---



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.



24,344,718 common shares (as at the financial year ended August 31, 2003)



26,164,395 common shares (as at January 31, 2004)



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





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

11

Cash Resources and Liquidity

12

Stated Business Objectives

12

Principal Products

23

Administration

26

Environmental Regulation

27

C.

Organizational Structure

28

D.

Property, Plants and Equipment

28

Office Space

28

Mineral Property

28

Plants

29

Equipment

30



ITEM 5  OPERATING AND FINANCIAL REVIEW AND PROSPECTS

30

A.

U.S. and Canadian GAAP differences

30

B.

The Company

30



ITEM 6  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

37

A.

Directors and Senior Management

37

Aggregate Ownership of Securities

40

Other Reporting Issuers

40

Individual Bankruptcies

41

Conflicts of Interest

41

Other Information

41

---

ii

Item

Page No.





B.

Compensation

42

The Companys Executive Compensation

42

Compensation of the Companys Directors

45

C.

Board Practices

45

The Company

46

D.

Employees

47

E.

Share Ownership

47

Directors and Officers

47

Public and Insider Ownership

48



ITEM 7  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

48

A.

Major Shareholders

48

B.

Related Party Transactions

49

C.

Interests of Experts and Counsel

49



ITEM 8  FINANCIAL INFORMATION

49

A.

Consolidated Statements and other Financial Information

49

B.

Significant Changes

50



ITEM 9  THE OFFERING AND LISTING

50

A.

Offer and Listing Details

50

B.

Plan of Distribution

51

C.

Markets

51

D.

Selling Shareholders

51

E.

Dilution

51

F.

Expenses of the Issue

51



ITEM 10  ADDITIONAL INFORMATION

52

A.

Share Capital

52

B.

Memorandum and Articles of Association

52

Disclosure of Interest of Directors or Officers

52

Shareholdings of Directors

52

Rights, Preferences and Restrictions attaching to each class of

shares

52

Changing the Rights of Holders of the Companys Stock

53

Annual General Meetings and Extraordinary General Meetings

53

Annual General Meeting

53

Notice

53

Quorum

53

Limitations on the rights to own securities

54

C.

Material Contracts

54

D.

Exchange Controls

54

E.

Taxation

56

F.

Dividends and Paying Agents

57

G.

Statement by Experts

57

H.

Documents on Display

57

I.

Subsidiary Information

57

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iii



Item

Page No.





ITEM 11  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT

MARKET RISK

57



ITEM 12  DESCRIPTION OF SECURITIES OTHER THAN EQUITY

SECURITIES

58

A.

Debt Securities

58

B.

Warrants and Rights

58

C.

Other Securities

58

D.

American Depositary Shares

58



PART II

58



ITEM 13  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

58



ITEM 14  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY

HOLDERS AND USE OF PROCEEDS

58



ITEM 17  FINANCIAL STATEMENTS

58



ITEM 18  FINANCIAL STATEMENTS

59



ITEM 19  EXHIBITS

59

(A)

Financial Statements

59

(B)

Exhibits

60



SIGNATURES

86



EXHIBIT INDEX

87

__________

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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. 31/03Year Ended
Aug. 31/02Year Ended
Aug. 31/01Year Ended
Aug. 31/00Year Ended
Aug. 31/99Net Sales$-$ -$ -$ -$ -Net Loss from Continuing OperationsCanadian GAAP$ (1,446,929)$ (1,913,120)$ (2,379,069)$ (273,947)$ (390,509)US GAAP$ (2,196,912)$ (2,791,524)$ (4,655,285)$ (722,375)$ (631,324)Net Loss from Continuing Operations per ShareCanadian GAAP(1)$ (0.06)$ (0.09)$ (0.11)$ (0.03)$ (0.06)US GAAP$ (0.08)$ (0.12)$ (0.21)$ (0.10)$ (0.10)Total AssetsCanadian GAAP$ 8,700,127$ 8,862,973$ 11,056,070$ 12,491,178$ 2,870,500US GAAP$ 1,691,293$ 2,604,122$ 6,061,698$ 9,773,022$ 600,772Long Term ObligationsConvertible Debentures
Current$ 68,333$ -$ -$ 31,641$ 506,688Weighted Average Common Shares OutstandingCanadian GAAP22,839,09822,354,71421,895,9087,323,2776,056,144US GAAP22,839,09822,354,71421,895,9087,323,2776,056,144






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, 1999 to August 31, 2003, 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

20032002200120001999High.7492.6619.6783.6969.6891Low.6272.6200.6333.6629.6428Average.6770.6354.6537.6805.6643End of Period.7220.6416.6461.6793.6682




---



4





February 20, 2004January 2004Dec. 2003Nov. 2003Oct. 2003Sept.
2003August 2003High.7880.7738.7708.7667.7424.7228Low.7946.7460.7484.7418.7207.7092.7439






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 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.  Graphite 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 the stability of exchange rates, among other factors, can cause significant fluctuations in graphite 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.



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7



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 in primarily in Canadian dollars and secondly in U.S. dollars.

Tax



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



Lack of Mineral Exchange for Graphite



Industrial minerals such as graphite, 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.  Companies selling graphite 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.  Due to the lack of available high purity graphite, prices currently are high.  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.





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8



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.



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





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9

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 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.





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





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10

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 from 25,000,000 to 250,000,000.  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.



Property Option Agreements



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.



On May 31, 1999, the Company entered into an option agreement with BCRL to acquire the remaining 50% interest in the Black Crystal Property in consideration of the issuance of 3,000,000 shares of the Company to BCRL.  In addition, the terms of the option agreement required the Company to expend $250,000 USD per year on the Black





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11

Crystal Property, the failure of which may result in the termination of the option agreement.  The Company failed to raise the necessary financing to comply with the expenditure requirements, and therefore, the option agreement was terminated.  The 3,000,000 shares of the Company were never issued to BCRL due to the termination of the option agreement.



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.  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.





Legal Proceedings and Stand-Still Arrangement



On or around August 14, 2001, the Company and fifteen other persons and corporations, including KAK Investments, Inc. (KAK), the major shareholder of the Company, were named as defendants in a lawsuit by R. W. Cuthill, Jr., the trustee (the Trustee) in bankruptcy for Evergreen Security Ltd. situate in Orlando, Florida.  The Trustee was attempting to seek from the defendants the return of the value of funds or assets, some of which is claimed to be KAKs equity investment in the Company of approximately $9,500,000 CDN, under the theory that transfers allegedly made, or indirectly made, to the defendants from Evergreen Security Ltd. may be recoverable under U.S. bankruptcy law if made within certain time frames and under certain circumstances prior to the bankruptcy.  The Company engaged U.S. counsel to advise the Company.



Subsequently, on November 23, 2001, the Company negotiated a stand-still agreement (the Stand-Still Agreement) with the Trustee, which had been seeking an order in Florida in respect to claims against the Companys largest shareholder, KAK, and in that respect had been seeking an injunction in respect to the funds received by the Company from KAK.  As a consequence of the Stand-Still Agreement, the motion for injunction in respect to the Company had been withdrawn.  By settlement agreement made between the Trustee and representatives of KAK, dated August 26, 2002, and approved by order of the U.S. Bankruptcy Court on November 4, 2002, the Trustee became the legal and beneficial owner of the KAK shares, and the Trustee thereby has full legal right as holder of the KAK shares.



Pursuant to satisfactory results of the Standstill Agreement and as a consequence of the Trustee acquiring the KAK shareholdings, the Company and the Trustee were able to effect and execute a settlement agreement effective November 7, 2002.   The Trustee filed the settlement agreement for approval with the Bankruptcy Court on November 19,





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12

2002.  Upon the approval of the Bankruptcy Court the settlement agreement is final and effective for all purposes and the lawsuit is fully discharged in respect to the Company.



B.

Business Overview



The Company is an industrial mineral exploration and development company based in Vancouver, British Columbia, Canada.  From 1994 to present, the Company has been principally engaged in the exploration and development for production of mineral properties.  The Company has a 100% interest in one property, the Black Crystal Property, located near the City of Nelson in southeastern British Columbia.  The Companys main focus is exploring and mining this graphite property and implementing plant operations on the Black Crystal Property.



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.



Cash Resources and Liquidity



As of November 30, 2003, the Company had approximately $104,396 in cash and term deposits and a positive working capital position of approximately $875,000.



Stated Business Objectives



The overall strategic mission of the Company is to establish a low cost high performance operating company processing economically high purity flake graphite products for the international markets from its Black Crystal deposit located near Nelson, British Columbia.  High health, safety and the environmental performances are priority followed by quality control and productivity while focusing on the potential in byproducts and added value.  The accomplishments to date have resulted in our company being a contributor to the economic base of the Kootenay District of the Province of British Columbia, which in turn increases shareholder value.



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





Exploration Objectives



The objective is to continue to further concentrate exploration for an economic deposit of flake graphite on the Molly 1 through 4 claims of the Black Crystal deposit and to understand the regional geology so that other potential deposits can be understood.  The Molly 1  4 claims contain graphite enriched weathered sandy material of varying thickness which overlay a graphite host rock calc-silicate zone.  With use of independent

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13

geological consultants for guidance, an extensive exploration program, which has been in progress since October 2000, may result in increasing the measured and indicated classification tonnage of the resource.  The increased measured resource, once determined, would allow a quarry plan to be finalized, which may result in the development of the proven reserves.  The plan objective is to delineate a strategy of a payback period plus a minimum of two years accompanied by probable and possible reserves.



Since flake graphite deposits worldwide tend to be regional, extensive exploration is planned annually to identify the regional structure, and grade and size distribution.  To date, the extent of the regional graphitic structure is estimated at 25 kilometres x 10 kilometres.



Marketing Objectives



The Company engaged a global marketing consultant to ascertain the future market direction and potential for the graphite, which will be produced.  The Company has determined that the deposit consists of high purity crystalline flake graphite, therefore the marketing strategy has been to determine the market for high purity crystalline flakegraphite.



The Company continues to retain an Industrial Mineral marketing firm to identify and contact potential customers to assist the Company in the marketing of the Companys product.



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.



Testing of the Companys high purity flake graphite in the bi-polar plate sector has been conducted since January 2001, with favourable results to date.  Since May of 2001, the Company has entered into an agreement to supply the graphite requirements to a manufacturer of bi-polar plates.  Many variable sized samples have been shipped to potential customers, along with actual minor revenue shipments.



Description of the Business



General



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.  The Company believes that with a US$0.6 million capital expenditure plus an additional US$0.4 million operating capital it can achieve a potential processing feed capacity of approximately 90,000 tonnes of graphitic feed material per





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year. With a further US$1.0 million the Company believes it can expand the plants capacity to 250,000 feed tonnes per year.



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 96.0% 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 with quotes ranging from  its the best product that we have looked at yet to it holds its conductivity test better than anything weve seen and with no hydrogen leakage.



The processing plant requires phased development to increase the feed material to meet projected market demands.  The table below gives the material feed required, capital cost and timeline for the Phased Production Program:



Phased Production Program



PhaseRaw Material FeedCapex Cost($Cdn)Planned Completion DatePhase I4,100 tonnes$97,000Dec2003 (done)Phase II25,000 tonnes$776,388Oct2004Phase III (a)50,000 tonnes$0Aug2006Phase III (b)90,000 tonnes$0Aug2007Phase IV180,000 tonnes$1,000,000Aug2008Phase V250,000 tonnes$300,000Aug2009




Note:  Phase I to II require an additional Cdn$603,296 operating capital.



At a design capacity of 250,000 plant feed tonnes per year, the plant has 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) generating up to Cdn$16.45 million per year in revenue; assuming an average market price of US$1935 per tonne (US$0.88 per pound) for the course and fine graphite products, and an exchange rate of 1.33 $Cdn to 1.00 US$.

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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 for study purposes during 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.



Mining



The Black Crystal Project 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 and the Company estimates, from experience, mining costs of approximately $13.00 per tonne of graphitic material extracted.  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.





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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.



Processing



The processing plant at the Black Crystal Project 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 conservatively forecasts process plant recoveries of 75% in the first year of operations gradually increasing to 90% in later years.



The Companys processing system is perhaps the most advanced of its kind in the graphite industry.  It is the only company that has achieved graphitic carbon grades as high as 99.5% without using expensive and dangerous chemicals such as hydrofluoric acid and sodium hydroxide.  The Company has easily 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.



Project Economics



With excellent access to transportation and low hydropower costs, the Black Crystal Project is expected to be a low-cost producer.  The Company is projecting site operating costs of approximately $21.00 per tonne of graphitic material processed based on annual processing input of 250,000 tonnes.



The Company estimates that revenue from graphite sales for planning purposes average approximately US$1935 per tonne of graphite produced in the first year and remain at the level over time.  Using this price, the in-situ value per tonne of graphitic material at the Black Crystal Project is approximately Cdn$81 per tonne of graphitic material after taking grade (concentration) and shrinkage into account. Based on preliminary estimates, the projected unit operating costs of Cdn$32 per tonne is





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substantially lower than the gross per tonne in-situ value of graphite material for a net gain of Cdn$49/tonne.



The breakeven production rate is estimated at 3.0 tonnes of total product per 12-shift at an average price of US$1935 per tonne (US$0.88 per pound).



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-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



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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 an excellent 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 Black Crystal Graphite Project 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



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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 exercised due diligence and 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.

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.



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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.





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



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

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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.

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.



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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.



Principal Products



The Company's material 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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[main002.jpg]

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.



Market research indicates that this product should gross in the area of $1,400 to $2,700 USD per tonne (the Company has sold graphite as high as $2,500 USD per tonne to date).  Total production cost is estimated to be in the order of $800 USD per tonne for a potential profit of + $1000 USD per tonne of graphite. The selling price could be higher if current trends continue and higher still if the graphite is manufactured locally into simple end products such as graphite salt or thin graphite sheets, both of which have extensive end uses.  The Company anticipates that the plant will be easily expandable in the future for the Black Crystal Propertys deposit, thereby giving this project positive market appeal.  Plant capacity could have an upper limitation of 500,000 tonnes of feed





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per year because of winter weather and road traffic congestions.  A recent graphite discovery adjacent to the processing plant may have the possibility of increasing this production level if proven economic.



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.



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.



Administration



During the period September of 2002 to August of 2003 the average monthly administration costs are approximately $110,089 and the total administration costs were $1,321,068.



The average monthly administration costs were as follows:



CategoryMonthly Cost
(Approximate)Wages, benefits and subcontractors:$30,330Legal$4,594Marketing:$38,168Travel:$6,332Shareholder Information and Investor Relations:$13,808Audit and accounting:$3,725General and Administrative:$5,422Occupancy costs:$4,956Transfer Agent fees:$724Amortization:$558Advertising and promotion:$196Listing and filing fees:$643Automobiles:$493Consulting fees:$140Total:$110,089




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Variations in the administration costs are mainly due to increases in wages and benefits, professional fees (legal and auditing), shareholder communication and regulatory compliance.



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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C.

Organizational Structure



The Company does not own any subsidiaries and is not part of a group.





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.



Mineral Property



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 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 - 63716714POST20500






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PLANT #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 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.



Plants



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.



The infrastructure in-place was inadequate at the end of August 2000.  As of August 31, 2003, all infrastructure is operational which includes:



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30



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.



Equipment



The Companys mobile fleet includes:

1 - Caterpillar 235C excavator

1 - Caterpillar 980 front end loader

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 14 to the audited financial statements of the Company for the years ended August 31, 2003 and 2002.



B.

The Company



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





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31



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 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





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32

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



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33

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 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.

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34



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 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.



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35



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.



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.



Year ended August 31, 2001 compared with the year ended August 31, 2000



Liquidity and Capital Resources



Cash decreased by $5,302,253 in fiscal 2001 and resulted in a balance of $3,939,588 at August 31, 2001, as compared to $9,241,841 in fiscal 2000.



Financing activities in fiscal 2001 raised $576,793 through the exercise of share purchase warrants and stock incentive options.  This compares to financing activities in 2000 of $10,473,284 which consisted of $9,552,598 from the major transaction with KAK Investments Inc. and $920,686 from the exercise of stock options, exercise of



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36

warrants and debt settlement inclusive.  During fiscal 2001, the remaining portion of the debenture, including interest was paid in full of $31,641.



Investing activities in fiscal 2001 required $5,220,702 as compared to $459,412 in fiscal 2000.  The investing activities in fiscal 2001 included $100,000 as a part of the property purchase agreement for the Black Crystal Project and $1,086,822 for capital assets such as the pilot plant and associated machinery.



The Companys capital budget for fiscal 2002 is $641,158.





Results of Operations



The Company incurred a net loss of $2,379,069 for the year ended August 31, 2001, as compared to a net loss of $273,947 for the year ended August 31, 2000.  This increased loss was a result of the development of the Black Crystal Project and the cost incurred in the investigation of resources based opportunities, for a total $1,836,777.  Pilot plant testing began in August 2001 and no operating revenue was recorded as the Black Crystal Project is in the pre-production and development phase of work.  Interest income in fiscal 2001 was $325,868 compared to an interest expense of $6,723 in fiscal 2000.  The increase is due to a higher cash balance.  The Company's administrative expenses were $704,902 in fiscal 2001 as compared to $145,897 in fiscal 1999.  The increase is a result of the Company's activities at the Black Crystal Project which required additional supervision and associated market research.



In fiscal 2001, the Company spent $2,276,216 at the Black Crystal Project.  This compares with $448,428 that was spent in fiscal 2000.  At the beneficiation plant and quarry operation, expenditures of $1,482,479 were made in fiscal 2001.  In fiscal 2000, no significant expenditures were made towards the capital assets of the Company.  Exploration expenditures consisting of 2,744 metres of drilling and 176 excavated trenches at the Black Crystal Project in fiscal 2001 were $419,881.  General exploration expenses which included prospecting and additional claim staking to cover extensions of the mineralized horizon to the south of the Black Crystal Project were $288,209 in fiscal 2001.  Exploration expenditures at the Black Crystal Project in fiscal 2000 were $91,178 and the increase in fiscal 2001 over that from the previous year is a reflection of the systematic program designed to increase the confidence level of the project resources as well as evaluate other prospective graphite occurrences on the Company's land holdings. All of the mineral claims owned by the Company are in the Black Crystal Project area and in aggregate, total 4,560 hectares.



Research and Development, Patents and Licenses, etc.



For the year ended August 31, 2001 and up to June 30, 2002 collectively, the Company did not incur any expenditures relating to either patent and/or license development or filings.



Trend Information



The continuing operations of the Company are dependent upon its ability to continue to raise adequate financing and to commence profitable operations in the future.

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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:



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, 1998876,658Richard 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, 1996731,387






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38



Barrett Sleeman
Vancouver, British Columbia, Canada

Director of the CompanySelf-Employed Professional EngineerMarch 18, 1999146,000Edward J. Nunn
Nelson, British
Columbia, Canada

Chief Operating
OfficerProfessional Mining
EngineerGeneral Manager
July 1, 2000


Vice President Operations September 30, 200344,975John H.P. Geisler
Vancouver, British Columbia

Vice President  Corporate DevelopmentSussex InsuranceVice President of Corporate Development
September 30, 200335,300Bernie Zacharias
Langley, British Columbia

Chief Financial OfficerChartered Accountant
Tonelli & AssociatesJanuary 13, 2004NilLana Bea Turner
Vancouver, British Columbia, Canada

Secretary and Chief Financial OfficerAccounting

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




|Notes: |                                         
|------ | ----------------------------------------
|(1)    | These figures are as of January 31, 2004



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39



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



- Mr. Gordon Sales(age 65) 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. Geoffrey R. Caine(age 81) is a Director of the Company.   Mr. Caine was involved in the lumber industry for 50 years and retired in 1997.
- Mr. Barrett Sleeman(age 62) is a Director of the Company.  Mr. Sleeman is a self-employed Professional Engineer who has been involved in numerous public companies and projects that were located in Asia globally.
- Mr. Richard Ivy(age 55) is a Director of the Company since July 4, 2001.  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. Edward J. Nunn (age 56) is the Chief Operating Officer of the Company.  Mr. Nunn was appointed 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. John H.P. Geisler (age 53) is Vice President of Corporate Development of the Company.  Mr. Geisler, who was appointed on September 30, 2003, has an extensive background in the financial services industry and is responsible for corporate marketing functions, including all aspects of strategic planning, acquisitions, and working with the financial community.
- Mr. Bernie Zachariasis Chief Financial Officer of the Company and was appointed on January 13, 2004.  He is also Vice President of Tonelli & Associates 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 48) is the Secretary and CFO of the Company.   Ms. Turner was appointed Secretary of the Company on March 3, 2000 and appointed Chief Financial Officer of the Company on July 19, 2002, devoting 100% of her time to the business of the Company.  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

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40

accountant and did corporate filings for several reporting companies over the past twenty years.



Aggregate Ownership of Securities



There are presently an aggregate of 1,834,320 common shares of the Company owned by all of the Directors, Officers and promoters of the Company representing 7.01% 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.Barrett SleemanCurrently, Director of Able Auctions and Dexpon Technologies
Served as President & a Director of Java Corporation until April of 1999Richard IvyNilJohn H.P. GeislerNilBernie ZachariasNilEdward NunnNil




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41



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.



Mr James Conroy, was named individually, along with fifteen other individuals and corporations, which includes the Company, KAK Investments, Inc. and Kristyn B. Zylka, the beneficial owner of KAK Investments, Inc., as defendants in a lawsuit by the trustee in bankruptcy for Evergreen Security Ltd. Situate in Orlando, Florida.  See Item 4 Legal Proceedings and Stand-Still Arrangement for more detailed information.





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 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%Geoffrey R. Caine5%Barrett Sleeman5%Richard Ivy25%




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42



Lana Bea Turner100%John H.P. Geisler100%Bernie Zacharias25%Edward Nunn100%






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 three Executive Offices, namely that of President, Secretary, and CEO.  In this 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.



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.



John H.P. Geisler Mr. Geisler was appointed the Vice President  Corporate Development of the Company on September 30, 2003.



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

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43

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, 2003:





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 Director2003
2002
2001118,000
132,000
22,000Nil
Nil
NilNil
Nil
Nil900,000
200,000
NilNil
Nil
NilLana Bea Turner
Secretary and CFO2003
2002
200149,920
49,920
48,320Nil
500
NilNil
Nil
Nil100,000
20,000
50,000Nil
Nil
NilEdward Nunn
Vice President  Operations (2)2003
2002
2001118,000
88,000
108,000Nil
Nil
16,200Nil
Nil
Nil200,000
100,000
100,000Nil
Nil
NilJohn H.P. Geisler
Vice President  Corporate Development (3)200345,000NilNil400,000Nil




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. Edward Nunn was appointed as the Vice President - Operations on September 30, 2003.(3)Mr. John H.P. Geisler was appointed as the Vice President  Corporate Development on September 30, 2003.




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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, 2004, the Company had granted the following options to purchase common stock of the Company as follows:





Name of OptioneePositionNumber
Of
Optioned
SharesExercise
PriceDate
GrantedExpiry
DateGordon J. SalesOff/Dir400,000CDN$0.68Oct 29/01Oct 29/06Gordon J. SalesOff/Dir900,000US$0.20Sep30/03Sep18/08Lana Bea TurnerOfficer90,000CDN$0.68Oct 29/01Oct 29/06Lana Bea TurnerOfficer100,000US$0.20Sep30/03Sep18/08Geoffrey CaineDirector100,000CDN$0.68Oct 29/01Oct 29/06Geoffrey CaineDirector200,000US$0.20Sep30/03Sep18/08Ernest Resources LtdDirector100,000CDN$0.68Oct 29/01Oct 29/06Ernest Resources LtdDirector100,000US$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. NunnOfficer200,000CDN$0.68Oct 29/01Oct 29/06Edward J. NunnOfficer300,000US$0.20Sep30/03Sep18/08Paul BoucherConsultant25,000CDN$0.68Oct 29/01Oct 29/06Paul BoucherConsultant25,000CDN$0.81Oct 29/01May30/03


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45



Aaron ZukowskiEmployee50,000CDN$0.68Oct 29/01Oct 29/06Vic LearmonthEmployee50,000CDN$0.68Oct 29/01Oct 29/06Vic LearmonthEmployee200,000US$0.20Sep30/03Sep18/08Sheila StreetEmployee50,000CDN$0.68Oct 29/01Oct 29/06Diana W. MortonEmployee50,000CDN$0.68Oct 29/01Oct 29/06John GeislerEmployee400,000US$0.20Sep30/03Sep18/08Pro Matrix Cap.Consultant305,000US$0.20Sep30/03Sep18/04




Notes:

(1)

Ernest Resources Ltd. is controlled by Mr. Barrett Sleeman, a Director of the Company.



A total of 4,045,000 shares are issuable pursuant to stock options.



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;



(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.

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46



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



A.

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 Sales:President, CEO and a Director appointed on December 9, 2000 as President and October 18, 1998 as Director.Geoffrey R. Caine:Director appointed on January 18, 1996.Barrett Sleeman:Director appointed on March 1999.Richard IvyDirector appointed on July 4, 2001.Edward J. NunnVice President  Operations appointed on September 30, 2003John H.P. GeislerVice President  Corporate Development 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






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.

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47



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





B.

Employees



The Company has the following five full-time employees as of August 31, 2002:



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. 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 the Companys Vice President of Corporate Development 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, Principal Financial Officer, Bookkeeper, Corporate Filing and receptionist services to the Company.



Mr. Victor B. Learmonth, is the Surface Superintendent who is responsible as the front-line supervision to the labourers and contractors.



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.



C.

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 Director876,658Geoffrey R. CaineDirector731,387






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Barrett SleemanDirector146,000Richard IvyDirectorNilLana Bea TurnerSecretaryNilJohn H.P. GeislerVice President  Corporate Development35,300Bernie ZachariasCFONilEdward NunnGeneral Manager
Vice President  Operations44,975




Note:

|(1) | These figures are as of January 31, 2004.
|--- | -----------------------------------------



As a group the Directors and Executive Officers of the Company hold 1,834,320 common shares; which is 7.01% of the total amount of issued and outstanding common shares of the Company (see the section captioned Options hereinbelow for a detailed description of any and all Options held by the Directors and Executive Officers in and to the Company.)





Public and Insider Ownership



The Directors, Officers and insiders of the Company hold an aggregate of 13,199,861 common shares of the Company on a non-fully diluted basis, being 50.45% of the then issued and outstanding common shares of the Company, as opposed to the public owning an aggregate of 26,164,243 common shares of the Company, or 49.55% of the then issued and outstanding common shares of the Company, assuming that no 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, 2003 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:





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49



MemberNumber of Common SharesPercentage of CommonSharesCDS & Co.(1)7,208,823(2)27.56%KAK Investments Inc. (2)(3)11,365,54143.44%




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.  See Item 4 Legal Proceedings and Stand-Still Arrangement for more detailed information.



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 except for KAK Investments, Inc., which owns 43.44% of the Company.  However, as of November 4, 2002, the U.S. Bankruptcy Court ordered that the trustee for Evergreen Securities Ltd. situated in Orlando, Florida, is the legal and beneficial owner of the shares of the Company held in the name of KAK Investments, Inc.



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.

A.

Related Party Transactions



None of the current Directors or Officers of the Company nor any associate or affiliate of the foregoing persons, has any material interest, direct or indirect, in any transactions of the Company or in any proposed transaction which, in either case, has or will materially affect the Company.



B.

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, 2003, and 2002 form a material part of this Annual Report.  See Item 19 hereinbelow.





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50



B.

Significant Changes



There have not been any significant changes in the Company since the date of the most recent interim financial statements other than those disclosed in this Annual Report.



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 Low2003(1)0.70 USD0.14 USD2002(2)Not AvailableNot Available2001$1.70$0.852000$1.85$0.251999$0.90$0.251998$1.75$0.30




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.


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, 2003(1)$0.50 USD$0.15 USDMay 31, 2003(1)$0.70 USD$0.20 USDFeb. 28, 2003Not AvailableNot AvailableNov. 30, 2002Not AvailableNot AvailableAug. 31, 2002(2)Not AvailableNot AvailableMay 31, 2002(2)Not AvailableNot AvailableFeb. 28, 2002(2)Not AvailableNot AvailableNov. 30, 2001(2)Not AvailableNot AvailableAug. 31, 2001$1.55$0.85May 31, 2001$1.35$0.96Feb. 28, 2001$1.45$0.89Nov. 30, 2000Not AvailableNot Available






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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.




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.



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.

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52





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.



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.

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53



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 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:

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54



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.

The Stand-Still Agreement between the Company and the Trustee for Evergreen Securities Ltd., dated November 23, 2001, whereby subject to the Company Board of Directors and regulators approval, the Company will appoint a nominee of the Trustee to the Board of Directors of the Company and negotiate an agreement providing for an option or right of first refusal to the Trustee permitting the Trustee to elect to purchase a pro rata portion of any future issuances of shares to permit the Trustee to elect to maintain the majority shareholding through the KAK Investments, Inc. stock.



2.

The Settlement Agreement between R. W. Cuthill, Jr., as Chapter 11 Trustee of the bankruptcy estate of Evergreen Security, Ltd. (the Trustee), and the Company, dated November 7, 2002, whereby the Trustee is entitled to retain the Evergreen Security, Ltd. ownership percentage as it exists from time to time by virtue of the Trustee having the right to purchase sufficient additional common shares or other voting shares in the capital of the Company from time to time upon the Company issuing additional common shares of securities convertible into common shares or other voting shares in the capital of the Company or taking any other step which might dilute the shareholding of Evergreen Security, Ltd. below the current ownership percentage.



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).

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55



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.



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

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56

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 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.

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57



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.



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



The Company does not have any subsidiaries.





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.



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58

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.



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 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.  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 financial statements.

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59



(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 discount from market at the date the option is granted.



(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, 2003 and 2002, the statements of shareholders equity, loss and cash flows for the three years ended August 31, 2003, 2002 and 2001 and cumulative from date of reorganization (August 31, 1994) to August 31, 2003, are attached hereto and form a material part of this Annual Report.



ITEM 18  FINANCIAL STATEMENTS



Not applicable.



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 financial statements for the period ended August 31, 2003 dated December 5, 2003.



2.

Balance Sheet for the Company dated August 31, 2003.



3.

Statement of Shareholders Equity for the Company for the years ended August 31, 2003, 2002 and 2001.



4.

Statement of Loss for the Company for the years ended August 31, 2003, 2002 and 2001, and cumulative from date of reorganization (August 31, 1994) to August 31, 2002.



5.

Statement of Cash Flows for the Company for the years ended August 31, 2003, 2002, and 2001, and cumulative from date of reorganization (August 31, 1994) to August 31, 2003.



6.

Notes to the Financial Statements for the Company.



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60



B.

Exhibits



This Annual Report contains the following Exhibits respecting the Company:



1.

Additional Exhibits:



(a)

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



(b)

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



(c)

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



(d)

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





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61







CRYSTAL GRAPHITE

CORPORATION



(An Exploration Stage Company)



FINANCIAL STATEMENTS



31 AUGUST 2003

















STALEY, OKADA & PARTNERS



Chartered Accountants







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62

AUDITORS REPORT





To the Shareholders of Crystal Graphite Corporation:



We have audited the balance sheet of Crystal Graphite Corporation (An Exploration Stage Company) as at 31 August 2003 and 2002, the statements of shareholders equity, loss and cash flows for the three years ended 31 August 2003, 2002 and 2001 and cumulative from date of reorganization (31 August 1994) to 31 August 2003.  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 audit.



We conducted our audit in accordance with Canadian generally accepted auditing standards.  Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.



In our opinion, these financial statements present fairly, in all material respects, the financial position of the company as at 31 August 2003 and 2002, the changes in shareholders equity, the results of its operations and its cash flows for the years ended 31 August 2003, 2002 and 2001 and cumulative from date of reorganization (31 August 1994) to 31 August 2003, in accordance with Canadian generally accepted accounting principles.  As required by the Company Act of British Columbia, we report that, in our opinion, these principles have been applied on a basis consistent with that of the preceding year.









Staley, Okada & Partners





|Surrey, B.C.    | STALEY, OKADA & PARTNERS
|--------------- | ------------------------
|5 December 2003 | CHARTERED ACCOUNTANTS   





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Crystal Graphite Corporation
(An Exploration Stage Company)Statement 1Balance SheetAs at 31 AugustCanadian FundsASSETS20032002CurrentCash and term deposits$16,091$171,182GST and other taxes recoverable19,257233,763B.C. Mineral Exploration Tax Credit receivable-323,087Accounts receivable and advances-6,008Prepaid expenses and deposits19,12618,72354,474752,763Investments(Note 4)3,2636,876Mineral Property Costs- Schedule (Note 5)7,008,8346,258,851Capital Assets (Note 6)1,243,5561,454,483Reclamation Bonds(Note 5b)390,000390,000$8,700,127$8,862,973LIABILITIESCurrentCheques issued in excess of funds on deposit$34,974$-Payroll remittance payable90,41313,639Accounts payable and accrued liabilities479,409142,157604,796155,796Convertible Debentures(note 7)68,333-Continued Operations(Note 1)Commitments (Note 10)SHAREHOLDERS EQUITYShare Capital- Statement 2 (Note 8)18,415,63217,894,782Contributed Surplus(Note 8c)245,900-Deficit - Statement 2(10,634,534)(9,187,605)8,027,0388,707,177$8,700,127$8,862,973


ON BEHALF OF THE BOARD:

Gordon Sales, Director

Geoffrey Caine, Director



- See Accompanying Notes -





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64



Crystal Graphite Corporation
(An Exploration Stage Company)Statement 2Statement of Shareholders EquityCanadian Funds




Common SharesNumberAmountContributed
SurplusAccumulated
DeficitTotalBalance - 31 August 200021,351,984$17,317,989$-$(4,895,416)$12,422,573Issuance of shares for:- Exercise of options200,000118,000--118,000- Exercise of warrants802,730458,793--458,793Loss for the year---(2,379,069)(2,379,069)Balance - 31 August 200122,354,71417,894,782-(7,274,485)10,620,297Loss for the year---(1,913,120)(1,913,120)Balance - 31 August 200222,354,71417,894,782-(9,187,605)8,707,177Issuance of shares for:- Exercise of options1,000,000148,250--148,250- Conversion of debentures990,004372,600--372,600Stock compensation equity included in contributed surplus--245,900-245,900Loss for the year---(1,446,929)(1,446,929)Balance - 31 August 200324,344,718$18,415,632$245,900$(10,634,534)$8,027,038










- See Accompanying Notes -



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65



Crystal Graphite Corporation
(An Exploration Stage Company)Statement 3Statement of LossFor the Periods Ended 31 AugustCanadian Funds






Cumulative
From Date of
Reorganization
(31 August 1994)
to 31 August 2003200320022001General and Administrative ExpensesMarketing (Note 8c)$811,016$458,010$163,701$189,305Wages, benefits and subcontractors1,405,403363,957410,687259,612Shareholders information and investor relations428,472165,693122,602107,124Travel358,72475,987136,379120,054General and administrative342,31365,06786,42069,423Occupancy costs237,81859,47760,08854,993Legal fees702,43155,130350,190161,883Accounting and audit fees176,97844,70088,8328,187Transfer agent fees81,7368,69136,85415,850Listing and filing fees89,0357,7226,4566,159Amortization331,0436,6948,5064,516Automobiles62,2975,9124851,262Advertising and promotion21,0692,3446,5072,436Consulting fees119,9141,68440089,330Loss Before the Following(5,168,249)(1,321,068)(1,478,107)(1,090,134)Write-down of investments (Note 4)(485,022)(3,613)(481,409)-Write-off of exploration costs on outside properties and properties abandoned(1,836,777)--(1,836,777)Gain (loss) on sale of capital assets15,271-3,949-Write-off of capital assets(32,633)--(29,335)Finders fee(62,250)(62,250)--Interest on debentures(43,589)(43,589)--Interest and bank charges, net162,251(2,027)52,262325,868Capital tax(36,934)(3,553)(19,028)(14,353)Gain (loss) on foreign exchange195,173(10,829)9,213265,662Loss for the Period$(7,292,759)$(1,446,929)$(1,913,120)$(2,379,069)Loss per Share - Basic and Diluted$0.06$0.09$0.11Weighted Average Number of Shares22,839,09822,354,71421,895,908








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- See Accompanying Notes -

Crystal Graphite Corporation
(An Exploration Stage Company)Statement 4Statement of Cash FlowsFor the Periods Ended 31 AugustCanadian Funds




Cash Resources Provided By (Used In)Cumulative From Date
of Reorganization
(31 August 1994)
to 31 August 2003200320022001Operating ActivitiesLoss for the period$(7,292,759)$(1,446,929)$(1,913,120)$(2,379,069)Items not affecting cashWrite-down of investments485,0223,613481,409-Accrued interest on convertible debenture26,10026,100--Write-off of exploration costs on outside properties and properties abandoned1,836,777--1,836,777Loss (gain) on sale of capital assets(15,271)-(3,949)-Write-off of capital assets32,633--29,335Stock compensation included in marketing fees245,900245,900--Amortization331,0436,6948,5064,516Changes in non-cash working capital527,164957,224(690,071)240,598(3,823,391)(207,398)(2,117,225)(267,843)Investing ActivitiesMineral property costs(7,165,007)(539,099)(1,040,447)(3,992,838)Prepaid deposit---100,000(7,165,007)(539,099)(1,040,447)(3,892,838)Promissory notes receivable(88,285)-(6,645)(81,640)Long-term investments(400,000)--(400,000)Purchase of capital assets(2,984,661)(6,651)(382,323)(1,086,822)Proceeds on sale of capital assets46,097-3,949-Reclamation bonds(390,000)-(343,977)-(10,981,856)(545,750)(1,769,443)(5,461,300)Financing ActivitiesShare capital - Issuance of shares13,605,201148,250-6,034,591- Allotment of shares---(5,457,798)13,605,201148,250-576,793Proceeds from convertible debentures1,095,186590,000--Convertible debentures repaid(175,167)(175,167)-(31,641)Due to (from) related parties--118,262(118,262)Loan receivable100,000---14,625,220563,083118,262426,890Net Decrease in Cash(180,027)(190,065)(3,768,406)(5,302,253)Cash position - Beginning of period161,144171,1823,939,5889,241,841Cash Position - End of Period$(18,883)$(18,883)$171,182$3,939,588Cash Consists of:Cash and term deposits$16,091$16,091$171,182$3,939,588Cheques issued in excess of funds on deposits(34,974)(34,974)--$(18,883)$(18,883)$171,182$3,939,588


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Supplemental Schedule of Non-Cash ConsiderationShares issued for property and equipment$284,000$-$-$-Shares issued for convertible debenture$372,600$372,600$-$-Shares issued for settlement of debt$555,186$-$-$-Shares received for settlement of debt$88,285$-$88,285$-Stock compensation expense included in marketing fees$245,900$245,900$-$-




- See Accompanying Notes -

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68



Crystal Graphite Corporation
(An Exploration Stage Company)ScheduleSchedule of Mineral Property CostsFor the Years Ended 31 AugustCanadian Funds




20032002Direct - MineralBlack Crystal Property, Nelson, B.C.Deferred exploration costsAmortization$210,884$224,032Wages, benefits and subcontractors173,543177,207Field and general157,008236,442Repairs and maintenance71,214145,590Transportation and hauling43,90490,051Crushing, screening and grinding29,61617,350Travel, meals and accommodation21,93744,357B.C. Mineral Exploration Tax Reduction (Credit)13,584(323,087)Laboratory and assay11,64353,735Environmental engineering11,32834,503Telecommunications4,88825,738Mine administration3,4769,860Health and safety3,0839,147Electrical engineering3,0007,070Freight2,6165,691Mining engineering and planning1,665219,855Geology and geological engineering460136,047Powerlines-96,314Drilling-34,928Mine site security-15,226Surveying-8,120Bulk sampling recovery(13,866)(3,697)Costs for the Year749,9831,264,479Balance - Beginning of year6,258,8514,994,372Balance - End of Year$7,008,834$6,258,851






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69





- See Accompanying Notes -

Crystal Graphite Corporation
(An Exploration Stage Company)Notes to Financial Statements31 August 2003Canadian Funds






1.

Continued Operations



These 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, has a working capital deficiency of $550,322 and a deficit of $10,634,534.



The company is planning to meet its current obligations by raising funds via a private placement, securing financing and issuing shares for debt (Note 15).  The company's continued existence is dependent upon its ability to complete the private placement, obtain additional financing and continued support of its debtors and/or achieve profitable operations.



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 which raise doubts about the validity of the going concern assumption used in preparing these financial statements.



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)

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.



b)

B.C. Mineral Exploration Tax Credit (BCMETC)



The company recognizes BCMETC amounts when the companys BCMETC application is approved by Canada Customs and Revenue Agency auditors or when the amount to be received can be reasonably estimated and collection is reasonably assured.  These amounts have been shown as a recovery of deferred exploration costs on the Schedule of Mineral Property Costs.





b)

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.





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70



Crystal Graphite Corporation
(An Exploration Stage Company)Notes to Financial Statements31 August 2003Canadian Funds






2.

Significant Accounting Policies - Continued



d)

Mineral



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 building 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 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.



e)

Environmental Expenditures



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.



f)

Capital Assets and Amortization



Capital assets are valued at cost less accumulated amortization.  The company provided for amortization on the declining balance method as follows:



- Beneficiation Plant - 30%
- Machinery and equipment - 30%
- Buildings - 30%
- Technical instruments - 30%
- Office furniture - 20%
- Computer hardware - 30%
- Vehicle - 30%
- Computer software - 100%



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





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Crystal Graphite Corporation
(An Exploration Stage Company)Notes to Financial Statements31 August 2003Canadian Funds








2.

Significant Accounting Policies - Continued



g)

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.



h)

Share Capital



i)

The 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.



ii)

Share capital issued for non-monetary consideration is recorded at an amount based on fair market value reduced by an estimate of transaction costs normally incurred when issuing shares for cash, as determined by the board of directors of the company.



i)

Stock-based Compensation



The company has adopted the new recommendations of CICA Handbook Section 3870, Stock-based compensation and other stock-based payments.  It is applied on a prospective basis and applies to all awards granted on or after 1 September 2002.  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.



Non-employees



The standard requires that all stock-based awards made to non-employees be measured and recognized using a fair value based method.



Employees



The standard encourages the use of a fair value based method for all awards granted to employees, but only requires the use of a fair value based method for direct awards of stock, stock appreciation rights, and awards that call for settlement in cash or other
assets.  Awards that a company has the ability to settle in stock are recorded as equity, whereas awards that the entity is required to or has a practice of settling in cash are recorded as liabilities.  The company has elected to account for employee stock options by measuring compensation cost for options as the excess, if any, of the quoted market price of the companys common shares at the date of grant over the amount an employee must pay to acquire the common shares. As required for the employee stock options, the company will disclose pro-forma income (loss) and pro-forma earnings (loss) per share using a fair value based method.

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72



Crystal Graphite Corporation
(An Exploration Stage Company)Notes to Financial Statements31 August 2003Canadian Funds






2.

Significant Accounting Policies - Continued



j)

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.



k)

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.



l)

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.



m)

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 2003.





3.

Fair Value of Financial Instruments



The companys financial instruments consist of cash and term deposits, GST and other taxes recoverable, accounts receivable and advances, cheques issued in excess of funds on deposit, accounts payable and payroll remittance payable.  Currency fluctuations may affect the cash flow which 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.





73



Crystal Graphite Corporation
(An Exploration Stage Company)Notes to Financial Statements31 August 2003Canadian Funds






4.

Investment



Details are as follows:



20032002137,500 (2002 - 137,500) common shares of USCO (i)$3,262$6,875100,000 (2002 - 100,000) common shares of ALCO (ii)11$3,263$6,876




i)

By letter agreement dated 4 April 2002, the company accepted 137,500 shares for debt totalling $88,285 due from an unrelated U.S. public company (USCO).  The shares were recorded at their fair market value of $6,875.



As at year-end, the USCO shares have been written down to fair market value.



ii)

During the 2001 fiscal year, the company purchased 100,000 common shares of a private Alberta company (ALCO) for $400,000, representing a 6.53% interest in ALCO.  ALCO, which is involved in the oil and gas sector and is negotiating an interest in certain properties located in the Yukon Territory, has an agreement with a First Nations group.  Although certain lands for the project have been identified with the First Nations group, the total exact lands which would be claimed by the First Nations group is uncertain.  In addition, the company may renegotiate its working interest into a royalty interest.  Consequently, final details are subject to negotiations with the First Nations group and the Federal government.



During the fiscal year ended 31 August 2002, management wrote down this investment to a nominal value for accounting purposes due to the uncertainty of further land claim settlements and the companys ultimate realization of future returns on the investment.





5.

Mineral Property Costs



a)

Details are as follows:

20032002Black Crystal Property, Nelson, B.C.Acquisition costs$618,927$618,927Exploration costs6,389,9075,639,924$7,008,834$6,258,851






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74



Crystal Graphite Corporation
(An Exploration Stage Company)Notes to Financial Statements31 August 2003Canadian Funds






5.

Mineral Property Costs - Continued



a)

By agreement dated 10 January 1995 and subsequent amendment, the company acquired a 100% interest in certain mineral claims known as the Black Crystal property, located in the Slocan Mining Division in British Columbia.



As consideration, the company, fulfilled the following conditions during prior fiscal years:



- Paid $300,000 cash
- Issued 800,000 shares (issued in a prior year based on the original agreement at a value of $284,000, being the exploration expenses incurred by the vendors on the property)
- Completed a private placement of 6,550,000 units for proceeds of $4,192,000



The property is subject to a 20% gross profit royalty for a period of 10 years ending 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.



The agreement was made with a former officer and director and a company controlled by a former officer and director and has accordingly been treated as a related party transaction.



As of 25 June 2002, the British Columbia Ministry of Energy and Mines granted the company two mining leases on this property.  These leases were issued for a term of 30 years and expire on 29 May 2032, with an option to renew at 30-year intervals.



On 4 July 2002, the company received a Mining Permit from the British Columbia Ministry of Energy and Mines.  The implementation of this 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.



As part of the terms of the Mining Permit the company was required to invest a Reclamation Bond in the amount of $390,000 (completed).





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6.

Capital Assets



Capital assets are recorded at cost.  Details are as follows:



CostAccumulated Amortization2003
Net Book Value2002
Net Book
ValueBeneficiation Plant$1,410,352$683,885$726,467$726,467Machinery and equipment983,575657,418326,157464,710Buildings189,674108,85980,815113,203Technical instruments151,45983,17068,28993,670Office furniture29,56412,36817,19621,495Computer hardware35,68721,77413,91319,674Vehicles62,45751,95010,50715,011Computer software11,98011,768212253$2,874,748$1,631,192$1,243,556$1,454,483




76





Crystal Graphite Corporation
(An Exploration Stage Company)Notes to Financial Statements31 August 2003Canadian Funds






7.

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.  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 bears interest after 1 April 2003 at a rate of 1% per month.



The company has determined that the equity component of the convertible debentures is not material and therefore, the full amount of the debentures has been shown as a long-term liability.



Of this private placement, 100,000 units were subscribed for by related parties.



b)

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 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.



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





8.

Share Capital



a)

Details are as follows:

Cumulative
Number of SharesCumulative
Amount2003200220032002Authorized:250,000,000 common shares
without par valueIssued and fully paid:For cash21,114,04720,114,047$16,507,906$16,359,656For property and equipment948,889948,889558,500558,500Settlement of debt1,291,7781,291,778992,714992,714Conversion of debentures990,004-372,600-Finders fee for share issuance--(16,088)(16,088)24,344,71822,354,714$18,415,632$17,894,782






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77



Crystal Graphite Corporation
(An Exploration Stage Company)Notes to Financial Statements31 August 2003Canadian Funds






1.

Share Capital- Continued



b)

Share Purchase Options and Warrants



As at 31 August 2003, the following share purchase options were outstanding:



SharesExercise PriceExpiry DateOptions25,000$ 0.6818 March 200625,000$ 0.8123 May 200650,000$ 1.0813 August 2006620,000(i)$ 0.6829 October 2006545,000$ 0.6829 October 20061,265,000




i)

During the 2002 fiscal year, these options were repriced and extended from prices ranging from $0.70 - $1.00 to $0.68 and dates ranging from 3 March 2002 - 23 January 2006 to 29 October 2006.  They have been presented at the amended price and expiry date.



During the year, 1,000,000 options were granted to consultants of the company and subsequently exercised for proceeds of $148,500 (US $100,000).



During the year, all outstanding warrants expired.



c)

Stock - Based Compensation



The fair value of stock options used to calculate compensation expense is estimated using the Black-Scholes Option Pricing Model with the following weighted average assumptions:



Average risk-free interest rate3.55%Expected dividend yieldNILExpected stock price volatility40.95%Average expected option life in years3 years




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.



For non-employees, the current year stock option grant results in a compensation expense of $245,900 which has been recorded in marketing fees for the year ended 31 August 2003.  The offsetting entry is to contributed surplus.



There was no pro forma effect on net loss and loss per share for the year ended 31 August 2003 of the actual results had the company accounted for the 25,000 stock options granted to directors and employees using the fair value method.



78



Crystal Graphite Corporation
(An Exploration Stage Company)Notes to Financial Statements31 August 2003Canadian Funds






9.

Related Party Transactions



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





a)

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



a)

During the year, management wages of $317,339 (2002 - $314,420) were paid or accrued to a director, two officers of the company and a company controlled by a director.



c)

During the year loans of $79,193 (2002- $NIL) were made to the company by a director and a relative of a director and officer of the company.



d)

During the year interest of $10,334 (2002 $NIL) was paid or accrued to a director and officer, and a relative of a director and officer of the company.



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.





10.

Commitments



By agreement dated 16 August 2001, the company entered into a lease for premises expiring 13 November 2003.  Subsequent to the year end the company renewed the lease until 13 November 2004.  Minimum basic rent is as follows:



Amount2004$46,646




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



The company has lease agreements for office equipment and a vehicle with terms of 5 years and 3 years respectively.  Minimum basic charges are as follows:



Amount2004$7,84720057,35720063,372$18,576




79



Crystal Graphite Corporation
(An Exploration Stage Company)Notes to Financial Statements31 August 2003Canadian Funds






11.

Lawsuit and Settlement Agreement



During the 2001 fiscal year, a lawsuit was brought against the company and 15 other individuals/corporations (including KAK Investments Inc. (KAK), the majority shareholder of the company) by the trustee of Evergreen Security Ltd.



By settlement agreement made between the trustee and representatives of KAK and approved by the U.S. Bankruptcy Court, the trustee has become the legal and beneficial owner of the KAK shares, and the trustee thereby has full legal right as holder of the KAK shares.



During the year, the company and the Trustee were able to effect and execute a settlement agreement effective 7 November 2002.  The terms of the settlement agreement are that the company remove its receiver over the KAK shares granted by the Supreme Court of B.C. (which the company has discharged) and that for a period, the lesser of five years or the date the KAK shares constitute 20% or less of the issued capital of the company, the trustee shall be permitted to attend board meetings and to have the benefit of an Antidilution Agreement whereby the trustee may elect to purchase securities at the terms and price paid by third parties to maintain its percentage interest in the company.  The Bankruptcy Court approved the settlement agreement dated 19 November 2002 during the period.  The lawsuit is fully discharged in respect to the company.





12.

Income Taxes



The company has incurred non-capital losses of approximately $2,597,109 which may be carried forward and used to reduce taxable income in future years.



The company has incurred certain resource-related expenditures of approximately $8,380,494 which 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:



|     |   | Amount   
|---- | - | ---------
|2009 | $ | 1,427,154
|2010 |   | 1,169,955
|     | $ | 2,597,109



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







13.

Comparative Figures



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



80





Crystal Graphite Corporation
(An Exploration Stage Company)Notes to Financial Statements31 August 2003Canadian Funds








14.

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.  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.



(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.



---

81



Crystal Graphite Corporation
(An Exploration Stage Company)Notes to Financial Statements31 August 2003Canadian Funds










14.

Differences Between United States and Canadian Generally Accepted

Accounting Principles GAAP- Continued



b)

Statement Reconciliation



(i)

A reconciliation of the financial statements from Canadian to U.S. presentation is as follows:



200320022001Net Loss - Canadian Basis$(1,446,929)$(1,913,120)$(2,379,069)Write-down of ALCO-399,999-Write-off of mineral property costs(749,983)(1,264,479)(2,276,216)Compensation expense on common stock options granted to non-employees-(13,924)-Net Loss - U.S. Basis$(2,196,912)$(2,791,524)$(4,655,285)Other Comprehensive Income (Loss)Unrealized gain (loss) - USCO$(6,828)$3,215$-Unrealized loss - ALCO-(399,999)-$(6,828)$(396,784)$-Net Loss per Share - Basic and Diluted - U.S. Basis$(0.08)$(0.12)$(0.21)




i)

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



200320022001Deficit - Canadian Basis$(10,634,534)$(9,187,605)$(7,274,485)Write-down ALCO399,999399,999-Write-off of mineral property costs - current(749,983)(1,264,479)(2,276,216)Write-off of mineral property costs - prior years(6,258,851)(4,994,372)(2,718,156)Stock compensation expense on common stock options granted to non-employees(13,924)(13,924)-Deficit - U.S. Basis$(17,257,293)$(15,060,381)$(12,268,857)




200320022001Share Capital- Canadian Basis$18,415,632$17,894,782$17,894,782Stock compensation expense on common stock options granted to non-employees13,92413,924-Share Capital - U.S. Basis$18,429,556$17,908,706$17,894,782






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82



Crystal Graphite Corporation
(An Exploration Stage Company)Notes to Financial Statements31 August 2003Canadian Funds








14.

Differences Between United States and Canadian Generally Accepted

Accounting Principles GAAP- Continued



c)

Disclosure Reconciliation



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



Effective 1 September 2002, the company adopted the recommendations of CICA Handbook Section 3870, Stock-based compensation (Note 2i).  As required for employee stock options, the company discloses pro-forma income (loss) and pro-forma earnings (loss) per share based on the a fair value method (Note 8c).  Prior to 1 September 2002, for Canadian GAAP purposes, this disclosure was not required and therefore the U.S. GAAP requirement is presented below:



2002Net LossAs reported - U.S. Basis$2,791,524Compensation expense on common stock options granted to employees556,958Pro 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 yield0.00%Expected stock price volatility61.0%Risk-free interest rate4.08%Expected Life of options5 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.

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83



Crystal Graphite Corporation
(An Exploration Stage Company)Notes to Financial Statements31 August 2003Canadian Funds






14.

Differences Between United States and Canadian Generally Accepted

Accounting Principles GAAP- Continued



d)

Recently Adopted U.S. Accounting Standards



In June 2001, the Financial Accounting Standards Board ("FASB) issued SFAS No. 141, Business Combinations.  SFAS No. 141 mandates the purchase method of accounting for all business combinations initiated after 30 June 2001.  In addition, SFAS No. 141 addresses the accounting for intangible assets and goodwill acquired in business combinations completed after 30 June 2001.  The Company adopted SFAS No. 141, as required, with no material impact on its financial statements.



In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which revises the accounting for purchased goodwill and other intangible assets.  Under SFAS No. 142, goodwill and other intangible assets with indefinite lives will no longer be systematically amortized into operating results.  Instead, each of these assets will be tested, in the absence of an indicator of possible impairment, at least annually, and upon an indicator of possible impairment, immediately. The Company adopted SFAS No. 142, as required, on 1 September 2002 with no material impact on its financial statements.



In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets.  SFAS No. 144 was issued to resolve certain implementation issues that had arisen under SFAS No. 121.  Under SFAS No. 144, a single uniform accounting model is required to be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and certain additional disclosures are required.  The Company adopted SFAS No. 144, as required, with no material impact on its financial 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.  SFAS No. 145 updates, clarifies and simplifies existing accounting pronouncements, by rescinding SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect.  As a result, the criteria in APB No. 30 will now be used to classify those gains and losses.  Additionally, SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions.  Finally, SFAS No. 145 also makes technical corrections to existing pronouncements.  While those corrections are not substantive in nature, in some instances, they may change accounting practice.  The Company adopted the provisions of SFAS No. 145 that amended SFAS No. 13, as required, on 15 May 2002 for transactions occurring after such date with no material impact on its financial statements.  The Company will adopt the remaining provisions of SFAS No. 145, as required, on 1 September 2003 with no material impact on its financial statements.



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84



Crystal Graphite Corporation
(An Exploration Stage Company)Notes to Financial Statements31 August 2003Canadian Funds










14.

Differences Between United States and Canadian Generally Accepted

Accounting Principles GAAP- Continued



d)

Recently Adopted U.S. Accounting Standards - Continued



Recently Issued U.S. Accounting Standards Not Yet Adopted



In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations".  SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is a cost by increasing the carrying amount of the related long-lived asset.  Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related obligation for its recorded amount or incurs a gain or loss upon settlement.  The Company will adopt SFAS No. 143, as required, on 1 September 2003.



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.  SFAS No. 146 was issued to address the financial accounting and reporting for costs associated with exit or disposal activities, unless specifically excluded.  SFAS No. 146 requires that a liability for a cost associated with a covered exit or disposal activity be recognized and measured initially at its fair value in the period in which the liability is incurred, except for a liability for one-time termination benefits that is incurred over time.  If employees are not required to render service until they are terminated in order to receive the one-time termination benefits or if employees will not be retained to render service beyond the minimum retention period (as dictated by existing law, statute or contract, or in the absence thereof, 60 days), a liability for the termination benefits shall be recognized and measured at its fair value at the communication date.  If employees are required to render service until they are terminated in order to receive the one-time termination benefits and will be retained to render service beyond the minimum retention period, a liability for the termination benefits shall be measured initially at the communication date based on the fair value of the liability as of the termination date.  The liability shall be recognized ratably over the future service period.  SFAS No. 146 also dictates that a liability for costs to terminate an operating lease or other contract before the end of its term shall be recognized and measured at its fair value when the entity terminates the contract in accordance with the contract terms.  A liability for costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity is to be recognized and measured at its fair value when the entity ceases using the right conveyed by the contract.  SFAS No. 146 further dictates that a liability for other covered costs associated with an exit or disposal activity be recognized and measured at its fair value in the period in which the liability is incurred.  The Company will adopt SFAS No. 146, as required, on 1 September 2003.



In December 2002, the 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 will adopt SFAS No. 148, as required, on 1 September 2003 with no material impact on its financial statements.



85



Crystal Graphite Corporation
(An Exploration Stage Company)Notes to Financial Statements31 August 2003Canadian Funds






15.

Subsequent Events



a)

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, of which $150,000 has been 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 26 September 2004.  The company paid a non-refundable application fee of $10,000 and issued 500,000 common shares of the company to the lender as a non-refundable commitment and funding fee.  The debenture provides for a first registered charge on the land and a general first floating charge on all other assets of the company.



The company may elect to extend the term of the loan for a further twelve months if the loan is in good standing.



b)

Subsequent to the year-end, 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 1 year period expiring 18 September 2004.



c)

Subsequent to the year-end, 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.



d)

Subsequent to the year-end, 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.



e)

Subsequent to the year-end, the company issued 780,045 units by private placement for gross proceeds of $211,392.  Each unit consisted 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.



f)

Subsequent to the year-end, the company issued 75,000 units in settlement of certain trade payables in the amount of $20,325.  Each unit consisted 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.



g)

Subsequent to year-end, the company also issued 50,000 bonus shares to a third party for arranging loans for the company at a price of US$0.10.



86

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:  February 27, 2004





*

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

__________



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87

EXHIBIT INDEX





Exhibit #Description of ExhibitPage No.99(a)Certification of Disclosure in Crystal Graphite Corporations Annual Report by Gordon Sales.9699(b)Certification of Disclosure in Crystal Graphite Corporations Annual Report by Bernie Zacharias.9999(c)Certification of Gordon Sales pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.10299(d)Certification of Bernie Zacharias pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.104






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88





EXHIBIT 99(a)







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 99(a)







---

89

Certification of Disclosure in

Crystal Graphite Corporations Annual Report



In connection with the Annual Report on Form 20-F of Crystal Graphite Corporation (the Company) for the period ended August 31, 2003, as filed with the Securities and Exchange Commission on February 27, 2004, (the Report), I, Gordon Sales, President and Chief Executive Officer of the Company, hereby certify, pursuant to the SarbanesOxley Act of 2002, that:



(1)

I have reviewed this Report being filed;



(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-14 and 15d-14) for the Company and have:



(i)

designed such disclosure controls and procedures 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;



(ii)

evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Report ( the "Evaluation Date"); and



(iii)

presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures based on their evaluation as of the Evaluation Date;



(5)

The Companys other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Companys board of directors (or persons fulfilling the equivalent function):



(i)

all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process,



---

90

summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and



(ii)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and



(6)

The Companys other certifying officer and I have indicated in this Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





Date:

February 27, 2004

/s/ Gordon Sales



Name:

Gordon Sales

Title:

President and Chief Executive Officer







---

91

EXHIBIT 99(b)







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 99(b)







---

92

Certification of Disclosure in

Crystal Graphite Corporations Annual Report



In connection with the Annual Report on Form 20-F of Crystal Graphite Corporation (the Company) for the period ended August 31, 2003, as filed with the Securities and Exchange Commission on February 27, 2004, (the Report), I, Bernie Zacharias, Chief Financial Officer of the Company, hereby certify, pursuant to the SarbanesOxley Act of 2002, that:



(1)        
I have reviewed this Report being filed;



(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-14 and 15d-14) for the Company and have:



(i)

designed such disclosure controls and procedures 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;



(ii)

evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Report ( the "Evaluation Date"); and



(iii)

presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures based on their evaluation as of the Evaluation Date;



(5)

The Companys other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Companys board of directors (or persons fulfilling the equivalent function):



(i)

all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process,



---

93

summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and



(ii)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and



(6)

The Companys other certifying officer and I have indicated in this Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





Date:

February 27, 2004

/s/ Bernie Zacharias

________

Name:

Bernie Zacharias

Title:

Chief Financial Officer



---

94

EXHIBIT 99(c)







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 99(c)









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95

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, 2003 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: February 27, 2004

/s/ Gordon Sales



Gordon Sales, President, CEO and Director





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96

EXHIBIT 99(d)







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 99(d)







---

97

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, 2003 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: February 27, 2004

/s/ Bernie Zacharias

_____

Bernie Zacharias, Chief Financial

Officer and Director