000.  Each debenture unit consists of one redeemable common share and one-tenth of a non-redeemable common share.  During the year, 213,333 redeemable shares were redeemed for $106,667 plus interest.  The redeemable shares are secured by a registerable debenture, which bear interest after 1 April 2003 at a rate of 1% per month.



In March 2003, the Company completed a private placement of convertible debentures for total proceeds of $415,000.  The debentures bear interest at 8% per annum



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47





and have a one-year term with a due date of 31 March 2004.  The Company has the option to pre-pay (in cash or shares) the debenture after three months with a 2% prepayment bonus if paying in cash.  The debentures are convertible into one common share of the Company for each $0.35 of principal, but only if the shares of the Company are trading in excess of US $0.50.



During August 2003, the Company repaid $68,500 of this debenture in cash.  The balance of $346,500 plus imputed interest of $26,100 was converted into 990,004 common shares.  Financing fees in the amount of $62,250 were paid to unrelated parties in connection with this convertible debenture private placement.



During the third quarter, 1,000,000 options were granted to consultants of the Company and subsequently exercised for proceeds of $148,250 (US $100,000).  The Company recorded $245,900 as stock-based compensation in connection with the stock options granted.  The stock compensation expense is included with marketing in the financial statements.



The prior year financing balance was a repayment of related party loans.  There were no loans in the current year.



At August 31, 2003, the Company had a working capital deficiency of $550,322.  In the short term, the Company will rely on external debenture financing and private placement equity financing to fund its cash requirements.



Results of Operation



The Company incurred a net loss of $1,446,929 for the year ended August 31, 2003, as compared to a net loss of $1,913,120 for the year ended August 31, 2002, which represents a decrease of 24% or $466,191 over the prior year.  The loss for the year consists of an operating loss of $1,321,068 and other items such as write-down of investments of $3,613, finders fees relating to the convertible debentures of $62,250, interest on debentures of $43,589 (which includes $26,100 of accrued interest recorded on the conversion of 990,004 shares), net interest and bank charges of $2,027, capital tax of $3,553 and a loss on foreign exchange of $10,829.   The operating loss is made up of wages, benefits and payments to contractors of $363,957, marketing costs of $458,010 (which includes stock-based compensation expense in the amount of $245,900 booked for stock options granted to consultants), shareholder information and investor relations of $165,693, travel of $75,987, general and administrative of $65,067, occupancy costs of $59,477, legal fees of $55,130, audit and accounting fees of $44,700 and various other smaller expenses all under $10,000 each, totalling $33,047.



The decrease in the loss of $466,191 is mainly attributable to a decrease in operating costs of $157,039 and lower write-down over the prior year of $477,796 offset by a net increase in expenses of other items in the amount of $168,644.  The key operating expense items that decreased over the prior year were a decrease in legal fees of $295,060, decrease in travel of $60,392, decrease in wages, benefits and subcontractors of $46,730, decrease in audit and accounting fees of $44,132, decrease in transfer agent fees of $28,163 and a decrease in general and administrative of $21,353.  The decrease of these key items was offset by increases over the prior year in marketing of $48,409 plus the stock compensation expense of $245,900, and shareholder information and investor relations of $43,091.  The net fluctuation of the other operating



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expenses was an increase of $1,391.  Legal fees, travel costs, audit fees and transfer agent fees all returned to normal levels after several years of inflated costs due to the lawsuit brought against the Company in 2001 and the related issues with KAK Investments Inc.  Please refer to Note 11 in the Companys audited financial statements for the year ended August 31, 2003 for further details.  The other decreases were due to the Company attempting to keep operating costs down as a result of decreased financial resources.  The increases in marketing and investor relations were due to the Company attempting to establish markets for its high purity flake graphite and to promote investment in the Company.  The finders fees relate directly to the convertible debenture funds received during the year.



The write-down of investments in the amount of $481,409 for the year ended August 31, 2002 was the result of the recording certain U.S. marketable securities at their market value and recording the Companys investment in an Alberta company involved in the oil and gas sector at $1.00.  These investments are not expected to reflect value for several years.  See Note 4 in the Companys audited financial statements for the year ended August 31, 2003 for further details.



Research and Development, Patents and Licenses, etc.



For the year ended August 31, 2003 and up to January 31, 2004 collectively, the Company did not incur any expenditures relating to either patent and/or license development or filings.



Trend Information



An International Marketing Team was initiated to determine:



·

The range of graphite able to be produced from the deposit

·

The demand for graphite in the markets of Japan, USA and Asia

·

The range of graphite purchased, the sources of supply and quality demanded for each grade of graphite

·

The likely prices of each grade of graphite

·

Competitor analysis

·

A marketing matrix



The demand for graphite is growing, especially in the aerospace industry and the automobile industry where the advent of fuel cells should dramatically increase the demand for graphite.



Most of the projected increase in demand for graphite will be in the high tech sector where high purity and stringent specifications are required.





Year ended August 31, 2002 compared with the year ended August 31, 2001



Liquidity and Capital Resources



Cash decreased by $3,768,406 in the fiscal year 2002 and resulted in a cash balance of $171,182 at August 31, 2002, as compared to $3,939,588 at August 31, 2001.  The August 31, 2002 cash balance does not include the following: GST and other tax



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49





recoverable in the amount of $233,763 (subsequently received), BC METC receivable in the amount of $323,087 (subsequently requested), or the cash amount of $390,000 invested in a term deposit and pledged in a Safekeeping Agreement with the Ministry of Employment and Investment, Energy and Minerals Division for a reclamation bond.



There were no financing activities, share purchase warrants or incentive stock options exercised during the 2002 fiscal period.



Investing activities in fiscal 2002 required $2,459,514 as compared to $5,220,702 in fiscal 2001.  Expenditures in 2002 included $1,264,479 in mineral property costs, as compared to $4,112,993 for fiscal 2001, and capital assets in the amount of $382,323 for fiscal 2002 as compared to $1,086,822 for fiscal 2001.  The major portion of expenditures spent in fiscal year 2001 were due to the construction of the processing plant and further exploration on the project.  The fiscal year 2002 costs were considerably less where the major expenditures were due to the ongoing maintenance and modifications to the processing plant.



Results of Operation



The Company incurred a net loss of $1,913,120 for the year ended August 31, 2002, as compared to a net loss of $2,379,069 for the year ended August 31, 2001.  The loss was a result of the capital development of the Black Crystal Project and the costs incurred in legal and audit fees which substantially increased because of the legal action in the U.S. and the resulting difficulty with the TSX Venture Exchange.  Legal expenses were $350,190 for the year ended August 31, 2002, as compared to $161,883 for the year ended August 31, 2001.  Accounting and audit fees were $88,832 for the year ended August 31, 2002, as compared to $8,187 for the year ended August 31, 2001.



A one time expenditure of $115,164 was paid to AMEC E&C Services Limited for a technical report on our Black Crystal Project which is capitalized in Mining Engineering and Planning in the Schedule of Mineral Property Costs.  This project was originally commissioned to assist the Company in verifying the project and development to the TSX Venture Exchange.  Subsequent, events have proven that the report did not assist our relationship with the TSX Venture Exchange, although it has proven valuable when dealing with knowledgeable readers in the industry and complies to the National Instrument 43-101 disclosure rules introduced in February 2001 by the Canadian Securities Administrators.



The Company was also compelled to invest $390,000 cash in a reclamation bond as a requirement of our mining permit.



Research and Development, Patents and Licenses, etc.



For the year ended August 31, 2002 and up to January 31, 2003 collectively, the Company did not incur any expenditures relating to either patent and/or license development or filings.





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50





Trend Information



An International Marketing Team was initiated to determine:



·

The range of graphite able to be produced from the deposit

·

The demand for graphite in the markets of Japan, USA and Asia

·

The range of graphite purchased, the sources of supply and quality demanded for each grade of graphite

·

The likely prices of each grade of graphite

·

Competitor analysis

·

A marketing matrix



The demand for graphite is growing, especially in the aerospace industry and the automobile industry where the advent of fuel cells should dramatically increase the demand for graphite.



Most of the projected increase in demand for graphite will be in the high tech sector where high purity and stringent specifications are required.



Prices ranging from US$1,000-US$4,000/tonne can be expected for high purity graphite (99% purity and -50 to +150 mesh flake size).



Most of the marketing efforts are now being directed to resolving the future of graphite in bi-polar plates and to researching the alternatives now being considered.  To this end, fuel cell manufacturers and bi-polar plate manufacturers are continually visited to ascertain the demand of natural graphite polar plates.



A similar approach is being taken with a Japanese manufacturer of lithium ion batteries, who is researching alternatives to graphite based anode materials.



The continuing operations of the Company are to commence profitable operations during year 2004.





ITEM 6  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES



A.

Directors and Senior Management



The names, municipality of residence and principal occupations in which each of the Directors, Executive Officers and other members of management of the Company have been engaged during the immediately preceding five years are as follows:





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Name, Municipality of Residence and Positions, if any, held with theCompanyPrincipal Occupation or Employment during the Past FiveYearsDirector/
Officer of the Company SinceNumber of Shares of the Company Beneficially Owned, Controlled orDirected(1)Gordon J. Sales
Vancouver, British Columbia, Canada

President, CEO and a Director of the CompanyBusinessman, Self-Employed

InvestorPresident since
December 1999

Director since October, 1998876,658Brian C. Wear
Abbotsford, British Columbia, Canada

Sr. Vice President, COO and a Director of the CompanyBusinessman, Self EmployedApril 29, 200415,345,000Richard J. Ivy
Pittsburg, PA
USA

Director of the CompanySelf-Employed
BusinessmanJuly 04, 2000NilGeoffrey R. Caine
Vancouver, British Columbia, Canada

Director of the CompanyRetired
BusinessmanJanuary 18, 1996358,187Alexander Cox
Vancouver, British Columbia, Canada

Director of the CompanyChartered Accountant, Real Estate Developer, Self EmployedFebruary 24, 20042,000,000




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Edward J. Nunn
Nelson, British
Columbia, Canada

Vice President - OperationsProfessional Mining
EngineerGeneral Manager
July 1, 2000


Vice President Operations September 30, 200344,975Bernie Zacharias
Langley, British Columbia

Chief Financial OfficerChartered Accountant and Vice President of Avisar (formerly Tonelli & Associates)January 13, 2004NilLana Bea Turner
Vancouver, British Columbia, Canada

Corporate SecretaryAdministration

Previously held Secretary (Officer) with Promax Energy Inc. from 1993 to 2000March 3, 200066,665




Notes:(1)These figures are as of February 18, 2005




The following are brief profiles of the Directors and Executive Officers of the Company:





Mr. Gordon Sales(age 67) is the President, CEO and a Director of the Company devoting 100% of his time to the business of the Company.  Mr. Sales has a strong background in the wholesale/retail industry, building supply operations, distributor and dealer of truck parts, wood chips export and commercial real estate development with budgets ranging from $10-180 million.





Mr. Brian C. Wear (age 50) is Sr. Vice President, Chief Operating Officer and a Director of the Company as well as the President of the Companys subsidiary, Canada Pumice Corporation devoting 100% of his time to the business of the Company.  Mr. Wear comes to the mining world from the marine industry.  He worked for 15 years in the merchant marine and is a commercial/research diver.  During his time in the merchant marine he earned his Canadian Masters Certificate and additional Foreign Going Officers Certificates.  He has acted as First Officer and Master on a host of ships from the Caribbean to the Arctic, shipping a variety of commodities.  Mr. Wear developed insight into the workings of the construction aggregate and cement products market during his shipping duties.  In 1986, he discovered the Nazko Volcanic Cone and quickly



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53





determined its potential significance in the world market.  As a result, Canada Pumice Corporation (CPC) was incorporated in 1990.





Mr. Geoffrey R. Caine(age 83) is a Director of the Company.   Mr. Caine was involved in the lumber industry for 50 years and retired in 1997.



 
Mr. Richard Ivy(age 57) is a Director of
the Company.  Mr. Ivy has approximately 25 years in management and
operations of sales of noble alloys, ferroalloys and other processed minerals.  From 1989 to 1996, he occupied senior positions with BHP Trading Inc. and Placer Sales, Inc. and from 1995 to the present has been President and owner of United Mineral Resources Inc. which had revenues of $13,000,000 in the latest year through presentation of major producers specializing in such products as vanadium
pentoxide, ferrovanadium, molybdenum oxide and other specialty products.





Mr. Alexander Cox(age 66) is a Director of the Company.  Mr. Cox is a resident of Vancouver and is a successful real estate developer, developing properties in Whistler, Victoria and the lower mainland of B.C.  Mr. Cox graduated from McGill University, 1961 Bachelor of Accounting, 1963 Licentiate in Accounting and 1963 Chartered Accountant.  Mr. Cox was engaged in public practice with the National Accounting Firm of Clarkson, Gordon (now Ernst & Young) for over 20 years.  Mr. Cox was a client handling partner responsible for co-ordinating the performance of audit, accounting tax and a variety of other special work for a wide range of clients in both the public and private sector.





Mr. Edward J. Nunn (age 58) is the Vice President - Operations of the Company.  Mr. Nunn was appointed as an officer of the Company on January 9th, 2002 devoting 100% of his time to the business of the Company.  Mr. Nunn has worked around the globe for several other mining companies, staying several years at each project.





Mr. Bernie Zacharias(age 31)is Chief Financial Officer of the Company and was appointed on January 13, 2004.  He is also Vice President of Avisar, Chartered Accountants.  Bernie received his Chartered Accounting designation in 2000 by examination in 1998.  Over the past seven years, Mr. Zacharias has worked extensively with mineral exploration and development stage companies on the TSX Venture Exchange as well as Foreign Private Issuers reporting to the Securities and Exchange Commission.





Ms. Lana B. Turner(age 50) is the Secretary and CFO of the Company.   Ms. Turner was appointed Secretary of the Company on March 3, 2000, devoting 100% of her time to the business of the Company.  Ms. Turner was appointed Chief Financial Officer of the Company on July 19, 2002 and resigned from such position on January 13, 2004.  Ms. Turner worked part-time for the Company since June 1999 and was awarded a full time contract on July 1, 2000.  Ms. Turner has worked as an accountant and did corporate filings for several reporting companies over the past twenty years.





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54





Aggregate Ownership of Securities



There are presently an aggregate of 19,027,985 common shares of the Company owned by all of the Directors, Officers and promoters of the Company representing 42.87% of the total issued and outstanding common shares of the Company.





Other Reporting Issuers



The following Directors, Officers, promoters or other members of management of the Company have held a position as a director, officer, promoter or other member of management of other reporting issuers within five years prior to the date of this Annual Report:



MemberPosition with Other Reporting IssuerGordon J. SalesBGR Corporation  Director since August 22, 2003Lana Bea TurnerSecretary of Jet Gold Inc. since December 2003
Secretary of Promax Energy Inc.  resigned in March of 2000R. Geoffrey CaineServed as a Director of Quinto Mining Corporation from 1994 to 1998.Richard IvyNilAlexander CoxNilBernie ZachariasNilEdward NunnNil






Individual Bankruptcies



Except for Mr. James Conroy who resigned as a Director of the Company on July 4, 2001, none of the Directors, Officers, promoters or members of management of the Company have, within the five years prior to the date of this Annual Report, been declared bankrupt or made a voluntary assignment in bankruptcy, made a proposal under any legislation relating to bankruptcy or insolvency, or been subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of that individual.





Conflicts of Interest



Some of the Directors and Officers of the Company also serve as directors and/or officers of other companies and may be presented from time to time with situations or opportunities which give rise to apparent conflicts of interest which cannot be resolved



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55





by arms length negotiations but only through exercise by the Directors and Officers of such judgement as is consistent with their fiduciary duties to the Company which arise under British Columbia and Canadian corporate law, especially insofar as taking advantage, directly or indirectly, of information or opportunities acquired in their capacities as Directors or Officers of the Company.  All conflicts of interest will be resolved in accordance with the appropriate business corporation statute.  Any transactions with Directors and Officers will be on terms consistent with industry standards and sound business practices in accordance with the fiduciary duties of those persons to the Company and, depending upon the magnitude of the transactions and the absence of any disinterested board members, may be submitted to the shareholders for their approval.



Other Information



There are no family relationships between any of the Directors or Officers of the Company.  The approximate percentage of business time that each Director and Officer will devote to the Companys business is as follows:





NamePercentage of TimeGordon Sales100%Brian Wear100%Geoffrey R. Caine5%Richard Ivy25%Alexander Cox10%Edward Nunn100%Lana Bea Turner100%Bernie Zacharias25%






B.

Compensation



The Companys Executive Compensation



The Companys fiscal year end is the 31st day of August.



Pursuant to Form 41 of the Securities Rules(British Columbia), the Company is a small business issuer, which is defined as a company that:



-

had revenues of less than $25,000,000 in its last completed financial year;

-

is not a non-redeemable investment fund or mutual fund;

-

has a public float of less than $25,000,000; and

-         
if it is a subsidiary of another company, that other company is also a small business issuer.



The Company has created eight Executive Offices, namely that of President, Secretary, CEO, Sr. Vice President, Chief Operating Officer, Vice President-
Operations, Vice President  Corporate Development and Chief Financial Officer.  In this



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regard the Companys named Executive Officers (collectively, the Named Executive Officers) are as follows:



Gordon Sales  Mr. Sales was appointed the President and CEO of the Company on December 9, 1999 and served as a Director since October, 1998.



Brian C. Wear  Mr. Wear was appointed Sr. Vice President and COO of the Company on April 29, 2004 and joined the board on the same date.



Edward Nunn  Mr. Nunn was appointed the Vice President  Operations of the Company on September 30, 2003.



Lana Bea Turner  Ms. Turner was appointed the Secretary of the Company on March 3, 2000 and appointed the Chief Financial Officer of the Company on July 19, 2002 and resigned from this position on January 13, 2004.



Bernie Zacharias  Mr. Zacharias was appointed the Chief Financial Officer of the Company on January 13, 2004.



For the purpose of this Annual Report, except as otherwise expressly provided or unless the context otherwise requires, the following words and phrases shall have the following meanings:



Equity security means securities of a company that carry a residual right to participate in earnings of that company and, upon liquidation or winding up of that company, its assets;



Option means all options, share purchase warrants and rights granted by a company or any of its subsidiaries (if any) as compensation for services rendered or otherwise in connection with office or employment;



LTIP means a long-term incentive plan, which is any plan providing compensation intended to serve as incentive for performance to occur over a period longer than one financial year, whether the performance is measured by reference to financial performance of the company or an affiliate of the company, the price for the companys securities, or any other measure, but does not include Option or SAR plans or plans for compensation through restricted shares or restricted share units; and



SAR means stock appreciation right, which is a right granted by a company or any of its subsidiaries (if any) as condensation for services rendered or otherwise in connection with office or employment to receive a payment of cash or an issue or transfer of securities based wholly or in part on changes in the trading price of publicly traded securities.



The following table details the compensation paid to the Companys Named Executive Officers during the fiscal year ended August 31, 2004:







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57







Summary Compensation Table

Annual Compensation
Long-Term CompensationName and Principal Position(1)Fiscal
Year
EndSalary
($)Bonus
($)All other
and annual Compensation
and LTIP Payouts
($)Securities under Options/
SARS
Granted
(#)Restricted Shares or Restricted
Share Units
(#)Gordon Sales
President, CEO and a Director2004
2003
2002132,000
118,000
132,000Nil
Nil
NilNil
Nil
NilNil
900,000
200,000Nil
Nil
NilBrian Wear
Sr. Vice President, COO and a Director (2)200460,000NilNil2,000,000NilLana Bea Turner
Secretary2004
2003
200249,920
49,920
49,920Nil
Nil
500Nil
Nil
NilNil
100,000
20,000Nil
Nil
NilEdward Nunn
Vice President  Operations(3)2004
2003
2002132,000
118,000
88,000Nil
Nil
NilNil
Nil
NilNil
200,000
100,000Nil
Nil
NilBernie Zacharias
Chief Financial Officer (4)2004Nil (5)NilNilNilNil




Notes:(1)Refer to the disclosure found above the Summary Compensation Table hereinabove for a detailed description of the Companys Named Executive Officers.(2)Mr. Brian Wear was appointed as the Sr. Vice President, COO and a Director on April 29, 2004(3)Mr. Edward Nunn was appointed as the Vice President  Operations on September 30, 2003.(4)Mr. Bernie Zacharias was appointed the Chief Financial Officer on January 13, 2004.(5)During the fiscal year ended Aug. 31, 2004, Avisar, Chartered Accountants, a company which Mr. Bernie Zacharias is part owner, was paid or accrued $43,175 by the Company.  This figure includes all accounting, tax and consulting work performed by Avisar, including the CFO functions as required by the Company.








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The Company anticipates that compensation will be provided by the Company during the Companys next financial year to certain of the Named Executive Officers of the Company and in conjunction with certain management and administrative services to be provided to the Company by such Named Executive Officers.



Long-term Incentive Plans  Awards in most recently completed Financial Year



During its most recently completed financial year, and for the two previously completed financial years, the Company has not awarded or instituted any LTIPs in favour of its Named Executive Officers.



Options/SAR Grants during the most recently completed Financial Year



As of January 31, 2005, the Company had granted the following options to purchase common stock of the Company and which still remain outstanding as follows:



Name of OptioneePositionNumber
Of
Optioned
Shares (1)Exercise
PriceDate
GrantedExpiry
DateGordon J. SalesOff/Dir400,000CDN$0.68Oct 29/01Oct 29/06Gordon J. SalesOff/Dir400,000US$0.20Sep30/03Sep18/08Lana Bea TurnerOfficer90,000CDN$0.68Oct 29/01Oct 29/06Geoffrey CaineDirector100,000CDN$0.68Oct 29/01Oct 29/06Geoffrey CaineDirector200,000US$0.20Sep30/03Sep18/08Richard J. IvyDirector50,000CDN$0.68Oct 29/01Oct 29/06Richard J. IvyDirector50,000CDN$1.08Oct 29/01Aug13/06Richard J. IvyDirector300,000US$0.20Sep30/03Sep18/08Edward J. NunnOfficer150,000CDN$0.68Oct 29/01Oct 29/06Edward J. NunnOfficer300,000US$0.20Sep30/03Sep18/08Paul BoucherConsultant25,000CDN$0.68Oct 29/01Oct 29/06Vic LearmonthEmployee50,000CDN$0.68Oct 29/01Oct 29/06Vic LearmonthEmployee190,000US$0.20Sep30/03Sep18/08Sheila StreetEmployee50,000CDN$0.68Oct 29/01Oct 29/06




Notes:

(1)

These figures do not include options that have been exercised prior to January 31, 2005.



The following persons exercised options during the fiscal year ended August 31, 2004:



NameAmount of Options ExercisedProceeds to the CompanyDate of ExercisePro Matrix Corp.100,000US$20,00012/18/03John Geisler100,000US$20,00001/09/04Gordon Sales200,000US$40,00002/06/04Lana Turner100,000US$20,00002/06/04




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59







John Geisler300,000US$60,00002/06/04Edward Nunn50,000CDN$34,00002/18/04Gordon Sales150,000US$30,00002/18/04Ernest Resources Ltd. (1)25,000US$5,00002/24/04Ernest Resources Ltd. (1)75,000US$15,00003/03/04Gordon Sales150,000US$30,00004/21/04Brian Wear2,000,000(2)07/09/04Pro Matrix Corp.100,000US$20,00008/17/04Pro Matrix Corp.55,000US$1,000(3)08/25/04Victor Learmonth10,000US$2,00009/24/04




(1)

Ernst Resources Ltd. is controlled by Mr. Barrett Sleeman, a former director of the Company who resigned on February 24, 2004.  All of the other options that were held by Ernest Resources Ltd. have now expired in accordance with the terms of the stock option agreement.

(2)

Mr. Brian Wear decided to use the alternative payment method in his stock option agreement which allowed him to surrender for cancellation and return to treasury 2,000,000 restricted shares of common stock of the Company as payment for the 2,000,000 shares received from the exercise of options.

(3)

Pro Matrix Corp. decided to use the net exercise provision in its stock option agreement which allowed it to surrender 50,000 stock options in order to receive 50,000 shares from the exercise of a total of 100,000 stock options.  In addition, Pro Matrix Corp. paid $1,000 for the exercise of an additional 5,000 stock options to receive 5,000 shares.



As at January 31, 2005, there were a total of 2,355,000 shares issuable pursuant to stock options outstanding.



Defined Benefit Plans



The Company does not have, and at no time during its most recently completed financial year had, any defined benefit or actuarial plans in respect of which any of its Named Executive Officers were eligible to participate.





Compensation of the Companys Directors



For the Companys most recently completed fiscal year:



(a)

no compensation of any kind was accrued, owing or paid to any of the Companys current Directors for acting in their capacity as such;



(b)

no arrangements of any kind existed with respect to the payment of compensation of any kind to any of the Companys current Directors for acting in their capacity as such;



(c)

no compensation of any kind was accrued, owing or paid to any of the Companys current Directors for services rendered to the Company as consultants or experts;





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60





(d)

no arrangements of any kind existed with respect to the payment of compensation of any kind to any of the Companys current Directors for services rendered, or proposed to be rendered, to the Company as consultants or experts;



(e)

no SARs or LTIPs were outstanding or in effect in favour of any of the Companys Directors; and



(f)

there were Options which were outstanding and in favour of certain Directors of the Company who are not also Named Executive Officers of the Company as set out in the options table above.



No directors have received any compensation other than option grants and travelling expenses.





C.

Board Practices



The Board of Directors meet quarterly to set policy and review the progress as well as review and approve budgets and expenditures.



The Company



The following is a list of the appointment dates of the current Directors and Executive Officers of the Company:



Director and OfficerPosition with the CompanyGordon SalesPresident, CEO and a Director appointed on December 9, 2000 as President and October 18, 1998 as Director.Brian WearSenior Vice President, COO and a Director appointed on April 29, 2004Geoffrey R. CaineDirector appointed on January 18, 1996.Alexander CoxDirector appointed on February 24, 2004Richard IvyDirector appointed on July 4, 2001.Edward J. NunnVice President  Operations appointed on September 30, 2003Lana Bea TurnerSecretary appointed on March 3, 2000 and CFO appointed on July 19, 2002.  Resigned as CFO on January 31, 2004.Bernie ZachariasCFO appointed on January 13, 2004








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The Directors of the Company are elected by the shareholders at each annual general meeting of the Company, or, in the event of a vacancy, they are appointed by the Board of Directors then in office, to serve until the next annual general meeting of the Company or until their successors are elected and ratified.



The Companys executive officers are appointed by the Board of Directors and serve at the discretion of the Board of Directors.





D.

Employees



The Company has the following eight full-time employees as of August 31, 2004:



Mr. Gordon J. Salesis the Companys President, CEO and a Director and is responsible for the overall management and administration of the Company.



Mr. Brian C. Wearis the Companys Sr. Vice President, COO and a Director and is responsible for the overall management and administration of the Companys subsidiary, Canada Pumice Corporation.



Mr. Edward J. Nunnis the Companys Vice President  Operations and General Manager and  is responsible for the production of the quarry and plant on our graphite deposit as well as assist the President in the overall management, administration, and growth of the Company.



Mr. John H.P. Geisler, is responsible for corporate marketing functions, including all aspects of strategic planning, acquisitions, and working with the financial community.



Ms. Lana Bea Turner, is the Companys Office Manager, Bookkeeper and is in charge of corporate filings and receptionist services for the Company.



Mr. Victor B. Learmonth, is the Surface Superintendent who is responsible as the front-line supervision to the labourers and contractors.  Mr. Learmonth is a qualified automotive technician, equipment operator, welder and machinist with over 25 years of experience in his own businesses.  Mr. Learmonth oversees the operations at the graphite beneficiation plant and the quarry site and is directly involved in the construction and logistical design of all surface operations.



Sheila Street, B.Sc is the Supervisor of Environment, Quality Control & TechnicalServices.  Ms. Street has overseen the environmental assessment of the Black Crystal Graphite Project and is in charge of graphite quality and product control.  She is also responsible for regulatory permitting and certification for the project.  Ms. Street has been involved in many mine assessment and remediation projects and worked closely with First Nations, Community and Regulatory groups.  Past experience includes environmental consulting work for the Diavik and Ekati diamond mines in the NWT.  She is presently on maternity leave and works on an on-call basis.



Steve Cameron is the Surface Superintendent for Canada Pumice Corporation.  Mr. Cameron is a qualified Heavy Equipment Operator and Class 1 Truck Driver,



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62





with over 27 years of experience in heavy industry as an employee and being self-employed.  Mr. Cameron, who has seven years supervisory experience, oversees the operations at the CPC Nazko and Quesnel quarry sites.



In addition to these employees, the Company also has a metallurgist and geologist engineer that it regularly uses as consultants on an as needed basis.



E.

Share Ownership



Directors and Officers



The share ownership in the Company held directly or indirectly by the Directors and Executive Officers of the Company are as indicated in the table below:



NameOfficeNumber of
Shares (1)Gordon SalesPresident, CEO and a Director1,213,158Brian WearVice President, Chief Operating Officer and Director15,345,000Geoffrey R. CaineDirector358,187Alexander CoxDirector2,000,000Richard IvyDirectorNilLana Bea TurnerSecretary66,665Bernie ZachariasCFONilEdward NunnGeneral Manager
Vice President  Operations44,975




Note:

|(1) | These figures are as of February 18, 2004.
|--- | ------------------------------------------



As a group the Directors and Executive Officers of the Company hold 19,027,985 common shares; which is 42.87% of the total amount of issued and outstanding common shares of the Company (see the section captioned Options hereinbelow for a detailed



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63





description of any and all Options held by the Directors and Executive Officers in and to the Company.)





Public and Insider Ownership



As at August 31, 2004, the Directors, Officers and insiders of the Company hold an aggregate of 19,027,985 common shares of the Company on a non-fully diluted basis, being 42.87% of the then issued and outstanding common shares of the Company, as opposed to the public owning an aggregate of 25,355,696 common shares of the Company, or 57.13% of the then issued and outstanding common shares of the Company, assuming that no outstanding Warrants to acquire common shares of the Company are exercised.



ITEM 7  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS



A.

Major Shareholders



To the knowledge of management of the Company, as at August 31, 2004 the following beneficially own directly or indirectly, or exercise control or direction, over common shares carrying 5% or more of the voting rights attached to any class of voting securities of the Company:



MemberNumber of Common SharesPercentage of CommonSharesBrian Wear15,345,00034,55%CDS & Co.(1)12,583,047(2)28.33%KAK Investments Inc. (2)(3)11,365,54125.59%




Notes:



(1)

The Company is informed that this shareholder is a share depository, the beneficial ownership of which is unknown to the Company.

(2)

This information was supplied to the Company by the Companys registrar and transfer agent, Pacific Corporate Trust Company.

(3)

As of November 4, 2002, the trustee in bankruptcy for Evergreen Securities Ltd. became the legal and beneficial owner of the shares of common stock of the Company held in the name of KAK Investments, Inc.



All the shareholders of the Company have the same voting rights.



To the best of the Companys knowledge, the Company is not owned or controlled, directly or indirectly, by another corporation or by any foreign government.





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64





To the best of the Companys knowledge, there are no arrangements, the operation of which at a subsequent date will result in a change in control of the Company other than as stated in this Annual Report.



As at January 14, 2005, there were 167 registered shareholders of record, of which 81 registered shareholders were resident of the United States.



B.

Related Party Transactions



Demand Debenture



By a loan agreement dated 25 September 2003, the Company secured financing in the form of a demand debenture for an amount of $1,000,000 from an Alexander Cox, (who subsequently became a director of the Company on 24 February 2004), of which $150,000 was set up as an interest reserve to service the monthly interest instalments.  The debenture bore interest at a rate of 15% per annum, compounded monthly, and was repayable on 26 September 2004.  The Company paid a non-refundable application fee of $10,000 and issued 500,000 common shares of the Company valued at $135,500 to the lender as a non-refundable commitment and funding fee.



By a loan agreement dated 7 May 2004, the Company secured additional financing in the form of a demand debenture by cancelling the first debenture for a new debenture in the amount of $4,000,000, from Alexander Cox, of which $600,000 was set up as an interest reserve to service the monthly interest instalments.  The debenture bears interest at a rate of 15% per annum, compounded monthly, and is repayable on 7 May 2005.  The Company paid a non-refundable application fee of $20,000 and issued 1,500,000 common shares of the Company valued at $900,000 to the lender as a non-refundable commitment and funding fee for the new debenture.  The Company also paid a three-month interest penalty of $37,500 as a result of the early redemption of the first debenture.  The new debenture provides for a first registered charge on the land and a general first floating charge on all other assets of the Company.  The application fee, the commitment and funding fee and the interest penalty have been recorded towards the acquisition of CPC as it was this funding that enabled the acquisition to complete.



Details of the demand debenture and interest reserve account as at 31 August 2004 are as follows:



Proceeds from demand debenture$4,000,000Balance of interest reserve held by the lender(410,640)$3,589,360




The Company may elect to extend the term of the debenture for a further twelve months at the option of the Lender.  The Company can pay off the debenture prior to the due date, in whole or part, subject to a three-month interest penalty.  If the Company secures new financing, 25% of the net proceeds shall be applied to the debenture.



During the year the Company paid $284,679 in interest on the two debentures in addition to the fees and penalties mentioned above.  During the same period the Company earned $4,522 on the monies held in the interest reserve account.





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65





Convertible Debenture



During the year, the Company issued 5,000 bonus shares to Edward Nunn and 5,000 bonus shares to Colleen Sales, a relative of a director, for loan arrangements with the Company at a price of $0.271 per share.



During the year, 39,975 units were issued to Edward Nunn and 39,975 units were issued to Colleen Sales for conversion of debentures.



Private Placement



Effective 30 September 2003, the Company issued 256,458 units to Gordon Sales, 357,535 units to Geoffrey Caine and 166,052 to Colleen Sales by private placement for gross proceeds of $211,392.  Each unit consists of one common share and one share purchase warrant.  Each warrant entitles the holder to purchase one additional common share of the Company at a purchase price of US$0.25 for a two-year period expiring 20 October 2005.



Stock Options



On 18 September 2003, the Company granted 2,575,000 share-purchase stock options to directors, officers and employees and are exercisable at a price of US$0.20 per share for a 5-year period expiring 18 September 2008.  For employees and directors, the stock option grant results in a compensation expense of $226,598, which has been recorded in wages and benefits.



On 28 April 2004, the Company granted 2,000,000 share-purchase stock options to Brian Wear, the former principal of CPC, as part of the new management agreement.  The options granted are exercisable at a price of $0.45 per share for a 5-year period expiring 28 April 2009.  The stock option grant results in a compensation expense of $738,086, which has been recorded in wages and benefits.



Amounts due from Related Parties



On 28 April 2004 in conjunction with the CPC acquisition, the Company loaned Brian Wear $263,000.  The loan is non-interest bearing, secured by 355,500 escrow shares of the Company and due after 1 October 2005.  If there is a default on the loan, the Companys only recourse is to keep the shares held in escrow.  As at 31 August 2004, the market value of the escrow shares is $202,635.



Amounts due to Related Parties



As at 31 August 2004, $37,606 (2003  $nil) is payable to Brian Wear.  The amounts are non-interest bearing, unsecured and due on demand.



During the year, the Company utilized certain personal credit cards of Brian Wear for a source of additional short term financing.  The Company has disclosed the balance owing from cash advances as at 31 August 2004 in the amount of $54,543 as line of credit under current assets.  The interest rates range from 3.99% to 14.25%.  The monthly minimum repayments range from approximately 1% of principal plus interest to 2% of principal plus interest.



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Expenditures paid to Related Parties



During the year, fees for marketing services in the amount of $43,307 (2003 - $93,864; 2002 - $91,621) were paid to United Mineral Resources, a company controlled by Richard Ivy, a director of the Company.



During the year, rent in the amount of $35,500 (2003 - $nil; 2002 - $nil) was paid to Brian Wear or a company controlled by Brian Wear, in respect of the CPC operations.



During the year, management wages were paid or accrued to directors and officers as follows:



Gordon Sales132,000Lana Turner49,920Edward Nunn104,000Brian Wear60,000




During the year, wages of $120,000 (2003 - $15,000; 2002 - $nil) were paid or accrued to John Geisler for corporate development.



During the year, interest of $2,500 was paid or accrued to Edward Nunn and $2,500 was paid or accrued to Colleen Sales.



Commitments



a)

By agreement dated 30 April 2004, the Company entered into a ten-year Ground and Equipment Lease with 530526 BC Ltd., a company controlled by Brian Wear.  The annual minimum basic rent payments are $82,500 triple net, payable in equal monthly installments of $6,875.  This agreement is renewable for three additional terms of ten years with mutual consent on the same terms and conditions as the original term, except for the amount of annual basic rent payable, which will be adjusted to fair market value.



In addition to the basic rent, the Company is responsible for its proportionate share of property taxes and operating costs.



b)

By agreement dated 28 April 2004, the Company entered into a five-year Management Agreement with Brian Wear.  Compensation is a base fee of $15,000 per month plus incentive fees as determined by the board.  The Company is also required to obtain disability and life insurance as outlined in the agreement.  This agreement will renew automatically for subsequent two-year periods on the same terms and conditions as the original term.  The Company may terminate the agreement at the end of a term with 90 days notice.  Commencing on the first anniversary of this agreement, if the agreement is terminated, there shall be a termination fee equal to the sum of:



-

extension of any outstanding stock options for a period of one year after termination; plus

-

the greater of:

i.

the aggregate remaining base fee for the unexpired remainder of the term; or



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ii.

Six months of base fee plus one month of base fee for each year, or portion thereof served.





C.

Interests of Experts and Counsel



This section is not applicable to the Company.



ITEM 8  FINANCIAL INFORMATION



A.

Financial Statements and other Financial Information



The audited financial statements for the Company for the fiscal years ending August 31, 2004, and 2003 form a material part of this Annual Report.  See Item 19 hereinbelow.



B.

Significant Changes



On April 28, 2004, the Company finalized the acquisition of Canada Pumice Corporation (CPC), initially announced as under negotiation by the news release dated March 8, 2004.  CPC is now a wholly owned subsidiary of the Company by the acquisition of 100% of the issued and outstanding shares of CPC from Mr. Brian Wear in exchange for 15,345,000 shares of the Company.  As a result of the acquisition, the Company is now in the market for various pumice products mined from its Nazko Cone property located in the proximity of Quesnel, British Columbia.



ITEM 9  THE OFFERING AND LISTING



A.

Offer and Listing Details



This Annual Report does not relate to any offering of the Companys shares.



The following table indicates the annual high and low market prices for the five most recent financial years:



YearAnnual HighAnnual Low2004US$0.65US$0.322003(1)US$0.70US$0.142002(2)Not AvailableNot Available2001$1.70$0.852000$1.85$0.25




Notes:(1)The Company commenced trading on the OTCBB on March 31, 2003, and commenced trading on the CNQ on February 9, 2004.(2)The Companys shares were cease traded by the British Columbia Securities Commission on January 25, 2002, for failure to timely file its financial statements.  At the Companys annual general meeting on April 25, 2002, the shareholders agreed to not seek reinstatement of the Companys shares on the TSX Venture Exchange at the Board of Directors discretion.  Effective on October 18, 2002, the Company voluntarily delisted its shares from the TSX Venture Exchange.




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The following table indicates the high and low market prices for each full financial quarter for the two most recent full financial years:



Quarter EndedHighLowAug. 31, 2004(1)US$0.55US$0.42May 31, 2004(1)US$0.53US$0.42Feb. 29, 2004(1)US$0.58US$0.40Nov. 30, 2003(1)US$0.49US$0.40Aug. 31, 2003(1)US$0.50US$0.15May 31, 2003(1)US$0.70US$0.20Feb. 28, 2003Not AvailableNot AvailableNov. 30, 2002Not AvailableNot Available




Notes:(1)The Company commenced trading on the OTCBB on March 31, 2003, and commenced trading on the CNQ on February 9, 2004.




The Companys shares have been listed and posted for trading on the OTCBB since March 31, 2003.



B.

Plan of Distribution



This Annual Report does not relate to any offering of the Companys shares.  Therefore, this section is not applicable to the Company.



C.

Markets



The Companys securities have been trading on the U.S. OTC Bulletin Board since March 31, 2003, and on the CNQ since February 9, 2004. The Companys shares were traded on the TSX Venture Exchange (the TSX-V) until January 25, 2002, at which time the Companys securities were cease traded from the TSX-V for failure to timely file its financial statements.  At the Companys annual general meeting on April 25, 2002, the shareholders agreed to not seek reinstatement of the Companys shares on the TSX-V at the Board of Directors discretion.  Effective on October 18, 2002, the Company voluntarily delisted its shares from the TSX-V.  In addition, the Companys share were listed for trading on the OTC Bulletin Board from March 21, 2000 to April 5, 2001 at which time the securities were delisted from the OTC Bulletin Board for failure to comply with the SEC reporting requirements due to the Companys failure to timely file its Annual Report for the fiscal year ending August 31, 2000.



D.

Selling Shareholders



This Annual Report does not relate to any offering of the Companys shares.  Therefore, this section is not applicable to the Company.





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E.

Dilution



This Annual Report does not relate to any offering of the Companys shares.  Therefore, this section is not applicable to the Company.



F.

Expenses of the Issue



This Annual Report does not relate to any offering of the Companys shares.  Therefore, this section is not applicable to the Company.



ITEM 10  ADDITIONAL INFORMATION



A.

Share Capital



This section is not applicable to the Company as this is an Annual Report.



B.

Memorandum and Articles of Association



Disclosure of Interest of Directors



A Director of the Company who is a party to a material contract or proposed material contract with the Company, or is a director of, or has a material interest in, any person who is a party to a material contract or proposed material contract with the Company shall disclose the nature and extent of his interest at the time and in the manner provided in the Company Act(British Columbia) (herein, only, the Act).  Except as provided in the Act, no such Director or Officer of the Company shall vote on any resolution to approve such contracts but each such director may be counted to determine the presence of a quorum at the meeting of Directors where such vote is being taken if provided for in the Articles of Association.



The Companys Articles of Association provide as follows:



11.5

A director who is in any way, whether directly or indirectly, interested in a contract or proposed contract or transaction with the Company shall disclose the nature and extent of his interest at a meeting of the directors in accordance with the provisions of the Companies Act.  A director may vote in respect of any such contract or transaction with the Company in which he is interested and he shall be counted in the quorum present at the meeting at which such vote is taken if he attends such meeting whether or nor he votes.



Shareholdings of Directors



The Companys Articles of Association provide as follows:



11.3

A director shall not be required to have any share qualification but any person not being a member of the Company who becomes a director shall be deemed to have agreed to be bound by the provisions of the Articles to the same extent as if he were a member of the Company.





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Rights, Preferences and Restrictions attaching to each class of shares



The common shares of the Company contain all the rights which include:



(a)

the right to vote at any meeting of shareholders;



(b)

the right to receive any dividend declared by the Company; and



(c)

the right to receive the remaining property of the Company on dissolution.



There are no restrictions on the transfer of the Companys common shares.



Changing the Rights of Holders of the Companys Stock



In order to change the rights of holders of the Companys stock, the shareholders of that class of the Companys stock must pass a special resolution by a majority of not less than three-quarters (3/4s) of the votes cast by the shareholders who voted in respect of that resolution or signed by all the shareholders entitled to vote on that resolution.



Annual General Meetings and Extraordinary General Meetings



Annual General Meeting



Subject to the provisions of Section 146 of the Act, the annual general meeting of the shareholders shall be held on such day in each year and at such time as the Board of Directors may determine at any place within British Columbia, or at a place out of British Columbia the Registrar of Companies for British Columbia, on application made to the Registrar of Companies by a company, approves.



Notice



Subject to the provisions of Sections 143 of the Act, the Companys Articles of Association provide as follows:



8.3

Not less than 21 days notice of any general meeting specifying the time and place of meeting and in case of special business, the general nature of that business shall be given in the manner mentioned in Part 18 hereof, or in such other manner, if any, as may be prescribed by ordinary resolution whether previous notice thereof has been given or not, to any person as may by law or under these Articles or other regulations of the Company entitled to receive such notice from the Company.  But the accidental omission to give notice of any meeting to, or the non-receipt of any such notice by, any of such persons shall not invalidate any proceedings at that meeting.



8.4

Persons entitled to notice of a general meeting may waive or reduce the period of notice convening the meeting by unanimous consent in writing, and may give such waiver before, during or after the meeting.



8.5

Where any special business includes the presenting, considering, approving, ratifying or authorizing of the execution of any document, then the portion of any notice relating to such document shall be sufficient if the same



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states that a copy of the document or proposed document is or will be available for inspection by members at a place in the Province of British Columbia specified in such notice during specified business hours in any specified working day or days prior to the date of the meeting.



Quorum



Subject to the provisions of Section 144 of the Act, the Companys Articles of Association provide as follows:



9.2

Save as otherwise herein provided a quorum for a general meeting shall be one member or a proxyholder representing one member personally present at the commencement of the meeting and holding or representing by proxy not less than one of the issued shares of a class of shares the holders of which are entitled to attend and to vote at such meeting."



Limitations on the right to own securities



There are no limits on the rights of non-residents or foreign shareholders to hold or exercise voting rights on the securities.



C.

Material Contracts



During the preceding two years, the Company entered into the following material contracts:



1.

Share Purchase Agreement  Phase I  dated March 3, 2004 among the Company, Canada Pumice Corporation (CPC) and Brian C. Wear (Wear), pursuant to which the Company acquired 92 of the 2000 issued shares of CPC, which 92 shares are owned by Wear, in consideration for $522,514 which was fully satisfied and paid by the delivery by the Company to Wear of 706,100 common shares of the Company (each at a deemed price of CDN$0.74/share).  The purchase and sale of these shares was completed on April 28, 2004.





2.

Share Purchase Agreement  Phase II  dated March 3, 2004 among the Company, CPC and Wear, pursuant to which the Company acquired 1908 of the 2000 issued shares of CPC, which 1908 shares are owned by Wear, in consideration for $10,832,786 which was fully satisfied and paid by the delivery by the Company to Wear of 14,638,900 common shares of the Company (each at a deemed price of CDN$0.74/share).  The purchase and sale of these shares was completed on April 29, 2004.



Upon completion of the Phase II agreement, the Company became the 100% owner of CPC.



3.

Loan, Pledge and Share Escrow Agreement dated April 28, 2004 between Wear (being the pledgor) and the Company (being the lender), pursuant to which the Company lent Wear $263,000 on a limited recourse loan, with the only recourse being against 355,500 shares of the Company owned by



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Wear which Wear delivered into escrow and pledged to the Company a security interest in the said shares as to all and any interest, residual, option or otherwise in the said shares.  The loan is due on demand after 4:00 pm on October 1, 2005, with such date being accelerate din the event of default of the agreement by Wear.  The loan does not bear interest.  In the event Wear does not make payment of the loan, the Companys only recourse for recovery is to exercise the pledge, take ownership of the shares related thereto and to realize proceeds from the sale of the shares.



4.

Management Agreement dated April 28, 2004, between the Company and Wear, pursuant to which the Company employed Wear as Vice-President and Chief Operating Officer of the Company for a term of five years commencing April 28, 2004 and terminating April 28, 2009.  The contract may be renewed automatically for subsequent two-year periods if not specifically terminated prior thereto.  Compensation payable to Wear is a base fee of $15,000 per month.  Wear will be reimbursed for expenses incurred on behalf of the Company.  Additional payment in the way of bonuses or other compensation may be paid at the absolute discretion of the Company.  The base fee will be reviewed on each anniversary date of the agreement.  In addition, Wear will receive an incentive fee which will be established by the Board of Directors.  Pursuant to the agreement, Wear is entitled to participate in and receive benefits from all life insurance, pension plans, medical insurance and similar benefits made available generally to staff of the Company.  The Company has agreed to purchase and pay the costs of full disability and life insurance policies for Wear.  On execution of the agreement, Wear also received options for 2,000,000 shares of the Company, which options are exercisable for the term of the management agreement.  Commencing on April 28, 2005, if the agreement is terminated for other than cause or failure to cure a breach of the agreement, a termination fee will be payable to Wear in such amount as is the greater of: (i)  the aggregate remaining base fee for the unexpired remainder of the term; or (ii) six months of base fee plus one month of base fee for each year, or portion thereof served.  In addition, the expiry period for any outstanding stock options will be extended for a period of one year after termination.



5.

Ground and Equipment Lease dated April 30, 2004, between the Company and 530526 BC Ltd., a company controlled by a director and officer, pursuant to which the Company is leasing land and equipment for annual minimum basic rent payments are $82,500 triple net, payable in equal monthly instalments of $6,875.  This agreement is renewable for three additional terms of ten years with mutual consent on the same terms and conditions as the original term, except for the amount of annual basic rent payable.  In addition to the basic rent, the Company is responsible for its proportionate share of property taxes and operating costs.



6.

Graphite Mineral Property Agreement dated August 18, 2004, between Bao Zi Wan County Government and the Company, pursuant to which the Company acquired the right to mine, process and market all graphite and tailings at the Da Tong DeSheng graphite plant and property.  A formal



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lease agreement is subject to satisfactory due diligence and Board approval of the Company.



7.

Agreement in Principle dated November 1, 2004, between the Company and Beijing XinLong Corporation for the proposed marketing of XinLongs geofabric products y CPC to Canadian, United States, Mexican and European markets.



8.

Agreement in Principle dated November 1, 2004, between the Company and Clay Industiral Minerals, Ltd. for the proposed marketing of Clays VOLROCK (bentonite) products by CPC to Canadian and United States markets.



9.

Agreement in Principle dated November 1, 2004, between the Company and Tri-star Activated Carbon Corporation whereby Tri-star agrees: (i) to allow CPC to be the exclusive and sole distributor of all its activated carbon products into the Canadian market, and (ii) to exclusively allow CPC to market its products into the Untied States market via Canada.



10.

Amended Share Purchase Agreement  Phase I  dated December 30, 2004 and having an effective date of March 3, 2004, among the Company, CPC and Wear, pursuant to which the original agreement was amended to reflect a deemed issuance price per share of CDN$0.45 instead of CDN$0.74.



11.

Amended Share Purchase Agreement  Phase II  dated December 30, 2004 and having an effective date of March 3, 2004, among the Company, CPC and Wear, pursuant to which the original agreement was amended to reflect a deemed issuance price per share of CDN$0.45 instead of CDN$0.74.





D.

Exchange Controls



There is no law or government decree of regulation in Canada that restricts the export or import of capital, or that affects the remittance of dividends, interest or other payments to a non-resident holder of common shares, other than withholding tax requirements.  See the section captioned Taxation hereinbelow.



There is no limitation imposed by Canadian law or by the Articles of Association or other charter documents of the Company on the right of a non-resident to hold or vote common shares of the Company, other than as provided in the Investment Canada Act (Canada), as amended (the Investment Act).



The Investment Act generally prohibits implementation of a reviewable investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture that is a non-Canadian as defined in the Investment Act, unless, after review the Minister responsible for the Investment Act is satisfied that the investment is likely to be of net benefit to Canada.  If an investment by a non-Canadian is not a reviewable investment, it nevertheless requires the filing of a short notice which may be given at any time up to 30 days after the implementation of the investment.



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An investment in common shares of the Company by a non-Canadian that is a WTO investor (an individual or other entity that is a national of, or has the right of permanent residence in, a member of the World Trade Organization, current members of which include the European Community, Germany, Japan, Mexico, the United Kingdom and the United States, or a WTO investor-controlled entity, as defined in the Investment Act) would be reviewable under the Investment Act if it were an investment to acquire direct control, through a purchase of assets or voting interests, of the Company and the value of the assets of the Company equalled or exceeded $218 million, the threshold established for 2001, as indicated on the financial statements of the Company for its fiscal year immediately preceding the implementation of the investment. In subsequent years, such threshold amount may be increased or decreased in accordance with the provisions of the Investment Act.



An investment in common shares of the Company by a non-Canadian, other than a WTO investor, would be reviewable under the Investment Act if it were an investment to acquire direct control of the Company and the value of the assets were $5.0 million or more, as indicated on the financial statements of the Company for its fiscal year immediately preceding the implementation of the investment.



A non-Canadian, whether a WTO investor or otherwise, would acquire control of the Company for the purposes of the Investment Act if he, she or it acquired a majority of the common shares of the Company or acquired all or substantially all of the assets used in conjunction with the Companys business. The acquisition of less than a majority, but one-third or more of the common shares of the Company, would be presumed to be an acquisition of control of the Company unless it could be established that the Company was not controlled in fact by the acquirer through the ownership of the common shares.



The Investment Act would not apply to certain transactions in relation to common shares of the Company, including:



(a)

an acquisition of common shares of the Company by any person if the acquisition were made in the ordinary course of that persons business as a trader or dealer in securities;



(b)

an acquisition of control of the Company in connection with the realization of security granted for a loan or other financial assistance and not for any purpose related to the provisions of the Investment Act; and



(c)

an acquisition of control of the Company by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of the Company, through the ownership of voting interests, remains unchanged.



E.

Taxation



The following comments summarize the material Canadian Federal Income Tax consequences for a shareholder of the Company who is a non-resident of Canada and was not previously a resident of Canada and who is a resident of the United States for income tax purposes.  These comments are intended to provide only a brief outline and are not a



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substitute for advice from a shareholders own tax advisor for the specific tax consequences to them as a result of their individual circumstances.  They do not anticipate statutory or regulatory amendments.



The provisions of the Income Tax Act (Canada), as amended (the Tax Act) are subject to income tax treaties to which Canada is a party, including the Canada-United States Income Tax Convention, 1980 (the Convention).



Under Article X of the Convention, dividends paid by Canadian corporations to non-resident U.S. shareholders are subject to a withholding tax of 15%.  The rate of withholding tax on dividends is reduced to 5% if the beneficial owner is a U.S. company, which owns at least 10% of the voting stock of the company paying the dividend.



A U.S. shareholder is not subject to tax under the Tax Act in respect of a capital gain realized on the disposition of a common share in the open market unless the share is taxable Canadian property to the shareholder thereof and the U.S. shareholder is not entitled to relief under the Convention.



A common share will be taxable Canadian property to a U.S. shareholder if, at any time during the 60 month period ending at the time of disposition, the U.S. shareholder or persons with whom the U.S. shareholder did not deal at arms length owned, or had options, warrants or other rights to acquire, 25% or more of the Registrants issued shares of any class or series.  In the case of a U.S. shareholder to whom common shares represent taxable Canadian property, tax under the Tax Act may be payable on a capital gain realized on a disposition of such shares in the open market.



The Convention gives protection to United States residents from Canadian tax on certain benefits derived from the alienation of property.  There is no protection for a gain on a disposition of shares the value of which is derived principally from real property in Canada.  The Companys operations are such that the Company does not intend to hold real property in Canada.



Revenue Canada has indicated that it considers the protection of the Convention with respect to capital gains extend to a deemed disposition under the Tax Act, including the deemed disposition arising from the death of a taxpayer.



The reader should be aware that the Company could be considered as a passive foreign investment company for United States federal income tax purposes.  Under section 1296 of the Internal Revenue Code of the United States, a foreign corporation is treated as a passive foreign investment company (a PFIC) if it earns 75% or more of its gross income from passive sources or if 50% or more of the value of its assets produce passive income.



Because the Company may have been a PFIC for its year ending August 31, 2002, and may have been a PFIC for some of its fiscal years ending before that date, each U.S. shareholder of the Company should consult a tax advisor with respect to how the PFIC rules may affect such shareholders tax situation.  In particular, a U.S. shareholder should determine whether such shareholder should elect to have the Company be treated as a Qualified Electing Fund in the event the Company is a PFIC.  This might avoid adverse U.S. federal income tax consequences that may otherwise result from the Company should it be treated as a PFIC.



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F.

Dividends and Paying Agents



This section is not applicable to the Company as this is an Annual Report.



G.

Statement by Experts



This section is not applicable to the Company as this is an Annual Report.



H.

Documents on Display



The above contracts respecting the Company may be inspected at the registered and records offices for the Company in the Province of British Columbia, located at Suite 2550, 555 West Hastings Street, Vancouver, British Columbia, V6B 4N5 for a period of 30 days following the filing of this Annual Report.



I.

Subsidiary Information



On April 28, 2004, the Company acquired Canada Pumice Corporation (CPC) and its two inactive subsidiaries, Volcanic & Industrial Minerals Inc. and Cariboo Lava Corp., which resulted in CPC becoming a wholly owned subsidiary of the Company.





ITEM 11  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK



The Company currently has no revenues.  All of the Companys expenditures are in Canada, and accordingly the Canadian dollar is the functional currency.  The Companys financial instruments are comprised of trade accounts receivables and payables which are subject to normal credit risks.





ITEM 12  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES



A.

Debt Securities



This section is not applicable to the Company as this is an Annual Report.



B.

Warrants and Rights



This section is not applicable to the Company as this is an Annual Report.



C.

Other Securities



This section is not applicable to the Company as this is an Annual Report.



D.

American Depositary Shares



This section is not applicable to the Company as this is an Annual Report.



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PART II



ITEM 13  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES



Not applicable.



ITEM 14  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS



This Annual Report does not relate to any offering of the Companys securities.  Therefore, this section is not applicable to the Company.



ITEM 15  CONTROLS AND PROCEDURES



Evaluation of disclosure controls and procedures. The Companys principal executive officer and its principal financial officer, after evaluating the effectiveness of the Companys disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) on August 31, 2004, concluded that, as of such date, the Companys disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified in the Commissions rules and forms.



Our officers concluded that the disclosure controls and procedures are also effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, as appropriate to allow timely decisions regarding required disclosure.



Changes in internal control over financial reporting. There were no changes in the Companys internal control over financial reporting  procedures or  in other factors that have materially affected, or are reasonably likely to materially affect these internal controls over financial reporting subsequent to the date of management's last evaluation.



ITEM 16A  AUDIT COMMITTEE FINANCIAL EXPERT



The Company currently does not have an audit committee financial expert serving on its Audit Committee.  Although the company does not have an independent financial expert on the Committee, the Committees members have broad commercial experience and extensive business leadership, having held various roles in accountancy, financial management and supervision, treasury and corporate finance.  The Board feels that there is a broad and suitable mix of business and financial experience on the Committee.  The Board will keep under active review the financial expert matter during the 2005 financial year as part of their nomination and succession planning activities.



ITEM 16B  CODE OF ETHICS



The Company has not yet adopted a code of ethics that applies to the principal executive officer and principal financial and accounting officers.  The Company will be developing a written code of ethics.





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ITEM 16C  PRINCIPAL ACCOUNTING FEES AND SERVICES



Audit Fees



The aggregate fees billed for each of the fiscal years ended August 31, 2004 and 2003 for professional services rendered by Staley, Okada and Partners (Staley Okada) for the audit of the Companys annual financial statements or services that are normally provided by Staley Okada in connection with statutory and regulatory filings or engagements for those fiscal years were $44,793 and $14,230, respectively.



Audit-Related Fees



There were no aggregate fees billed in each of the fiscal years ended August 31, 2004 and 2003 for assurance and related services by Staley Okada to the Company that are reasonably related to the performance of the audit or review of the Companys financial statements and are not reported under Audit Fees above.



Tax Fees



There were no aggregate fees billed in each of the fiscal years ended August 31, 2004 and 2003 for professional services rendered by Staley Okada to the Company for tax compliance, tax advice or tax planning and are not reported under Audit Fees above.



All Other Fees



There were no aggregate fees billed in each of the fiscal years ended August 31, 2004 and 2003 for products and services provided by Staley Okada to the Company, other than the services reported in the three preceding paragraphs..



Audit Committee Pre-Approval Policies



The Audit Committee pre-approves all auditing and non-auditing services to be provided to the Company by the Companys independent auditors.



ITEM 16D  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES



Not Applicable.



ITEM 16E  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS



Not Applicable.





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ITEM 17  FINANCIAL STATEMENTS



Differences Between United States and Canadian Generally Accepted Accounting Principles (GAAP)



These financial statements are prepared in accordance with accounting principles generally accepted in Canada.  Except as set out below, these financial statements comply, in all material aspects, with accounting principles generally accepted in the United States and the rules and regulations of the Securities Exchange Commission.  The significant differences between Canadian and U.S. GAAP are as follows:



(i)

Under Canadian GAAP, the mineral properties are carried at cost and written off or written down if the properties are abandoned, sold or if management decides not to pursue the properties. Under U.S. GAAP, the company would periodically review and obtain independent reports in determining adjustments to the mineral properties and record properties at net realizable value. The company has not yet obtained an independent report for U.S. GAAP purposes, therefore, the companys mineral property costs have been written off in this note to the financial statements.



(ii)

Under Canadian GAAP, the company was not required to record the effect of non-employee stock option based compensation expense in the financial statements until 1 September 2002.  Under U.S. GAAP, stock compensation expense is recorded for non-employees based upon the fair market value at the date the option granted.  The effect of this difference for the year ended 31 August 2002 and prior is noted below.  Commencing on 1 September 2002, Canadian GAAP treatment is consistent with U.S. GAAP.



(iii)

Under U.S. GAAP, investments held for re-sale are recorded at market value.  The difference between the market value and the cost of the investment is recorded as a separate shareholder equity category named comprehensive income.  Once the investment is sold, the comprehensive income for that investment is cleared out to income.  Under Canadian GAAP, investments held for re-sale are recorded at the lower of cost or market.  There is no comprehensive income category in Canada.



The audited balance sheet of the Company as at August 31, 2004 and 2003, the statements of shareholders equity, loss and cash flows for the three years ended August 31, 2004, 2003 and 2002 and cumulative from date of reorganization (August 31, 1994) to August 31, 2004, are attached hereto and form a material part of this Annual Report.



ITEM 18  FINANCIAL STATEMENTS



Not applicable.





---

80







ITEM 19  EXHIBITS



A.

Financial Statements



This Annual Report contains the following financial statements and information respecting the Company:



1.

Auditors Report for the Companys consolidated financial statements for the period ended August 31, 2004 dated December 8, 2004.



2.

Consolidated Balance Sheet for the Company dated August 31, 2004 and 2003.



3.

Consolidated Statement of Shareholders Equity for the Company for the years ended August 31, 2004, 2003 and 2002.



4.

Consolidated Statement of Loss for the Company for the years ended August 31, 2004, 2003 and 2002, and cumulative from date of reorganization (August 31, 1994) to August 31, 2004.



5.

Consolidated Statement of Cash Flows for the Company for the years ended August 31, 2004, 2003, and 2002, and cumulative from date of reorganization (August 31, 1994) to August 31, 2004.



6.

Notes to the Consolidated Financial Statements for the Company dated August 31, 2004 and 2003.





B.

Exhibits



This Annual Report contains the following Exhibits respecting the Company:



Additional Exhibits:



10.1*

Loan Agreement entered into between the Company and Alexander Cox, dated September 25, 2003, for an amount of $1,000,000.



10.2*

Share Purchase Agreement  Phase I  dated March 3, 2004 among the Company, CPC and Brian Wear.



10.3*

Share Purchase Agreement  Phase II  dated March 3, 2004 among the Company, CPC and Brian Wear.



10.4*

Loan, Pledge and Share Escrow Agreement, dated April 28, 2004, between Brian Wear and the Company.



10.5*

Management Agreement, dated April 28, 2004, between the Company and Brian Wear.



10.6*

Ground and Equipment Lease, dated April 30, 2004, between the Company and 530526 B.C. Ltd.



---

81







10.7*

Loan Agreement entered into between the Company and Alexander Cox, dated May 7, 2004, for an amount of $4,000,000.



10.8*

Graphite Mineral Property Agreement dated August 18, 2004, between Bao Zi Wan County Government and the Company.



10.9*

Agreement in Principle dated November 1, 2004, between the Company and Beijing XinLong Corporation.



10.10*

Agreement in Principle dated November 1, 2004, between the Company and Clay Industiral Minerals, Ltd.



10.11*

Agreement in Principle dated November 1, 2004, between the Company and Tri-star Activated Carbon Corporation.



10.12*

Amended Share Purchase Agreement  Phase I  dated December 30, 2004 and having an effective date of March 3, 2004, among the Company, CPC and Brian Wear.



10.13*

Amended Share Purchase Agreement  Phase II  dated December 30, 2004 and having an effective date of March 3, 2004, among the Company, CPC and Brian Wear.



31.1

Certification of Disclosure in Crystal Graphite Corporation's Annual Report by Gordon Sales.



31.2

Certification of Disclosure in Crystal Graphite Corporation's Annual Report by Bernie Zacharias.



32.1

Certification of Gordon Sales pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



32.2

Certification of Bernie Zacharias pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

--------------------------

Note:

*

Previously filed as an exhibit to the Form 20-F filed on March 15, 2005, and incorporated herein by reference.





---























CRYSTAL
GRAPHITE

CORPORATION



(An Exploration
Stage Company)



CONSOLIDATED
FINANCIAL STATEMENTS



31 August 2004 and
2003





























STALEY, OKADA &
PARTNERS



Chartered Accountants



---



|[financial001.jpg] | Suite
      400 - 889 West Pender Street
      Vancouver,
      BC Canada  V6C 3B2
      Tel604 694-6070
      Fax604 585-3800
      info@staleyokada.com
      www.staleyokada.com
|------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



















Report
of Independent Registered Public Accounting Firm





To
the Shareholders of Crystal Graphite Corporation



We
have audited the accompanying consolidated balance sheets of Crystal Graphite
Corporation (the "Company") as at 31 August 2004 and 2003 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years ended 31 August 2004, 2003 and 2002.  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 Auditing Standards
and with the Standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about 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. We believe that our audits provide a reasonable basis for our
opinion.

In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as at 31
August 2004 and 2003, and the results of its operations and its cash flows for
each of the years ended 31 August 2004, 2003 and 2002, in conformity with
Canadian generally accepted accounting principles.







"Staley,
Okada & Partners"





|Vancouver, B.C. | STALEY, OKADA &
      PARTNERS
|--------------- | ------------------------------
|8 December 2004 | CHARTERED
      ACCOUNTANTS   







[financial002.jpg]



---



| | 
| | 































MANAGEMENT'S
RESPONSIBILITY FOR THE FINANCIAL STATEMENTS





The
preparation and presentation of the Company's financial statements is the
responsibility of management.  The financial statements have been prepared
in accordance with Canadian generally accepted accounting principles and
necessarily include estimates which are based on management's best judgements.
 Information contained elsewhere in the Annual Report is consistent, where
applicable, with that contained in the financial statements.



Management
is also responsible for installing and maintaining a system of internal controls
to provide reasonable assurance that assets are safeguarded and that reliable
financial information is produced for preparation of financial statements.



Staley,
Okada & Partners, a firm of chartered accountants, were appointed by the
shareholders as external auditors to conduct an independent examination and
express their opinion on the financial statements.  The Auditors' Report
outlines the auditors' opinion and the scope of their examination.



The
Board of Directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting and internal control.  The Board
exercises these responsibilities with the assistance of the Audit Committee of
the Board.





























---



Crystal Graphite Corporation
      
      
      
      Statement 1(An
        Exploration Stage Company)Consolidated
        Balance SheetAs at 31 AugustCanadian
        FundsASSETS
      
      2004
      
      2003CurrentCash and term
        deposits
      $
      20,898
      $
      16,091GST
        recoverable
      
      54,061
      
      19,257Accounts
        receivable
      
      257,097
      
      -Due from
        related parties (Note 11a)
      
      263,000
      
      -Inventory
      
      421,005
      
      -Prepaid
        expenses, advances and deposits
      
      27,861
      
      19,1261,043,922
      
      54,474Investments
      
      3,263
      
      3,263Prepaid Mineral Property
        Costs
      
      10,288
      
      -Mineral Property Costs- Schedule (Note 5)
      
      16,241,072
      
      7,009,943Property, Plant and
        Equipment (Note 6)
      
      1,570,912
      
      1,242,447Reclamation Bonds
      
      414,500
      
      390,000$
      19,283,957
      $
      8,700,127LIABILITIESCurrentCheques
        issued in excess of funds on deposit
      $
      -
      $
      34,974Accounts
        payable and accrued liabilities
      
      593,899
      
      569,822Employee
        deductions payable
      
      115,135
      
      -Line of
        credit (Note 11c)
      
      54,543
      
      -Demand
        debenture (Note 7)
      
      3,589,360
      
      -Due to
        Related Party(Note 11b)
      
      37,606
      
      -Current
        portion of long-term debt
      
      9,000
      
      -4,399,543
      
      604,796Convertible Debentures(Note
        9)
      
      -
      
      68,333Long-term Debt(Note
        8)
      
      10,525
      
      -Asset Retirement Obligations
      
      159,500
      
      -Continued Operations (Note
        1)Commitments (Note 12)SHAREHOLDERS' EQUITYShare Capital-
        Statement 2 (Note 10)
      
      28,340,361
      
      18,661,532Deficit- Statement 2
      
      (13,625,972)
      
      (10,634,534)14,714,389
      
      8,026,998$
      19,283,957
      $
      8,700,127ON BEHALF OF
        THE BOARD:"Gordon
        Sales",
        Director"Brian
        Wear",
        Director




- See
Accompanying Notes -



---









|Crystal Graphite Corporation                         |               |   |             |   |              |   | Statement 2
|---------------------------------------------------- | ------------- | - | ----------- | - | ------------ | - | -----------
|(An
      Exploration Stage Company)                 |               |   |             |   |              |   |            
|Consolidated
      Statement of Shareholders' Equity |               |  
|Canadian
      Funds                                 |               |   |             |   |              |   |            
|                                                     |               |   |             |   |              |   |            
|                                                     |               |   |             |   |              |   |            
|                                                     |               |   |             |   |              |   |            
|                                                     |               |   |             |   |              |   |            
|                                                     | Common Shares |   | Accumulated |   |              |   |            
|                                                     | Shares        |   | Amount      |   | Deficit      |   | Total      
|Balance - 31 August 2001                             | 22,354,714    | $ | 17,894,782  | $ | (7,274,485)  | $ | 10,620,297 
|Loss for the
      year- Statement 3                 | -             |   | -           |   | (1,913,120)  |   | (1,913,120)
|Balance - 31 August 2002                             | 22,354,714    |   | 17,894,782  |   | (9,187,605)  |   | 8,707,177  
|Issuance of
      shares for:                        |               |   |             |   |              |   |            
|Exercise of
      options                            | 1,000,000     |   | 148,250     |   | -            |   | 148,250    
|Conversion of
      debentures                       | 990,004       |   | 372,600     |   | -            |   | 372,600    
|Stock
      compensation equity                      | -             |   | 245,900     |   | -            |   | 245,900    
|Loss for the
      year- Statement 3                 | -             |   | -           |   | (1,446,929)  |   | (1,446,929)
|Balance - 31 August 2003                             | 24,344,718    |   | 18,661,532  |   | (10,634,534) |   | 8,026,998  
|Issuance of
      shares for:                        |               |   |             |   |              |   |            
|Acquisition of
      Canada                          |               |   |             |   |              |   |            
|Pumice
      Corporation ("CPC")                     |               |   |             |   |              |   |            
|-
      Shares issued to vendor                      | 15,345,000    |   | 6,905,250   |   | -            |   | 6,905,250  
|- Commitment
      fees on                           |               |   |             |   |              |   |            
|acquisition
      financing                          | 1,500,000     |   | 900,000     |   | -            |   | 900,000    
|-
      Finders fee on acquisition                   | 155,000       |   | 93,000      |   | -            |   | 93,000     
|Commitment
      fees on financing                   | 500,000       |   | 135,500     |   | -            |   | 135,500    
|Conversion of
      debentures                       | 251,062       |   | 69,543      |   | -            |   | 69,543     
|Exercise of
      options                            | 3,455,000     |   | 1,298,044   |   | -            |   | 1,298,044  
|Exercise of
      warrants                           | 15,990        |   | 5,167       |   | -            |   | 5,167      
|Loan
      arrangements                              | 85,000        |   | 16,260      |   | -            |   | 16,260     
|Private
      placements                             | 780,045       |   | 211,392     |   | -            |   | 211,392    
|Settlement of
      debt                             | 75,000        |   | 20,325      |   | -            |   | 20,325     
|Shares
      repurchased and                         |               |   |             |   |              |   |            
|returned
      to treasury                           | (2,107,144)   |   | (947,745)   |   | -            |   | (947,745)  
|Stock
      compensation equity                      | -             |   | 972,093     |   | -            |   | 972,093    
|Loss for the
      year- Statement 3                 | -             |   | -           |   | (2,991,438)  |   | (2,991,438)
|Balance - 31 August 2004                             | 44,399,671    | $ | 28,340,361  | $ | (13,625,972) | $ | 14,714,389 









- See
Accompanying Notes -



---



|Crystal
      Graphite Corporation                             |                        |                    |   |             |   |             |   | Statement 3
|-------------------------------------------------------------- | ---------------------- | ------------------ | - | ----------- | - | ----------- | - | -----------
|(An
      Exploration Stage Company)                           |                        |                    |   |             |   |             |   |            
|Consolidated
      Statement of Operations                     |                        |                    |   |            
|For the Years
      Ended 31 August                            |                        |                    |   |             |   |             |   |            
|Canadian
      Funds                                           |                        |                    |   |             |   |             |   |            
|                                                               |                        | Cumulative         |   |             |   |             |   |            
|                                                               |                        | From
      Date of |   |             |   |             |   |            
|                                                               | Reorganization         |                    |   |             |   |             |  
|                                                               | (31
      August 1994) |                    |   |             |   |             |  
|to
      31 August 2004                                        |                        | 2004               |   | 2003        |   | 2002       
|Sales                                                          | $                      | 449,427            | $ | 449,427     | $ | -           | $ | -          
|Cost
      of Sales                                            |                        | 336,788            |   | 336,788     |   | -           |   | -          
|Gross
      Margin                                             |                        | 112,639            |   | 112,639     |   | -           |   | -          
|Expenses                                                       |                        |                    |   |             |   |             |   |            
|Accounting
      and audit                                     |                        | 219,247            |   | 42,269      |   | 44,700      |   | 88,832     
|Advertising
      and promotion                                |                        | 38,604             |   | 17,535      |   | 2,344       |   | 6,507      
|Amortization                                                   |                        | 366,065            |   | 35,022      |   | 6,694       |   | 8,506      
|Automobile                                                     |                        | 78,479             |   | 16,182      |   | 5,912       |   | 485        
|Bad
      debt (recovery)                                      |                        | (2,657)            |   | (2,657)     |   | -           |   | -          
|Consulting                                                     |                        | 129,914            |   | 10,000      |   | 1,684       |   | 400        
|General
      and administrative                               |                        | 472,133            |   | 129,820     |   | 65,067      |   | 86,420     
|Legal                                                          |                        | 798,273            |   | 95,842      |   | 55,130      |   | 350,190    
|Listing
      and filing                                       |                        | 103,648            |   | 14,613      |   | 7,722       |   | 6,456      
|Marketing                                                      |                        | 1,040,218          |   | 229,202     |   | 458,010     |   | 163,701    
|Occupancy
      costs                                          |                        | 314,538            |   | 76,720      |   | 59,477      |   | 60,088     
|Research
      and development                                 |                        | 25,492             |   | 25,492      |   | -           |   | -          
|Shareholders'
      information and                            |                        |                    |   |             |   |             |   |            
|investor
      relations                                       |                        | 577,929            |   | 149,457     |   | 165,693     |   | 122,602    
|Transfer
      agent                                           |                        | 126,497            |   | 44,761      |   | 8,691       |   | 36,854     
|Travel                                                         |                        | 424,652            |   | 65,928      |   | 75,987      |   | 136,379    
|Wages,
      benefits and subcontractors                       |                        | 3,040,851          |   | 1,635,448   |   | 363,957     |   | 410,687    
|                                                               |                        | 7,753,883          |   | 2,585,634   |   | 1,321,068   |   | 1,478,107  
|Loss
      Before the Following                                |                        | (7,641,244)        |   | (2,472,995) |   | (1,321,068) |   | (1,478,107)
|                                                               |                        |                    |   |             |   |             |   |            
|Other
      Income (Expenses)                                  |                        |                    |   |             |   |             |   |            
|Write-down
      of investments                                |                        | (485,022)          |   | -           |   | (3,613)     |   | (481,409)  
|Write-off
      of exploration costs on outside properties and |                        |                    |   |             |   |             |   |            
|properties
      abandoned                                     |                        | (1,836,777)        |   | -           |   | -           |   | -          
|Gain
      (loss) on disposition of property,                  |                        |                    |   |             |   |             |   |            
|plant
      and equipment                                      |                        | (17,362)           |   | -           |   | -           |   | 3,949      
|Financing
      fees                                           |                        | (195,321)          |   | (195,321)   |   | -           |   | -          
|Finders
      fees                                             |                        | (62,250)           |   | -           |   | (62,250)    |   | -          
|Interest
      on loans and debentures                         |                        | (346,278)          |   | (302,689)   |   | (43,589)    |   | -          
|Interest
      on long-term debt                               |                        | (1,986)            |   | (1,986)     |   | -           |   | -          
|Interest
      and bank charges, net                           |                        | 155,280            |   | (6,971)     |   | (2,027)     |   | 52,262     
|Capital
      tax                                              |                        | (36,934)           |   | -           |   | (3,553)     |   | (19,028)   
|Gain
      (loss) on foreign exchange                          |                        | 183,697            |   | (11,476)    |   | (10,829)    |   | 9,213      
|Loss
      for the Period                                      | $                      | (10,284,197)       | $ | (2,991,438) | $ | (1,446,929) | $ | (1,913,120)
|                                                               |                        |                    |   |             |   |             |   |            
|Loss
      per Share - Basic and Diluted                       |                        |                    | $ | (0.09)      | $ | (0.06)      | $ | (0.09)     
|Weighted
      Average Number of Shares                        |                        |                    |   | 32,500,491  |   | 22,839,098  |   | 22,354,714 



- See Accompanying Notes
-

---



|Crystal
      Graphite Corporation                             |                        |                         |   |             |   |             |   | Statement 4
|-------------------------------------------------------------- | ---------------------- | ----------------------- | - | ----------- | - | ----------- | - | -----------
|(An
      Exploration Stage Company)                           |                        |                         |   |             |   |             |   |            
|Consolidated
      Statement of Cash Flows                     |                        |                         |   |            
|For the Years Ended 31 August                                  |                        |                         |   |             |   |             |   |            
|Canadian
      Funds                                           |                        |                         |   |             |   |             |   |            
|                                                               |                        |                         |   |             |   |             |   |            
|                                                               |                        | Cumulative              |   |             |   |             |   |            
|                                                               |                        | From
      Date of      |   |             |   |             |   |            
|                                                               |                        | Reorganization          |   |             |   |             |   |            
|                                                               | (31
      August 1994) |                         |   |             |   |             |  
|Cash
      Resources Provided By (Used In)                     |                        | to
      31 August 2004 |   | 2004        |   | 2003        |   | 2002       
|Operating
      Activities                                     |                        |                         |   |             |   |             |   |            
|Loss
      for the period                                      | $                      | (10,284,197)            | $ | (2,991,438) | $ | (1,446,929) | $ | (1,913,120)
|Item
      not affecting cash                                  |                        |                         |   |             |   |             |   |            
|Write-down
      of investments                                |                        | 485,022                 |   | -           |   | 3,613       |   | 481,409    
|Write-off
      of exploration costs on outside properties and |                        |                         |   |             |   |             |   |            
|properties
      abandoned                                     |                        | 1,836,777               |   | -           |   | -           |   | -          
|Accrued
      interest on debenture, net                       |                        | 37,468                  |   | 11,368      |   | 26,100      |   | -          
|Gain
      (loss) on disposition of property,                  |                        |                         |   |             |   |             |   |            
|plant
      and equipment                                      |                        | 17,362                  |   | -           |   | -           |   | (3,949)    
|                                                               |                        |                         |   |             |   |             |   |            
|Amortization                                                   |                        | 366,065                 |   | 35,022      |   | 6,694       |   | 8,506      
|Financing
      fees paid in shares                            |                        | 151,760                 |   | 151,760     |   | -           |   | -          
|Stock
      compensation expense                               |                        | 1,217,993               |   | 972,093     |   | 245,900     |   | -          
|Changes
      in non-cash working capital                      |                        | 366,709                 |   | (160,455)   |   | 957,224     |   | (690,071)  
|                                                               |                        | (5,805,041)             |   | (1,981,650) |   | (207,398)   |   | (2,117,225)
|Investing
      Activities                                     |                        |                         |   |             |   |             |   |            
|Mineral
      property costs                                   |                        | (7,610,636)             |   | (445,629)   |   | (539,099)   |   | (1,040,447)
|CPC
      acquisition costs                                    |                        | (190,056)               |   | (190,056)   |   | -           |   | -          
|Promissory
      notes receivable                              |                        | (88,285)                |   | -           |   | -           |   | (6,645)    
|Long-term
      investments                                    |                        | (400,000)               |   | -           |   | -           |   | -          
|Purchase
      of property, plant and equipment                |                        | (3,390,756)             |   | (406,095)   |   | (6,651)     |   | (382,323)  
|Proceeds
      on sale of equipment                            |                        | 46,097                  |   | -           |   | -           |   | 3,949      
|Purchase
      of reclamation deposit                          |                        | (390,000)               |   | -           |   | -           |   | (343,977)  
|                                                               |                        | (12,023,636)            |   | (1,041,780) |   | (545,750)   |   | (1,769,443)
|Financing
      Activities                                     |                        |                         |   |             |   |             |   |            
|Repayment
      of bank indebtedness                           |                        | (368,173)               |   | (368,173)   |   |             |   | -          
|Proceeds
      from demand debenture, net                      |                        | 3,689,360               |   | 3,589,360   |   |             |   | -          
|Proceeds
      from convertible debentures                     |                        | 1,100,186               |   | 5,000       |   | 590,000     |   | -          
|Convertible
      debentures repaid                            |                        | (211,834)               |   | (36,667)    |   | (175,167)   |   | -          
|Long-term
      debt                                           |                        | (7,199)                 |   | (7,199)     |   | -           |   | -          
|Advances
      to related parties, net                         |                        | (712,222)               |   | (712,222)   |   | -           |   | 118,262    
|Share
      capital issued for cash                            |                        | 14,193,568              |   | 588,367     |   | 148,250     |   | -          
|                                                               |                        | 17,683,686              |   | 3,058,466   |   | 563,083     |   | 118,262    
|Net
      Increase (Decrease) Cash                             |                        | (144,991)               |   | 35,036      |   | (190,065)   |   | (3,768,406)
|                                                               |                        |                         |   |             |   |             |   |            
|Cash
      acquired on CPC acquisition                         |                        | 4,745                   |   | 4,745       |   | -           |   | -          
|Cash
      position - Beginning of period                      |                        | 161,144                 |   | (18,883)    |   | 171,182     |   | 3,939,588  
|Cash
      Position - End of period                            | $                      | 20,898                  | $ | 20,898      | $ | (18,883)    | $ | 171,182    



- See Accompanying Notes
-

---





|Crystal
      Graphite Corporation                    |                        |                         |   |           |   |          |   | Statement 4 -Continued
|----------------------------------------------------- | ---------------------- | ----------------------- | - | --------- | - | -------- | - | ----------------------
|(An
      Exploration Stage Company)                  |                        |                         |   |           |   |          |   |                       
|Consolidated
      Statement of Cash Flows- Continued |                        |                         |   |          
|For the Years Ended 31 August                         |                        |                         |   |           |   |          |   |                       
|Canadian
      Funds                                  |                        |                         |   |           |   |          |   |                       
|                                                      |                        |                         |   |           |   |          |   |                       
|                                                      |                        |                         |   |           |   |          |   |                       
|                                                      |                        | Cumulative              |   |           |   |          |   |                       
|                                                      |                        | From
      Date of      |   |           |   |          |   |                       
|                                                      |                        | Reorganization          |   |           |   |          |   |                       
|                                                      | (31
      August 1994) |                         |   |           |   |          |  
|Cash
      Resources Provided By (Used In)            |                        | to
      31 August 2004 |   | 2004      |   | 2003     |   | 2002                  
|                                                      |                        |                         |   |           |   |          |   |                       
|Cash
      Consists of:                               |                        |                         |   |           |   |          |   |                       
|Cash
      and term deposits                          | $                      | 20,898                  | $ | 20,898    | $ | 16,091   | $ | 171,182               
|Cheques
      issued in excess of funds on deposit    |                        | -                       |   | -         |   | (34,974) |   | -                     
|                                                      | $                      | 20,898                  | $ | 20,898    | $ | (18,883) | $ | 171,182               
|                                                      |                        |                         |   |           |   |          |   |                       
|Supplemental
      Schedule of Non-Cash Consideration |                        |                         |   |           |   |         
|Asset
      retirement costs                          | $                      | 159,500                 | $ | 159,500   | $ | -        | $ | -                     
|Shares
      issued for property and equipment        | $                      | 284,000                 | $ | -         | $ | -        | $ | -                     
|Shares
      issued for acquisition of CPC            | $                      | 7,898,250               | $ | 7,898,250 | $ | -        | $ | -                     
|Shares
      issued for convertible debentures        | $                      | 420,634                 | $ | 48,034    | $ | 372,600  | $ | -                     
|Shares
      issued for settlement of debt            | $                      | 575,511                 | $ | 20,325    | $ | -        | $ | -                     
|Shares
      received for settlement of debt          | $                      | 88,285                  | $ | -         | $ | -        | $ | 88,285                
|Shares
      issued for financing fees                | $                      | 151,760                 | $ | 151,760   | $ | -        | $ | -                     
|Stock
      compensation                              | $                      | 1,223,326               | $ | 972,093   | $ | 245,900  | $ | -                     





- See
Accompanying Notes -



---



|Crystal
      Graphite Corporation                    |   |            |   | Schedule 
|----------------------------------------------------- | - | ---------- | - | ---------
|(An
      Exploration Stage Company)                  |   |            |   |          
|Consolidated
      Schedule of Mineral Property Costs |   |           
|For the Years
      Ended 31 August                   |   |            |   |          
|Canadian
      Funds                                  |   |            |   |          
|                                                      |   |            |   |          
|                                                      |   |            |   |          
|                                                      |   |            |   |          
|                                                      |   |            |   |          
|                                                      |   |            |   |          
|                                                      |   |            |   |          
|                                                      |   | 2004       |   | 2003     
|Direct
      - Mineral                                |   |            |   |          
|Black
      Crystal Property, Nelson, B.C.            |   |            |   |          
|Deferred
      exploration costs                      |   |            |   |          
|Amortization                                          | $ | 158,350    | $ | 210,884  
|Asset
      retirement costs                          |   | 135,000    |   | -        
|B.C.
      Mineral Exploration Tax Credit             |   | -          |   | 13,584   
|Bulk
      sampling recovery                          |   | -          |   | (13,866) 
|Crushing,
      screening and grinding                |   | 1,436      |   | 29,616   
|Environmental
      engineering                       |   | 5,407      |   | 11,328   
|Field
      and general                               |   | 121,912    |   | 161,577  
|Freight                                               |   | 7,439      |   | 2,616    
|Health
      and safety                               |   | 2,099      |   | 3,083    
|Laboratory
      and assay                            |   | -          |   | 11,643   
|Mine
      administration                             |   | 15,310     |   | 3,476    
|Repairs
      and maintenance                         |   | 50,598     |   | 72,879   
|Telecommunications                                    |   | 7,865      |   | 4,888    
|Transportation
      and hauling                      |   | 37,337     |   | 43,904   
|Travel,
      meals and accommodation                 |   | 26,564     |   | 21,937   
|Wages,
      benefits and subcontractors              |   | 159,374    |   | 173,543  
|                                                      |   |            |   |          
|                                                      |   | 728,691    |   | 751,092  
|Nazko
      Cone Property, Quesnel, B.C.              |   |            |   |          
|Acquisition
      costs                               |   | 8,502,438  |   | -        
|                                                      |   |            |   |          
|Costs
      for the Period                            |   | 9,231,129  |   | 751,092  
|                                                      |   |            |   |          
|Balance
      - Beginning of period                   |   | 7,009,943  |   | 6,258,851
|                                                      |   |            |   |          
|Balance
      - End of Period                         | $ | 16,241,072 | $ | 7,009,943



- See
Accompanying Notes -



---



|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









1.

Continued
Operations



These
consolidated financial statements have been prepared on the basis of accounting
principles applicable to a going concern which assumes that the Company will be
able to continue in operation for the foreseeable future and will be able to
realize its assets and discharge its liabilities in the normal course of
business.



Several
adverse conditions cast doubt on the validity of this assumption.  The
Company has incurred significant operating losses over the past several fiscal
years, is currently unable to self-finance operations, and has a working capital
deficiency of $3,355,621 and a deficit of $13,625,972.



These
financial statements do not reflect adjustments that would be necessary if the
going concern assumption were not appropriate because management believes that
the actions already taken or planned will mitigate the adverse conditions and
events that raise doubts about the validity of the going concern assumption used
in preparing these financial statements.



The
Company is planning to meet its current obligations by raising funds via private
placements, and/or securing further debt financing. The Company's continued
existence is dependent upon its ability to obtain additional financing and
continued support of its debtors and/or achieve profitable operations.



If
the going concern assumption were not appropriate for these financial statements
then adjustments would be necessary in the carrying value of assets and
liabilities, the reported revenue and expenses and the balance sheet
classifications used.





2.

Significant
Accounting Policies



a)

Basis
of Consolidation



These
consolidated financial statements include the accounts of the Company and its
wholly-owned Canadian subsidiaries as follows:



a)

Canada
Pumice Corporation ("CPC"), which was acquired by the Company on 28 April
2004 (Note 4) and CPC's wholly-owned inactive subsidiaries, Volcanic
& Industrial Minerals Inc. and Cariboo Lava Corp.  Results of operation
are included from the date of acquisition.



These
investments have been accounted for using the purchase method.



b)

Cash
and Short-Term Investments



For
purposes of reporting cash flows, the company considers cash and short-term
investments to include amounts held in banks and highly liquid investments with
remaining maturities at point of purchase of three months or less.  The
company places its cash and cash investments with institutions of high-credit
worthiness.  At times, such investments may be in excess of federal
insurance limits.



c)

Inventory



Inventory,
consisting primarily of stockpiled lava rock processed to various stages, is
stated at the lower of average production cost and net realizable value.





---



|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









2.

Significant
Accounting Policies - Continued



d)

Investments



Investments,
in which the company has less than a 20% interest and where the company has no
significant influence, are recorded at the lower of cost or market value.
 Investments are written down to market value when the decline in market
value is deemed to be other than temporary.



e)

Mineral
'Change in Accounting Policy



The
company is in the process of exploring and developing its mineral properties.



Mineral
exploration, development costs and amortization on mining equipment and on-site
buildings are capitalized on an individual prospect basis until such time as an
economic ore body is defined or the prospect is abandoned.  Costs for a
producing prospect are amortized on a unit-of-production method based on the
estimated life of the proven and probable ore reserves, while those costs for
the prospects abandoned are written off.



The
recoverability of the amounts capitalized for the undeveloped mineral properties
is dependent upon the determination of economically recoverable ore reserves,
confirmation of the company's interest in the underlying mineral claims, the
ability to obtain the necessary financing to complete their development, and
future profitable production or proceeds from the disposition thereof.



Title
to mineral properties involves certain inherent risks due to the difficulties of
determining the validity of certain claims as well as the potential for problems
arising from the frequently ambiguous conveyancing history characteristic of
many mineral properties.  The company has investigated title to all of its
mineral properties and, to the best of its knowledge; title to all of its
properties is in good standing.



Effective
1 September 2003, the Company prospectively adopted the Canadian Institute of
Chartered Accountants ("CICA") Handbook Section ("HB") 3063 "Impairment
of Long-Lived Assets", which requires that an impairment loss be recognized if
the carrying value of a long-lived asset exceeds its fair market value.  An
estimate of fair market value is undertaken annually and the impairment loss, if
any, is charged to earnings. There were no impairment losses recorded during
fiscal 2004. Management's estimates of resources, inventories and reclamation
costs are subject to risks and uncertainties that may affect its assessment of
the recoverability of mineral property costs.



f)

Environmental
Expenditures and Closure Costs 'Change in Accounting Policy



The
operations of the company may in the future be affected from time to time in
varying degree by changes in environmental regulations, including those for
future removal and site restoration costs.  Both the likelihood of new
regulations and their overall effect upon the company vary greatly and are not
predictable.  The company's policy is to meet or, if possible, surpass
standards set by relevant legislation, by application of technically proven and
economically feasible measures.



Environmental
expenditures that relate to ongoing environmental and reclamation programs are
charged against earnings as incurred or capitalized and amortized depending on
their future economic benefits.  Estimated future removal and site
restoration costs, when the ultimate liability is reasonably determinable, are
charged against earnings over the estimated remaining life of the related
business operation, net of expected recoveries.





---



|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









2.

Significant
Accounting Policies - Continued



f)

Environmental
Expenditures and Closure Costs 'Continued



Effective
1 September 2003, the Company elected early implementation of CICA HB 3110 "Asset
Retirement Obligations", whereby the Company prospectively recognizes asset
retirement obligations in the period in which they are incurred, if a reasonable
estimate of fair market value can be made.  The asset retirement costs are
capitalized as part of the carrying amount of the long-term asset to be
amortized over the estimated remaining useful life of the asset and the
associated liability is recorded until settlement of the obligation.  As a
result of the adoption of this accounting standard, the carrying value of the
Black Crystal property and the corresponding asset retirement obligation was
increased by $135,000 during the year ended 31 August 2004.  The
estimated closure costs of $24,500 associated with the Nazko Cone property at
the time of acquisition was recognized in full as part of the acquisition cost.



g)

Property,
Plant and Equipment and Amortization



Property,
Plant and Equipment is valued at cost less accumulated amortization.  The
company provided for amortization on the declining balance method as follows:



- Beneficiation
Plant - 30%
- Bagging
Plant '30%
- Machinery
and equipment - 30%
- Buildings
- 30%
- Technical
instruments - 30%
- Concrete
forms '20 years straight-line
- Office
furniture - 20%
- Computer
hardware - 30%
- Vehicle
- 30%
- Computer
software - 100%







One-half
of the above rate is taken in the year of acquisition.



h)

Income
Taxes



Income
taxes are accounted for using the asset and liability method.  Future taxes
are recognized for the tax consequences of "temporary differences" by
applying enacted or substantively enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
tax basis of existing assets and liabilities.  The effect on deferred taxes
for a change in tax rates is recognized in income in the period that includes
the date of enactment or substantive enactment.  In addition, the method
requires the recognition of future tax benefits to the extent that realization
of such benefits is more likely than not.



i)

Share
Capital



Proceeds
from the exercise of stock options, warrants and escrow shares are recorded as
share capital in the amount for which the option, warrant or escrow share
enabled the holder to purchase a share in the Company.



Share
capital issued for non-monetary consideration is recorded at an amount based on
estimated fair market value.







---



|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









2.

Significant
Accounting Policies - Continued



j)

Stock-Based
Compensation 'Change in Accounting Policy



The
Company has adopted the recommendations of CICA HB 3870, "Stock-based
compensation and other stock-based payments".  This Section establishes
standards for the recognition, measurement and disclosure of stock-based
compensation and other stock-based payments made in exchange for goods and
services.



The
new standard requires that all stock-based awards made to employees and
non-employees be measured and recognized using a fair value based method.
 In prior years, stock-based compensation expense was only recognized when
stock-based compensation awards were made to non-employees, while pro forma
disclosure was acceptable for awards made to employees.



As
encouraged by CICA HB 3870, the Company has enacted prospectively early adoption
of the fair value based method of accounting for awards issued to employees for
the current fiscal year beginning 1 September 2003.



k)

Foreign
Exchange



Transaction
amounts denominated in foreign currencies are translated into their Canadian
dollar equivalents at exchange rates prevailing at the transaction date.
 Carrying values of monetary assets and liabilities are adjusted at each
balance sheet date to reflect exchange rates prevailing at that date.
 Gains and losses arising from restatement of foreign currency monetary
assets and liabilities at each year-end are included in earnings.



l)

Revenue
Recognition



Revenue
is recorded once there is persuasive evidence that an arrangement exists;
product has been transferred to the purchaser; the selling price is fixed and
determinable; and collectability is reasonably assured.



m)

Loss
per Share



Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the year.  The computation of diluted earnings per share assumes the
conversion, exercise or contingent issuance of securities only when such
conversion, exercise or issuance would have a dilutive effect on earnings per
share.  The dilutive effect of convertible securities is reflected in
diluted earnings per share by application of the "if converted"
method.  The dilutive effect of outstanding options and warrants and their
equivalents is reflected in diluted earnings per share by application of the
treasury stock method.



n)

Management's
Estimates



The
preparation of financial statements in conformity with Canadian generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reported
periods.  Actual results could differ from those estimates.



o)

Cumulative
Figures



The
figures provided for cumulative purposes represents the figures from the date of
the company's reorganization (31 August 1994) to 31 August 2004.





|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









3.

Fair
Value of Financial Instruments



The
company's financial instruments consist of cash and term deposits, GST
recoverable, accounts receivable and advances, amounts due to/from related
parties, accounts payable, employee deductions payable, line of credit, demand
debenture and long-term debt.  Currency fluctuations may affect the cash
flow that the company may realize from its operations, since graphite is sold in
the world market denominated in U.S. dollars, while the company's costs are
incurred in Canadian and U.S. currencies.  Unless otherwise noted, it is
management's opinion that the company is not exposed to significant interest,
currency or credit risks arising from the financial instruments.  The fair
value of these financial instruments approximates their carrying value due to
their short-term maturity or capacity of prompt liquidation.





4.

Acquisition
of Subsidiary



On
April 28, 2004 the Company purchased a British Columbia company named Canada
Pumice Corporation ("CPC"), and its two inactive subsidiaries, Volcanic
& Industrial Minerals Inc. and Cariboo Lava Corporation.  CPC produces
volcanic rock material including pumice and scoria at its Nazko Cone quarry near
Quesnel, British Columbia.  CPC is now a wholly owned subsidiary of the
Company by the acquisition of 100% of the issued and outstanding shares of CPC
in exchange for 15,345,000 shares of the Company.  A finder's fee of
155,000 common shares was paid to an unrelated party on this acquisition.



The
purchase method of accounting has been applied with the shares issued as
consideration being recorded at $6,905,250, that being the value of the shares
given up after considering price fluctuations, liquidity issues and exchange
rates.  In addition, all legal, financing, accounting and consulting fees
relating to the acquisition have been added as part of the purchase cost.



Details
are as follows:



Shares
        issued to the vendor
      $
      6,905,250Shares
        issued for financing
      
      900,000Shares
        issued for finder's fee
      
      93,000Legal
        fees
      
      77,419Financing
        fees
      
      57,517Accounting
        fees
      
      37,175Consulting
        fees
      
      17,945$
      8,088,306










---



|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









4.

Acquisition
of Subsidiary - Continued



At
the date of the acquisition, the value of the identifiable net assets of CPC was
as follows:



ASSETSCash
      $
      4,745Accounts
        receivable
      
      135,316Inventory
      
      434,602574,663Mineral
        property costs
      
      8,502,438Property,
        plant and equipment, at net book value
      
      115,742Reclamation
        deposit
      
      24,500$
      9,217,343LIABILITIESBank
        overdraft
      $
      368,173Accounts
        payable and accrued liabilities
      
      78,963Employee
        deductions payable
      
      62,143Line
        of credit
      
      81,706Due
        to related parties
      
      486,828Current
        portion of long-term debt
      
      13,4461,091,259Long-term
        debt
      
      13,278Asset
        retirement obligation
      
      24,500$
      1,129,037Total
        Purchase Price
      $
      8,088,306




The
excess value of the consideration given up has been allocated to mineral
property costs.







---



|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









5.

Mineral
Property Costs



a)

Details
are as follows:

2004
      
      2003Black Crystal Property, Nelson,
        B.C.Acquisition
        costs
      $
      618,927
      $
      618,927Exploration
        costs
      
      7,119,707
      
      6,391,0167,738,634
      
      7,009,943Nazko Cone Property, Quesnel,
        B.C.Acquisition
        costs
      
      8,502,438
      
      -$
      16,241,072
      $
      7,009,943




b)

Black
Crystal Property

The
Company has a 100% interest in certain mineral claims known as the Black Crystal
property, located in the Slocan Mining Division in British Columbia.



The
property is subject to a 20% gross profit royalty for a period up until 25
August 2010 to a maximum of $1,700,000.  The royalty is defined as 20% of
the gross receipts from sales received from the product of the property less
direct operating costs.



During
the year, due to the Company adopting CICA HB 3110 (Note 2f) regarding asset
retirement obligations, $135,000 has been recorded to the carrying value of the
property, that being management's estimate of future mine closure costs for
the Black Crystal property.



The
Black Crystal property is in the preproduction stage as there have been no
material sales to date.



b)

Nazko
Cone Property



The
Company, through its wholly-owned subsidiary, owns certain mineral rights and
tenures within properties known as the Klara claims comprising approximately
3,000 acres (48 units) including and surrounding an extinct volcano referred to
as the Nazko Cone, located in the proximity of Quesnel, British Columbia.
 In conjunction with these claims, the Company holds two 30 year, renewable
mine leases with a quarry permit for the life of the quarry.  At current
licensing, this allows the Company to extract up to 100,000 metric tons of
volcanic aggregate per year from the Nazko Cone deposit.



The
Nazko Cone property is a producing property.  All of the Company's
revenue in the current year is from the Nazko Cone property operations.









---



|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









6.

Property,
Plant and Equipment



Property,
Plant and Equipment is recorded at cost.  Details are as follows:



Cost
      Accumulated
        Amortization
      2004
        Net Book
        Value
      2003
        Net Book
        ValueBeneficiation plant
      $
      1,410,352
      $
      683,885
      $
      726,467
      $
      726,467Bagging plant'under
        construction
      
      21,722
      
      -
      
      21,722
      
      -Machinery and equipment
      
      1,805,660
      
      1,212,539
      
      593,121
      
      326,157Buildings
      
      191,286
      
      133,858
      
      57,428
      
      80,815Technical instruments
      
      156,024
      
      104,175
      
      51,849
      
      67,180Concrete forms
      
      11,525
      
      97
      
      11,428
      
      -Office furniture
      
      64,811
      
      44,439
      
      20,372
      
      17,196Computer hardware
      
      47,802
      
      29,807
      
      17,995
      
      13,913Vehicles
      
      225,859
      
      156,345
      
      69,514
      
      10,507Computer software
      
      14,013
      
      12,997
      
      1,016
      
      212$
      3,949,054
      $
      2,378,142
      $
      1,570,912
      $
      1,242,447






7.

Demand
Debenture



By a
loan agreement dated 25 September 2003, the Company secured financing in the
form of a demand debenture for an amount of $1,000,000 from an unrelated party,
(who subsequently became a director of the Company), of which $150,000 was set
up as an interest reserve to service the monthly interest instalments.  The
debenture bore interest at a rate of 15% per annum, compounded monthly, and was
repayable on 26 September 2004.  The Company paid a non-refundable
application fee of $10,000 and issued 500,000 common shares of the Company
valued at $135,500 to the lender as a non-refundable commitment and funding fee.



By a
loan agreement dated 7 May 2004, the Company secured additional financing in the
form of a demand debenture by cancelling the first debenture for a new debenture
in the amount of $4,000,000, from a company controlled by a director, of which
$600,000 was set up as an interest reserve to service the monthly interest
instalments.  The debenture bears interest at a rate of 15% per annum,
compounded monthly, and is repayable on 7 May 2005.  The Company paid
a non-refundable application fee of $20,000 and issued 1,500,000 common shares
of the Company valued at $900,000 to the lender as a non-refundable commitment
and funding fee for the new debenture.  The Company also paid a three-month
interest penalty of $37,500 as a result of the early redemption of the first
debenture.  The new debenture provides for a first registered charge on the
land and a general first floating charge on all other assets of the Company.
 The application fee, the commitment and funding fee and the interest
penalty have been recorded towards the acquisition of CPC as it was this funding
that enabled the acquisition to complete.



Details
of the demand debenture and interest reserve account as at 31 August 2004 are as
follows:



Proceeds
        from demand debenture
      $
      4,000,000Balance
        of interest reserve held by the lender
      
      (410,640)$
      3,589,360








---



|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









7.

Demand
Debenture - Continued



The
Company may elect to extend the term of the debenture for a further twelve
months at the option of the Lender.  The Company can pay off the debenture
prior to the due date, in whole or part, subject to a three-month interest
penalty.  If the Company secures new financing, 25% of the net proceeds
shall be applied to the debenture.



During
the year the Company paid $284,679 in interest on the two debentures in addition
to the fees and penalties mentioned above.  During the same period the
Company earned $4,522 on the monies held in the interest reserve account.





8.

Long-term
Debt



The
Company has an automobile loan, payable at $876 per month including interest;
secured by specific automobile equipment.



Details
are as follows:



GMAC
        financing
      $
      19,525Less:
        current portion
      
      (9,000)$
      10,525






9.

Convertible
Debentures



a)

In
December 2002, the Company completed a convertible debenture private placement
of 350,000 debenture units at a price of $0.50 per unit for total proceeds of
$175,000.  The debenture bore interest after 1 April 2003 at a rate of 1%
per month.  Related parties subscribed for 100,000 units.



During
the year, the Company issued 35,000 bonus shares to certain debenture holders
for loan arrangements with the Company at a price of $0.271 per share.
 10,000 shares were issued to an officer and a relative of a director.



During
the year, the Company paid out $16,666 plus interest to certain debenture
holders in cash.  The balance of $51,667 plus accrued interest of $12,500
was settled by issuing 236,776 units to the remaining holders.  An
additional 14,286 units were issued to another debenture subscriber for $5,000
plus interest under the same terms as the original private placement.  One
unit was issued for each $0.271 of outstanding debenture.  Each unit
consists of one share and one share purchase warrant.  Each warrant
entitles the holder to purchase one additional common share of the Company at a
purchase price of US$0.25 for a two-year period expiring 20 October 2005. 79,950
shares were issued to an officer and a relative of a director.



b)

In
March 2003, the Company completed a private placement of convertible debentures
for total proceeds of $415,000.  The debentures bore interest at 8% per
annum.



During
August 2003, the Company repaid $68,500 plus accrued interest of this debenture
in cash.  The balance of $346,500 plus imputed interest of $26,100 was
converted into 990,004 common shares.  Financing fees in the amount of
$62,250 were paid to unrelated parties in connection with this convertible
debenture private placement during the prior fiscal year.



During
the year, 57,144 common shares were returned to the Company in exchange for the
original principal amount of $20,000 plus accrued interest.





|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









10.

Share
Capital



a)

Authorized
Share Capital



The
Company's authorized share capital consists of 250,000,000 common shares
without par value.



b)

Private
Placement



During
the year, the Company issued 780,045 units to two directors and a relative of a
director by private placement for gross proceeds of $211,392.  Each unit
consists of one common share and one share purchase warrant.  Each warrant
entitles the holder to purchase one additional common share of the Company at a
purchase price of US$0.25 for a two-year period expiring 20 October 2005.



c)

Shares
for Debt



During
the year, the Company issued 75,000 units in settlement of certain trade
payables in the amount of $20,325.  Each unit consists of one common share
and one share purchase warrant.  Each warrant entitles the holder to
purchase one additional common share of the Company at a purchase price of
US$0.25 for a two-year period expiring 20 October 2005.



d)

Bonus
Shares



During
the year, the Company issued 50,000 bonus shares to a third party for arranging
loans for the Company at a price of US$0.10.  35,000 bonus shares were also
issued to debenture holders (Note 9a).



e)

Cancelled
Shares



During
the year, the Company repurchased 2,107,144 of its common shares for a value of
$947,745.  The repurchased shares were subsequently cancelled.



f)

Share
Purchase Options



As
at 31 August 2004, the following share purchase options were outstanding:



Shares
      
      Exercise Price
      Expiry DateOptions
      25,000
      
      CDN
        $ 0.68
      18 March 200625,000
      
      CDN
        $ 0.81
      23 May 200650,000
      
      CDN
        $ 1.08
      13 August 2006570,000
      
      CDN
        $ 0.68
      29 October 2006545,000
      
      CDN
        $ 0.68
      29 October 20061,475,000
      
      US
        $ 0.20
      18 September
        20082,690,000




g)

Share
Purchase Warrants



As
at 31 August 2004, the following share purchase warrants were outstanding:



Shares
      
      Exercise Price
      Expiry DateWarrants
      1,075,831
      
      US
        $ 0.25
      30 September
        2005








---



|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









10.

Share
Capital - Continued



h)

Stock-Based
Compensation



On
18 September 2003, the Company granted 2,880,000 share-purchase stock options to
directors, officers, employees and a consultant.  Of the options granted,
2,575,000 options were granted to directors, officers and employees and are
exercisable at a price of US$0.20 per share for a 5 year period expiring 18
September 2008.  The remaining 305,000 options were granted to a consultant
and are exercisable at a price of US$0.20 per share for a one-year period
expiring 18 September 2004.



For
non-employees, the stock option grant results in a compensation expense of
$7,409, which has been recorded in marketing fees.  For employees and
directors, the stock option grant results in a compensation expense of $226,598,
which has been recorded in wages and benefits.  The offsetting entries are
to share capital.



The
fair value of each option grant is estimated using the Black-Scholes Option
Pricing Model with the following weighted average assumptions:



Risk-free
        interest rate
      
      3.59%Expected
        dividend yield
      
      NilExpected
        stock price volatility
      
      72%Expected
        life of options
      
      4.6
        years




On
28 April 2004, the Company granted 2,000,000 share-purchase stock options to the
former principal of CPC as part of the new management agreement (Note 12d).
 The options granted are exercisable at a price of $0.45 per share for a
5-year period expiring 28 April 2009.



The
stock option grant results in a compensation expense of $738,086, which has been
recorded in wages and benefits.  The offsetting entry is to share capital.



The
fair value of the option grant is estimated using the Black-Scholes Option
Pricing Model with the following assumptions:



Risk-free
        interest rate
      
      3.81
        %Expected
        dividend yield
      
      NilExpected
        stock price volatility
      
      131%Expected
        life of options
      
      1
        year




Option
pricing models require the input of highly subjective assumptions including the
expected price volatility.  Changes in the subjective input assumptions can
materially affect the fair value estimate, and therefore the existing models do
not necessarily provide a reliable single measure of the fair value of the
Company's stock options.









---



|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









11.

Related
Party Transactions



Except
as disclosed elsewhere in these financial statements, related party transactions
are as follows:



a)

On
28 April 2004 in conjunction with the CPC acquisition, the Company loaned the
former principal of CPC and current director of the Company $263,000.  The
loan is non-interest bearing, secured by 355,500 escrow shares of the Company
and due after 1 October 2005.  If there is a default on the loan, the
Company's only recourse is to keep the shares held in escrow.  As at 31
August 2004, the market value of the escrow shares is $202,635.



b)

As
at 31 August 2004, $37,606 (2003 '$nil) is payable to a director or a company
controlled by a director.  The amounts are non-interest bearing, unsecured
and due on demand.



c)

During
the year, the Company utilized certain personal credit cards of a director for a
source of additional short term financing.  The Company has disclosed the
balance owing from cash advances as at 31 August 2004 in the amount of $54,543
as line of credit under current assets.  The interest rates range from
3.99% to 14.25%.  The monthly minimum repayments range from approximately
1% of principal plus interest to 2% of principal plus interest.



d)

During
the year, fees for marketing services in the amount of $43,307 (2003 - $93,864;
2002 - $91,621) were paid to a company controlled by a director of the Company.



e)

During
the year, rent in the amount of $35,500 (2003 - $nil; 2002 - $nil) was paid to a
director or a company controlled by a director of the Company, in respect of the
CPC operations.



f)

During
the year, management wages of $345,920 (2003 - $317,339; 2002 '$314,420) were
paid or accrued to directors and officers.



g)

During
the year, wages of $120,000 (2003 - $15,000; 2002 - $nil) were paid or accrued
to an officer of the Company for corporate development.



h)

During
the year, interest of $5,000 (2003 - $10,334; 2002 - $nil) was paid or accrued
to a director and officer and a relative of a director.



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





12.

Commitments



a)

The
Company has a lease for premises expiring 13 November 2004.



Minimum
basic rent is as follows:



Amount2005
      $
      11,649




In
addition to the basic rent, the Company is responsible for its proportionate
share of property taxes and operating costs.







---



|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









12.

Commitments
-Continued



a)

The
Company has lease agreements for office equipment and automotive equipment with
terms ranging up to 42 months.  Minimum basic charges are as follows:



Amount2005
      $
      96,5482006
      
      93,3562007
      
      91,0792008
      
      22,3072009
      
      7,181$
      310,471




b)

By
agreement dated 30 April 2004, the Company entered into a ten-year Ground and
Equipment Lease with a company controlled by a director and officer.  The
annual minimum basic rent payments are $82,500 triple net, payable in equal
monthly installments of $6,875.  This agreement is renewable for three
additional terms of ten years with mutual consent on the same terms and
conditions as the original term, except for the amount of annual basic rent
payable, which will be adjusted to fair market value.



In
addition to the basic rent, the Company is responsible for its proportionate
share of property taxes and operating costs.



c)

By
agreement dated 28 April 2004, the Company entered into a five-year Management
Agreement with a director and officer of the Company.  Compensation is a
base fee of $15,000 per month plus incentive fees as determined by the board.
 The Company is also required to obtain disability and life insurance as
outlined in the agreement.  This agreement will renew automatically for
subsequent two-year periods on the same terms and conditions as the original
term.  The Company may terminate the agreement at the end of a term with 90
days notice.  Commencing on the first anniversary of this agreement, if the
agreement is terminated, there shall be a termination fee equal to the sum of:



-

extension
of any outstanding stock options for a period of one year after termination;
plus

-

the
greater of:

i.

the
aggregate remaining base fee for the unexpired remainder of the term; or

ii.

Six
months of base fee plus one month of base fee for each year, or portion thereof
served.





13.

Supplemental
Information to the Statement of Cash Flows



Details
are as follows:



2004
      
      2003
      
      2002Interest paid
      $
      291,321
      $
      17,489
      $
      1,395Taxes paid
      $
      Nil
      $
      Nil
      $
      Nil










---



|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









14.

Income
Taxes



The
company has incurred non-capital losses of approximately $4,226,420 that may be
carried forward and used to reduce taxable income in future years.



The
company has incurred certain resource-related expenditures of approximately
$8,816,000 that may be carried forward indefinitely and used to reduce
prescribed taxable income in future years.



The
resource deductions have no expiry date whereas the non-capital losses carried
forward expire as follows:



Amount2009
      $
      1,427,1542010
      
      1,152,4632011
      
      1,646,803$
      4,226,420




The
potential future tax benefits of these non-capital losses and the resource
expenditures have not been reflected in the accounts of the company.





15.

Comparative
Figures



Certain
of the prior years figures, shown for comparative purposes, have been
reclassified to conform with the presentation used in the current year.





16.

Subsequent
Events



a)

On 6
October 2004, the Company completed a debenture financing of $300,000 at an
interest rate of 1% per month calculated and payable monthly in arrears.
 The principal will be due and payable by the Company to the Lender in full
on demand on or after the one-year anniversary date (the "Due Date") or on
any acceleration of the Due Date.  In addition, the Company has agreed that
on or before ten (10) days following receipt of funds from a senior funder, that
the Company shall fully repay, regardless of whether such shall be prior to the
Due Date, the principal and interest from such senior funding.
 Furthermore, the Company guarantees a minimum of three months of interest
and accordingly a payment of principal prior to the third month anniversary
shall include additional interest sufficient to provide for a three (3%) percent
aggregate interest payment.  As a bonus at an agreed aggregate value of
$100 effective 6 October 2004, the Company granted the Lender 100,000 five
(5) year non-transferable warrants which entitles the Lender to acquire up to
100,000 common shares of the Company at an exercise price of USD$0.50 as to
50,000 warrants and USD$0.75 as to 50,000 warrants.



On
18 November 2004, the Company completed a second debenture financing with the
same lender in the amount of $200,000 with the same terms and conditions as the
above loan.  As a bonus at an agreed aggregate value of $100 effective 18
November 2004, the Company granted the Lender 66,668 five (5) year
non-transferable warrants which entitles the Lender to acquire up to 66,668
common shares of the Company at an exercise price of USD$0.46 as to 33,334
warrants and USD$0.71 as to 33,334 warrants.







---



|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









16. Subsequent
Events -Continued



b)

On
15 November 2004 the Company entered into a Project Funding Agreement ("Agreement")
with a Syndicated Trading Trust in Australia.  Under the terms of the
Agreement, the Company will receive US$10,000,000 ("Project Sum") which will
be used to repay existing short term debt, further develop its two properties
and for additional working capital as defined in the Agreement.  The loan
will bear interest at 4.5% to 6.5% according to the Agreement and will be
repayable in 10 years from the drawdown date.  The Company must reimburse
the lender 0.25% of the Project Sum for reimbursement of legal, administrative
and accounting fees as well as 0.10% of the Project Sum for reimbursement for
bank fees or charges payable under the facility.  Prior to receiving the
Project Sum the Company must arrange a Finance Guarantee Bond, Standby Letter of
Credit, Bank Guarantee or other security ("the Collateral Security") in the
amount of 5% of the Project Sum.  Subsequent to year-end, the Company has
paid US$30,000 to cover administration costs to secure the Collateral Security
and US$25,000 for legal fees relating to the preparation of the Agreement.
 Management expects that the funding will be in place within 30 days from
the date these financial statements are filed.



c)

Subsequent
to the year-end, the Company purchased two pieces of equipment for a total of
$385,000 plus GST for use in the Company's pumice operations.  The
purchases have been financed over three and four years respectively at a rate of
bank prime plus 1.75%.  The initial financed balance is $393,450.  The
underlying equipment is held as security on the finance contracts.





17.

Segmented
Information



Details
are as follows:



Graphite
        Operations
      
      Pumice
        Operations
      
      Consolidated31 August 2004Segmented
        revenue
      $
      -
      $
      449,427
      $
      449,427Segmented
        loss
      $
      2,821,136
      $
      170,302
      $
      2,991,438Identifiable
        assets
      $
      10,802,570
      $
      8,481,387
      $
      19,283,957




During
the years ended 31 August 2003 and 2002 all financial information relates to the
Company's graphite operations.









---



|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









18.

Differences
Between United States and Canadian Generally Accepted

Accounting
Principles "GAAP"



a)

Accounting
Policy Differences



These
financial statements are prepared in accordance with accounting principles
generally accepted in Canada.  Except as set out below, these financial
statements comply, in all material aspects, with accounting principles generally
accepted in the United States and the rules and regulations of the Securities
Exchange Commission.  The significant differences between Canadian and U.S.
GAAP are as follows:



(i)

Under
Canadian GAAP, the mineral properties are carried at cost and written off or
written down if the properties are abandoned, sold or if management decides not
to pursue the properties. Under U.S. GAAP, the company would periodically review
and obtain independent reports in determining adjustments to the mineral
properties and record properties at net realizable value. The company has not
yet obtained an independent report for U.S. GAAP purposes, therefore, the
company's mineral property costs have been written off in this note to the
financial statements.



(ii)

Under
Canadian GAAP, the company was not required to record the effect of non-employee
stock option based compensation expense in the financial statements until
1 September 2002.  Under U.S. GAAP, stock compensation expense is
recorded for non-employees based upon the fair market value at the date the
option granted.  The effect of this difference for the year ended 31 August
2002 and prior is noted below.  Commencing on 1 September 2002, Canadian
GAAP treatment is consistent with U.S. GAAP.



(iii)

Under
U.S. GAAP, investments held for re-sale are recorded at market value.  The
difference between the market value and the cost of the investment is recorded
as a separate shareholder equity category named comprehensive income.  Once
the investment is sold, the comprehensive income for that investment is cleared
out to income.  Under Canadian GAAP, investments held for re-sale are
recorded at the lower of cost or market.  There is no comprehensive income
category in Canada.







---



|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









18.

Differences
Between United States and Canadian GAAP- Continued



b)

Statement
Reconciliation



i)

The
impact of the above differences between Canadian and U.S. GAAP on the loss and
loss per share is as follows:



2004
      2003
      2002Net
        Loss - Canadian Basis
      $
      (2,991,438)
      $
      (1,446,929)
      $
      (1,913,120)Write-down
        of investments
      
      -
      
      -
      
      399,999Write-off
        of mineral property costs
      
      (9,231,129)
      
      (751,092)
      
      (1,264,479)Compensation
        expense on common stock options granted to non-employees
      
      -
      
      -
      
      (13,924)Net Loss - U.S.
        Basis
      $
      (12,222,567)
      $
      (2,198,021)
      $
      (2,791,524)Other
        Comprehensive Income (Loss)Unrealized
        (loss) on investments
      $
      -
      $
      (6,828)
      $
      (396,784)$
      -
      $
      (6,828)
      $
      (396,784)Net Loss per
        Share - Basic and Diluted - U.S. Basis
      $
      (0.38)
      $
      (0.08)
      $
      (0.12)




ii)

A
reconciliation of certain balance sheet accounts from Canadian presentation to
U.S. presentation is as follows:



2004
      2003
      2002Deficit
        - Canadian Basis
      $
      (13,625,972)
      $
      (10,634,534)
      $
      (9,187,605)Write-down
        of investments
      
      399,999
      
      399,999
      
      399,999Write-off
        of mineral property costs - current
      
      (9,231,129)
      
      (751,092)
      
      (1,264,479)Write-off of
        mineral property costs - prior years
      
      (7,009,943)
      
      (6,258,851)
      
      (4,994,372)Stock
        compensation expense on common stock options granted to non-employees
      
      (13,924)
      
      (13,924)
      
      (13,924)Deficit - U.S.
        Basis
      $
      (29,480,969)
      $
      (17,258,402)
      $
      (15,060,381)




2004
      2003
      2002Share
        Capital- Canadian Basis
      $
      28,340,361
      $
      18,661,532
      $
      17,894,782Stock
        compensation expense on common stock options granted to non-employees
      
      13,924
      
      13,924
      
      13,924Share Capital -
        U.S. Basis
      $
      28,354,285
      $
      18,675,456
      $
      17,908,706










---



|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









18.

Differences
Between United States and Canadian GAAP- Continued



c)

Disclosure
Reconciliation



A
reconciliation of certain of the disclosure items from Canadian presentation to
U.S. presentation is a follows:



Prior
to the year ended 31 August 2003, under Canadian GAAP, the Company was not
required to disclose the pro forma effect of employee stock option-based
compensation in the notes to the financial statements.  Under U.S. GAAP,
SFAS No. 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans.  The statement encourages all
entities to adopt a fair value based method of accounting, but allows an entity
to continue to measure compensation cost for those plans using the intrinsic
value based method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees".  The company adopted only the disclosure
provisions of SFAS No. 123 as follows:



2002Net LossAs
        reported - U.S. Basis
      
      
      $
      2,791,524Compensation
        expense on common stock options granted to employees
      
      
      
      556,958Pro forma
      
      
      $
      3,348,482Net LossAs
        reported - U.S. Basis
      
      
      $
      0.12Pro forma
      
      
      $
      0.15




The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:



2002Expected dividend yield
      
      
      
      0.00%Expected stock price volatility
      
      
      
      61.0%Risk-free interest rate
      
      
      
    
    4.08%Expected Life of options
    
    
    
    5 years




The
weighted average grant-date fair value of employee options granted in 2002 was
$0.56 respectively.



Option
pricing models require the input of highly subjective assumptions including the
expected price volatility.  Changes in the subjective input assumptions can
materially affect the fair value estimate, and therefore the existing models do
not necessarily provide a reliable single measure of the fair value of the
company's stock options.



Commencing
on 1 September 2003, the Company adopted the new recommendations of CICA HB
3870, which mirrors, in all material respects, SFAS No. 123, therefore the
Canadian GAAP treatment is now consistent with United States GAAP.





---



|Crystal Graphite Corporation
      (An
      Exploration Stage Company) | 
|----------------------------------------------------------------------- | 
|Notes
      to Consolidated Financial Statements                       
|31 August 2004
      and 2003                                           | 
|Canadian Funds                                                          | 









18.

Differences
Between United States and Canadian GAAP- Continued



d)

Recently Adopted
United States Accounting Standards



In
December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure".  SFAS 148 amends SFAS No. 123, to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS 148 is effective for fiscal years beginning after 15 December
2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after 15 December
2002.  The Company adopted SFAS No. 148, as required, with no material
impact on its financial statements.



Recent
accounting pronouncements that are listed below did and/or are not currently
expected to have a material effect on the Company's financial statements.



FASB
Statements:



In
April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections";



In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities";



On
30 April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities";



In
May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity";



In
November 2004, the FASB issued SFAS 151, "Inventory Costs";



In
December 2004, the FASB issued SFAS 152, "Accounting for Real Estate
Time-Sharing Transactions";



In
December 2004, the FASB issued SFAS 123, "Share-Based Payment".



FASB
Interpretations:



In
January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51".







---

109





SIGNATURES





The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.





ON BEHALF OF THE COMPANY, CRYSTAL GRAPHITE CORPORATION



Per:







/s/ Gordon Sales

Gordon Sales

President, CEO and a Director

Authorized Signatory*





Date:  June 3, 2005





*

Print the name and title of the signing officer under the signature.

__________



---

110





EXHIBIT INDEX





Exhibit #Description of ExhibitPage No.31.1Certification of Disclosure in Crystal Graphite Corporations Annual Report by Gordon Sales.31.2Certification of Disclosure in Crystal Graphite Corporations Annual Report by Bernie Zacharias.32.1Certification of Gordon Sales pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2Certification of Bernie Zacharias pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.






---

111







EXHIBIT 31.1







This is an Exhibit to the Form 20-F of Crystal Graphite Corporation





Attached find the following materials:





Certification of Disclosure in Crystal Graphite Corporations Annual Report by Gordon Sales





End of Exhibit 31.1







---

112





Certification of Disclosure in

Crystal Graphite Corporations Annual Report



I, Gordon Sales, certify that:



1.

I have reviewed and read this annual report on Form 20-F of Crystal Graphite Corporation;



2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;



3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;



4.

The companys other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:



(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



(b)

evaluated the effectiveness of the companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



(c)

disclosed in this report any change in the companys internal control over financial reporting that occurred during the period covered y the annual report that has materially affected, or is reasonable likely to materially affect, the companys internal control over financial reporting; and



5.

The companys other certifying officer and I have disclosed, based on our most recent evaluations of internal control over financial reporting, to the companys auditors and the audit committee of the companys board of directors (or persons performing the equivalent functions):





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(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the companys ability to record, process, summarize and report financial information; and



(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the companys internal control over financial reporting.





Dated: June 3, 2005

/s/ Gordon Sales



Gordon Sales, President, CEO and Director.





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EXHIBIT 31.2







This is an Exhibit to the Form 20-F of Crystal Graphite Corporation.





Attached find the following materials:





Certification of Disclosure in Crystal Graphite Corporations Annual Report by Bernie Zacharias





End of Exhibit 31.2







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115





Certification of Disclosure in

Crystal Graphite Corporations Annual Report



I, Bernie Zacharias, certify that:



1.

I have reviewed and read this annual report on Form 20-F of Crystal Graphite Corporation;



2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;



3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;



4.

The companys other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:



(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



(b)

evaluated the effectiveness of the companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



(d)

disclosed in this report any change in the companys internal control over financial reporting that occurred during the period covered y the annual report that has materially affected, or is reasonable likely to materially affect, the companys internal control over financial reporting; and



5.

The companys other certifying officer and I have disclosed, based on our most recent evaluations of internal control over financial reporting, to the companys auditors and the audit committee of the companys board of directors (or persons performing the equivalent functions):





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116





(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the companys ability to record, process, summarize and report financial information; and



(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the companys internal control over financial reporting.





Dated: June 3, 2005

/s/ Bernie Zacharias



Bernie Zacharias, Chief Financial Officer (Principal Accounting Officer)





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EXHIBIT 32.1







This is an Exhibit to the Form 20-F of Crystal Graphite Corporation





Attached find the following materials:





Certification of Gordon Sales pursuant to Section 906

of the Sarbanes-Oxley Act of 2002





End of Exhibit 32.1







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118





CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the Annual Report on Form 20-F for fiscal year ended August 31, 2004 of Crystal Graphite Corporation, a British Columbia, Canada corporation (the Company), as filed with the Securities and Exchange Commission on the date hereof (the Annual Report), I, Gordon Sales, President and Chief Executive Officer of the Company certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:



1.

The Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and



2.

The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.





Dated: June 3, 2005

/s/ Gordon Sales



Gordon Sales, President, CEO and Director





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119





EXHIBIT 32.2







This is an Exhibit to the Form 20-F of Crystal Graphite Corporation





Attached find the following materials:





Certification of Bernie Zacharias pursuant to Section 906

of the Sarbanes-Oxley Act of 2002





End of Exhibit 32.2









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120





CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the Annual Report on Form 20-F for fiscal year ended August 31, 2004 of Crystal Graphite Corporation, a British Columbia, Canada corporation (the Company), as filed with the Securities and Exchange Commission on the date hereof (the Annual Report), I, Bernie Zacharias, Chief Financial Officer of the Company certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:



1.

The Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and



2.

The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.





Dated: June 3, 2005

/s/ Bernie Zacharias



Bernie Zacharias, Chief Financial Officer (Principal Accounting Officer)