Bontan
Corporation Inc.





Consolidated Financial Statements





For
the Years Ended March 31, 2008, 2007 and 2006





(Canadian Dollars)




















































IndexAudit
      Report of Independent Registered Public Accounting Firm
            2Consolidated
      Balance Sheets
            3Consolidated
      Statements of Operations
            4Consolidated
      Statements of Cash Flows
            5Consolidated
      Statement of Shareholders’ Equity
              
              Consolidated
      Statement of Comprehensive Loss and Accumulated Other Comprehensive
      Loss
            6-7
              
              8Notes
      to Consolidated Financial Statements
            9-30






























































































1




Schwartz
Levitsky Feldman llp


CHARTERED
ACCOUNTANTS




LICENSED
PUBLIC ACCOUNTANTS




TORONTO.
MONTREAL






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the
Shareholders of


Bontan
Corporation Inc.








We have
audited the consolidated balance sheets of Bontan Corporation Inc. as at March
31, 2008 and 2007 and the consolidated statements of operations, shareholders'
equity, comprehensive loss and accumulated other comprehensive loss and cash
flows for each of the years in the three year period ended March 31, 2008. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.





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





In our
opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of the Company as at March 31, 2008 and 2007
and the results of its operations and its cash flows for the years then ended,
in accordance with Canadian generally accepted accounting principles which
differ in certain respects from generally accepted accounting principles in the
United States (refer to note 16).












“SCHWARTZ LEVITSKY FELDMAN LLP”








Toronto,
Ontario, Canada  Chartered Accountants


May 23,
2008  Licensed Public Accountants








1167 Caledonia Road


Toronto,
Ontario M6A 2X1


Tel:  416
785 5353


Fax:  416
785 5663


2
  Bontan Corporation
Inc. Consolidated Balance Sheets
 (Canadian Dollars)


As
      at March 31
            
            Note
            
            
            2008
            
            
            2007(Restated
      - refer Note 17)AssetsCurrentCash
            
            
            
            
            $
            1,259,062
            
            
            $
            3,014,928Short
      term investments
            
            3,13(x)
      & (xi) & 14
            
            
            
            3,633,760
            
            
            
            3,315,691Prepaid consulting services
            
            
            5
            
            
            
            285,896
            
            
            
            276,146Other
      receivables
            
            
            
            
            
            
            54,198
            
            
            
            66,153$
            5,232,916
            
            
            $
            6,672,918Office
      equipment and furniture
            
            
            4
            
            
            $
            6,206
            
            
            $
            -$
            5,239,122
            
            
            $
            6,672,918Liabilities
      and shareholders' equityCurrent
      liabilitiesAccounts
      payable
            
            13(viii)
            
            
            $
            30,339
            
            
            $
            19,052Accrued
      liabilities
            
            
            
            
            
            
            28,685
            
            
            
            29,400Total
      current liabilities
            
            
            
            
            
            $
            59,024
            
            
            $
            48,452Shareholders'
      EquityCapital
      stock
            
            
            7
            
            
            $
            32,901,488
            
            
            $
            32,413,811Warrants
            
            
            9
            
            
            
            2,153,857
            
            
            
            2,215,213Contributed
      surplus
            
            
            
            
            
            
            4,077,427
            
            
            
            4,069,549Accumulated
      other comprehensive loss
            
            
            
            
            
            
            (1,306,768
            )
            
            
            -Deficit
            
            
            
            
            
            
            (32,645,906
            )
            
            
            (32,074,107
            )(33,952,674
            )
            
            
            (32,074,107
            )Total
      shareholders' equity
            
            
            
            
            
            $
            5,180,098
            
            
            $
            6,624,466$
            5,239,122
            
            
            $
            6,672,918Commitments
      and Contingent Liabilities (Note 12)Related
      Party Transactions (Note 13)






Approved by the
Board ”Kam
Shah” ”Dean
Bradley” (signed)                                                (signed)




The accompanying
notes are an integral part of these consolidated financial
statements.





3


Bontan
Corporation Inc.


Consolidated
Statements of Operations


(Canadian
Dollars)




For
      the years ended March 31,
            
            Note
            
            
            2008
            
            
            2007
            
            
            2006IncomeGain
      on disposal of short term investments
            
            
            
            
            $
            248,455
            
            
            $
            650,508
            
            
            $
            618,707Gain
      on sale of interest in oil exploration project
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            1,207,831Interest
            
            13(ix)
            
            
            
            73,300
            
            
            
            93,278
            
            
            
            31,109321,755
            
            
            
            743,786
            
            
            
            1,857,647ExpensesConsulting
      fees settled for common  shares
            
            
            5,13
            (v)
            
            
            314,248
            
            
            
            367,973
            
            
            
            1,984,938Travel,
      promotion and consulting
            
            13(vii)
            
            
            
            202,225
            
            
            
            158,727
            
            
            
            275,754Shareholders
      information
            
            
            13
            (i)
            
            
            133,502
            
            
            
            149,105
            
            
            
            176,982Exchange
      loss
            
            
            
            
            
            
            141,841
            
            
            
            111,659
            
            
            
            194,758Professional
      fees
            
            
            
            
            
            
            34,601
            
            
            
            53,084
            
            
            
            71,588Office
      and general
            
            
            
            
            
            
            40,349
            
            
            
            30,630
            
            
            
            22,219Bank
      charges and interest
            
            
            
            
            
            
            1,625
            
            
            
            13,885
            
            
            
            4,029Communication
            
            
            
            
            
            
            11,905
            
            
            
            7,984
            
            
            
            19,471Rent
            
            13(ii)
            
            
            
            8,915
            
            
            
            5,666
            
            
            
            5,839Transfer
      agents fees
            
            
            
            
            
            
            4,343
            
            
            
            4,974
            
            
            
            8,495Write
      off of interest in gas exploration  project
            
            
            6
            
            
            
            -
            
            
            
            4,142
            
            
            
            3,878,507893,554
            
            
            
            907,829
            
            
            
            6,642,580Net
      loss for year
            
            
            
            
            
            
            (571,799
            )
            
            
            (164,043
            )
            
            
            (4,784,933
            )Basic
      and diluted loss per share informationNet
      Loss per share
            
            
            10
            
            
            $
            (0.02
            )
            
            $
            (0.01
            )
            
            $
            (0.31
            )






4


Bontan
Corporation Inc.


Consolidated
Statements of Cash Flows


(Canadian
Dollars)





For
      the years ended March 31,
              
              Note
              
              
              2008
              
              
              2007
              
              
              2006Cash
      flows from operating activitiesNet
      loss for year
              
              
              
              
              
              -571,799
              
              
              
              -164,043
              
              
              
              -4,784,933Write
      off of interest in gas exploration project
              
              
              6
              
              
              
              -
              
              
              
              4,142
              
              
              
              3,878,507Amortization
      of office equipment and furniture
              
              
              
              
              
              
              817
              
              
              
              -
              
              
              
              -Gain
      on sale of interest in oil exploration project
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              -1,207,831Gain
      on disposal of short term investments
              
              
              
              
              
              
              -248,455
              
              
              
              -650,508
              
              
              
              -618,707Consulting
      fees settled for common shares
              
              
              5
              
              
              
              314,248
              
              
              
              367,973
              
              
              
              1,984,938Promotion
      costs settled by shares
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              12,542Net
      change in working capital componentsPrepaid
      and other receivables
              
              
              
              
              
              
              11,955
              
              
              
              29,649
              
              
              
              -68,843Accounts
      payable and accrued liabilities
              
              
              
              
              
              
              10,572
              
              
              
              -116,536
              
              
              
              51,807-482,662
              
              
              
              -529,323
              
              
              
              -752,520Investing
      activitiesPurchase
      of short term Investments
              
              
              
              
              
              
              -3,366,685
              
              
              
              -6,366,652
              
              
              
              -4,267,360Net
      proceeds from sale of short term investments
              
              
              
              
              
              
              1,990,303
              
              
              
              5,479,390
              
              
              
              3,184,533Purchase
      of fixed assets
              
              
              
              
              
              
              -7,023
              
              
              
              -
              
              
              
              -Disposal
      of  interest in oil exploration project
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              4,045,081Investment
      in interest in gas properties
              
              
              6
              
              
              
              -
              
              
              
              -4,142
              
              
              
              -3,661,939-1,383,405
              
              
              
              -891,404
              
              
              
              -699,685Financing
      activitiesNet
      advances from shareholders
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              -11,140Common
      shares issued net of issuance costs
              
              
              
              
              
              
              110,201
              
              
              
              1,172,813
              
              
              
              3,865,857110,201
              
              
              
              1,172,813
              
              
              
              3,854,717(Decrease)
      increase in cash during year
              
              
              
              
              
              
              -1,755,866
              
              
              
              -247,914
              
              
              
              2,402,512Cash
      at beginning of year
              
              
              
              
              
              
              3,014,928
              
              
              
              3,262,842
              
              
              
              860,330Cash
      at end of year
              
              
              
              
              
              
              1,259,062
              
              
              
              3,014,928
              
              
              
              3,262,842Supplemental
      disclosuresNon-cash
      operating activitiesConsulting
      fees settled for common shares and
              
              
              5
              
              
              
              314,248
              
              
              
              367,973options
      and expensed during the year
              
              
              2,640,717Consulting
      fees prepaid in shares
              
              
              5
              
              
              
              285,896
              
              
              
              276,146
              
              
              
              314,208$
              600,144
              
              
              $
              644,119
              
              
              $
              2,954,925


The
accompanying notes are an integral part of these consolidated financial
statements.


5


Bontan
Corporation Inc.


Consolidated
Statement of Shareholders’ Equity


(Canadian
Dollars)


For
the Years Ended March 31, 2008, 2007 and 2006




Number
      of Shares
              
              
              Share
                Capital
              
              
              Warrants
              
              
              Contributed
      surplus
              
              
              Accumulated
      Deficit
              
              
              Accumulated
      other comprehensive loss
              
              
              Shareholders'
      EquityBalance
      March 31, 2005
              
              
              12,975,539
              
              
              $
              28,280,890
              
              
              $
              -
              
              
              $
              3,795,078
              
              
              $
              (27,125,131
              )
              
              $
              -
              
              
              $
              4,950,837Options
      exercised
              
              
              500,000
              
              
              
              284,367
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              284,367Value
      of options excercised transferred
              
              
              
              
              
              
              381,308
              
              
              
              
              
              
              
              (381,308
              )
              
              
              
              
              
              
              
              
              
              
              -Issued
      under 2003 Consultant stock compensation plans
              
              
              196,212
              
              
              
              238,390
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              238,390Issued
      under 2005 Consultant stock compensation plans
              
              
              1,000,000
              
              
              
              327,827
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              327,827Restricted
      shares issued in settlement of fees
              
              
              23,500
              
              
              
              32,027
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              32,027Warrants
      exercised
              
              
              2,162,452
              
              
              
              2,256,738
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,256,738Issued
      under private placement
              
              
              3,900,000
              
              
              
              1,139,146
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,139,146Existing
      warrants revalued *
              
              
              
              
              
              
              (192,951
              )
              
              
              192,951
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Warrants
      issued under private placement *
              
              
              
              
              
              
              (758,348
              )
              
              
              758,348
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Subscribed
      and paid for under private placement but Issued subsequent to the balance
      sheet date
              
              
              2,000,000
              
              
              
              583,550
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              583,550Finder
      fee
              
              
              
              
              
              
              (397,944
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (397,944
              )Options
      granted
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              655,779
              
              
              
              
              
              
              
              
              
              
              
              655,779Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,784,933
              )
              
              
              
              
              
              
              (4,784,933
              )Balance
      March 31, 2006
              
              
              22,757,703
              
              
              $
              32,175,000
              
              
              $
              951,299
              
              
              $
              4,069,549
              
              
              $
              (31,910,064
              )
              
              $
              -
              
              
              $
              5,285,784Issued
      under private placement
              
              
              4,500,000
              
              
              
              1,303,126
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,303,126Warrants
      issued under private placement*
              
              
              
              
              
              
              (1,263,914
              )
              
              
              1,263,914
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Finder
      fee
              
              
              
              
              
              
              (130,313
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (130,313
              )Shares
      cancelled
              
              
              (20,000
              )
              
              
              (5,980
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,980
              )Issued
      under 2003 Consultant stock compensation plans
              
              
              42,500
              
              
              
              22,406
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              22,406Issued
      under 2007 Consultant stock compensation plans
              
              
              1,150,000
              
              
              
              313,486
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              313,486Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (164,043
              )
              
              
              
              
              
              
              (164,043
              )Balance,
      March 31, 2007
              
              
              28,430,203
              
              
              $
              32,413,811
              
              
              $
              2,215,213
              
              
              $
              4,069,549
              
              
              $
              (32,074,107
              )
              
              $
              -
              
              
              $
              6,624,466
  * Restated
refer note 17







The
accompanying notes are an integral part of these consolidated financial
statements.




6




Bontan
Corporation Inc.


Consolidated
Statement of Shareholders’ Equity - Continued...2


(Canadian
Dollars)


For
the Years Ended March 31, 2008, 2007and 2006





Number
      of Shares
            
            
            Capital
      Stock
            
            
            Warrants
            
            
            Contributed
      surplus
            
            
            Accumulated
      Deficit
            
            
            Accumulated
      other comprehensive loss
            
            
            Shareholders'
      EquityBalance
      March 31, 2007
            
            
            28,430,203
            
            
            $
            32,413,811
            
            
            $
            2,215,213
            
            
            $
            4,069,549
            
            
            $
            (32,074,107
            )
            
            
            
            
            $
            6,624,466Warrants
      excercised
            
            
            315,540
            
            
            
            122,446
            
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            122,446Value
      of warrants transferred to capital stock upon exercise
            
            
            
            
            
            
            61,356
            
            
            
            -61,356Finder
      fee
            
            
            
            
            
            
            -12,245
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -12,245Issued
      under 2007 Consultant stock compensation plan
            
            
            1,350,000
            
            
            
            316,120
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            316,120Options
      granted
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,878
            
            
            
            
            
            
            
            
            
            
            7,878Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (571,799
            )
            
            
            
            
            
            (571,799
            )Unrealised
      loss on short term investments considered avilable for sale, cumulative to
      march 31, 2008 on adoption of new Accounting Policy
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,306,768
            )
            
            
            (1,306,768
            )Balance,
      March 31, 2008
            
            
            30,095,743
            
            
            $
            32,901,488
            
            
            $
            2,153,857
            
            
            $
            4,077,427
            
            
            $
            (32,645,906
            )
            
            $
            (1,306,768
            )
            
            $
            5,180,098









7




Bontan
Corporation Inc.


Consolidated
Statement of Comprehensive Loss and Accumulated Other Comprehensive
Loss


(Canadian
Dollars)




For
      the years ended March 31,
            
            Note
            
            
            2008
            
            
            2007
            
            
            2006Net
      loss for year
            
            
            
            
            $
            (571,799
            )
            
            $
            (164,043
            )
            
            $
            (4,784,933
            )Other
      comprehensive lossUnrealised
      loss for year on short term investments considered available for
      sale
            
            
            3
            
            
            
            (2,266,470
            )
            
            
            -
            
            
            
            -Comprehensive
      loss
            
            
            
            
            
            
            -2,838,269
            
            
            
            -164,043
            
            
            
            -4,784,933Accumulated
      other comprehensive income(loss)Beginning
      of year
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -Adjusment
      on adoption of new Accounting Policy
            
            
            3
            
            
            
            959,702
            
            
            
            -
            
            
            
            -959,702
            
            
            
            -
            
            
            
            -Other
      comprehensive loss for year
            
            
            
            
            
            
            (2,266,470
            )
            
            
            -
            
            
            
            -Accumulated
      other comprehensive loss, end of year
            
            
            
            
            
            $
            (1,306,768
            )
            
            $
            -
            
            
            $
            -









8





Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March 31,
2008 and 2007





1.      NATURE
OF OPERATIONS





Bontan
Corporation Inc. (“the Company”) is a diversified natural resource company that
invests in major oil and gas exploration and exploitation projects in countries
around the globe through its subsidiary by acquiring joint venture, indirect
participation interest and working interest in those projects.





The
company focuses on projects where the other project partners have proven
experience in oil and gas exploration, development and
distribution.





The
Company currently does not have any active project participation and has now
expanded its search for participation in suitable projects in all
sectors.





2.      SIGNIFICANT
ACCOUNTING POLICIES





Basis
of Presentation


These
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada, which do not materially
differ from accounting principles generally accepted in the United States (U.S.
GAAP) except as described in Note 16 “Differences from United States
Generally Accepted Accounting Principles”.





Principles
of Consolidation


The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary as detailed below. All inter-company balances and
transactions have been eliminated on consolidation.





The
Company has one subsidiary, Bontan Oil & Gas Corporation. The following
subsidiaries which were inactive and discontinued in fiscal 2007 were dissolved
under the Ontario Business Corporation Act during the current fiscal year as
follows:





Subsidiary                                                                      Date
of Dissolution





Foodquest
Inc.                                                              June
27, 2007


Bontan
Gold
Corporation                                            June
15, 2007


Bontan
Trading
Corporation                                      June
27, 2007


Bontan
Mineral
Corporation                                       June
27, 2007


1388755
Ontario
Inc.                                                     June
27, 2007


Bontan
Diamond
Corporation                                    June
27, 2007





The
following paragraphs describe the significant accounting policies, including
changes to our accounting policies effective April 1, 2007, upon adoption of the
CICA handbook sections 1530 “Comprehensive income, 3855 “Financial instruments –
Recognition and Measurement, 3861 “Financial instruments- disclosure and
presentation, , 3251 – “Equity” and 1651 “Foreign currency translation”. These
standards have been applied on a prospective basis with no restatement of prior
year financial statements.








9


Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





2.      SIGNIFICANT
ACCOUNTING POLICIES (Continued





Oil
and Gas Properties Interest





Interests
held in oil and gas properties are recorded on the basis of successful efforts
method of accounting for oil and gas exploration and development activities
under which direct acquisition costs of development properties, geological and
geophysical costs associated with these properties and costs of development and
exploratory wells that result in additions to proven reserves are capitalized.
When the carrying value of a property exceeds its net recoverable amount that
may be estimated by quantifiable evidence of an economic geological resource or
reserve, joint venture expenditure commitments or the Company’s assessment of
its ability to sell the property for an amount exceeding the deferred costs,
provision is made for the impairment in value.





Revenue
Recognition





Revenues
associated with the sales of natural gas, crude oil and natural gas liquids
(“NGLs”) together with costs including production and mineral taxes, royalty to
landowner and transportation and selling costs are recognized on receipt of a
statement of account from the operators of the projects where the Company holds
equity interest and collection is reasonably assured.





Short-term
Investments and other financial instruments





Short-term
investments are investments that are either highly liquid or are to be disposed
of within a one year period. All short term investments are considered available
for sale type of investments. Prior to April 1, 2007, short term investments
were recorded at lower of average cost and market value with the difference
being expensed. Unrealised gains were not accounted for.





Effective April 1, 2007,all
financial instruments are measured at fair value on initial recognition of the
instrument. Measurement in subsequent periods depends on whether
the


financial instrument has been classified as “held-for-trading”,
“available-for-sale”, “held-to-maturity”, “loans and receivables”, or “other
financial liabilities” as defined by the


applicable accounting standards. The methods used by the Company in
determining the fair value of financial instruments are unchanged as a result of
implementing this new


accounting
policy.




Cash is designated as “held-for-trading” and is measured at carrying value,
which approximates fair value.




Short
term investments which consist mostly of marketable securities are designated as
“available-for-sale” and measured at fair value with unrealized gains and losses
recorded in


other comprehensive income until the security is sold or if an unrealized loss
is considered other than temporary, the unrealized loss is expensed. Unrealized
gains and losses


represent
the net difference between the total average costs of short term assets on hand
and their fair value based on quoted market prices for the marketable
securities.




Other
receivable are designated as “loans and receivable” and are carried at cost.
Accounts payable and accrued liabilities are designated as ‘other financial
liabilities” and are


carried at cost.




10




Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





2.      SIGNIFICANT
ACCOUNTING POLICIES (Continued)





Foreign
Currency Translation




The functional currency of the Company is the Canadian dollar. Monetary assets
and liabilities are translated at exchange rates in effect at the balance sheet
date.  Non-monetary


assets are translated at exchange rates in effect when they were acquired.
Revenue and expenses are translated at the approximate average rate of exchange
for the year, except that


amortization
is translated at the rates used to translate related assets.




The Company’s only subsidiary, Bontan Oil & Gas Corporation uses US Dollar
as a functional currency. However, the subsidiary is not self sustaining but is
integrated to Bontan


Corporation
Inc. Hence translation gains and losses of this subsidiary are charged to the
consolidated statement of operations.




Office equipment and furniture and amortization




Office equipment and furniture are amortised over their useful lives as
follows:




Office
furniture                                       5
years – declining balance basis


Computers                                               3
years – declining balance basis





Accumulated
Other Comprehensive Income (AOCI)





Effective
April 1, 2007, AOCI is included on the consolidated balance sheet as a separate
component of shareholders’ equity, and includes net unrealised gains and losses
on short term investments net of applicable taxes,  held as available
for sale





Income
Taxes





The
Company follows the liability method of accounting for income
taxes.  Under this method, future income tax assets and liabilities
are determined based on temporary differences between financial reporting and
tax bases of assets and liabilities, as well as for the benefit of losses
available to be carried forward to future years for tax
purposes.  Future income tax assets and liabilities are measured using
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.  Future income tax assets are recognized in the
financial statements if realization is considered more likely than not. A
valuation allowance against future tax assets is provided to the extent that the
realization of these future tax assets is not more likely than not.





Stock-Based
Compensation Plan





The
Company follows a fair value based method of accounting for all Stock-based
Compensation and Other Stock-based Payments to employees and
non-employees.  The fair value of all share purchase options is
expensed over their vesting period with a corresponding increase to contributed
surplus. Upon exercise of share purchase options, the consideration paid by the
option holder, together with the amount previously recognized in contributed
surplus, is recorded as an increase to share capital. The Company uses the
Black-Scholes option valuation model to calculate the fair value of share
purchase options at the date of grant.





The
quoted market price of the Company’s shares on the date of issuance under any
stock compensation plan is considered as fair value of the shares
issued.





11




Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007








2.     SIGNIFICANT
ACCOUNTING POLICIES (Continued)





Accounting
Changes





Effective
January 1, 2007, the Company adopted the revised CICA Section 1506, “Accounting
changes” which require that (i) voluntary changes in accounting policies can be
made if, and only if, the changes result in more reliable and relevant
information (ii) changes in accounting policies are accompanied by disclosure of
prior period amounts and justification for the changes, and (iii)  for
changes in estimates, the nature and amount of the change should be disclosed.
The Company has not made any voluntary change in accounting policies since the
adoption of the revised Standard.





Loss
per Share





Basic
loss per share is calculated by dividing net loss (the numerator) by the
weighted average number of common shares outstanding (the denominator) during
the period.  Diluted loss per share reflects the dilution that would
occur if outstanding stock options and share purchase warrants were exercised or
converted into common shares using the treasury stock method and are calculated
by dividing net loss applicable to common shares by the sum of the weighted
average number of common shares outstanding and all additional common shares
that would have been outstanding if potentially dilutive common shares had been
issued.





The
inclusion of the Company’s stock options and share purchase warrants in the
computation of diluted loss per share would have an anti-dilutive effect on loss
per share and are therefore excluded from the
computation.  Consequently, there is no difference between basic loss
per share and diluted loss per share.





Use
of 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 date of the financial
statements and the reported amounts of revenues and expenses during the
period.  Actual results could differ from those
estimates.  Some of the key areas where estimates and assumptions are
normally used include valuation of stocks, warrants and options, ascertaining
useful lives of fixed assets and impairment of short term
investments.





Recent
accounting pronouncements





(a)
            Capital
      disclosures





In
December 2006, the Canadian Institute of Chartered Accountants (CICA) issued a
new handbook section 1535, “capital disclosure”, which requires an entity to
disclose its objectives, policies and processes for managing capital. This new
standard is effective for fiscal years beginning on or after October 1, 2007.
The Company will adopt this standard, and management is currently assessing its
impact on the Company’s interim and annual financial statements.




12





Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





2.     SIGNIFICANT
ACCOUNTING POLICIES (Continued)


Recent
accounting pronouncements (Continued)





(b)           Financial
instruments





In
      December 2006, the CICA issued two new handbook sections 3862 “Financial
      instruments – Disclosures” and 3863 “Financial instruments –
      Presentation”. These sections replace the handbook section 3861 “Financial
      instruments- Disclosure and Presentation.” These new sections enhance
      disclosure requirements on the nature and extent of risks arising from
      financial instruments and how the entity manages those risks. These new
      standards are effective for fiscal years beginning on or after October 1,
      2007.The
      Company will adopt thisstandard, and
      management is currently assessing its impact on the Company’s interim and
      annualfinancial
      statements.





(c)           General
standards of financial statement presentation





In May
2007, the Accounting Standards Board amended Section 1400 “General Standards of
Financial Statement Presentation” to change guidance on management’s
responsibility to assess and disclose the Company’s ability  to
continue as a going concern The amendments are effective for fiscal years
beginning on or after January 1, 2008.The Company will adopt
this standard, and management is currently assessing its impact on the Company’s
interim and annual financial statements.





(d)                 Adoption
of International Financial Reporting Standards





In
February 2008, the CICA Accounting Standards Board confirmed that publicly
accountable companies will be required to prepare interim and annual financial
statements under International


Financial
Reporting Standards (“IFRS”) for fiscal years beginning on or after January 1,
2011.


Management
is currently assessing the impact of adopting IFRS and has not yet determined
its effect on the Company’s financial statements.








3.
            SHORT
      TERM INVESTMENTS




March
      31, 2008
              
              
              March
      31, 2007Carrying
      average costs
              
              
              fair
      market value
              
              
              Carrying
      average costs
              
              
              fair
      market valueMarketable
      securities
              
              
              4,637,738
              
              
              
              3,330,970
              
              
              
              3,200,401
              
              
              
              4,275,393Non-marketable
      securities
              
              
              302,790
              
              
              
              302,790
              
              
              
              115,290
              
              
              
              -$
              4,940,528
              
              
              $
              3,633,760
              
              
              $
              3,315,691
              
              
              $
              4,275,393Unrealised
      (loss) gain before tax
              
              
              
              
              
              $
              (1,306,768
              )
              
              
              
              
              
              $
              959,702Movements
      in unrealised (loss)gainAt
      beginning of year
              
              
              
              
              
              
              959,702
              
              
              
              
              
              
              
              746,928(loss)gain
      during year
              
              
              
              
              
              
              -2,266,470
              
              
              
              
              
              
              
              212,774At
      end of year
              
              
              
              
              
              $
              (1,306,768
              )
              
              
              
              
              
              $
              959,702
  13





Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





3.                SHORT
TERM INVESTMENTS – (Continued)





a.                Marketable
securities





Marketable
securities are designated as “available-for-sale”.





Marketable
securities are stated at fair value based on quoted market prices on the balance
sheet as at March 31, 2008. An unrealised loss of $ 2,266,470 for the year and
accumulated unrealised gain of $959,702 at the beginning of year was included in
the consolidated statement of comprehensive loss and accumulated other
comprehensive loss as a result of an adoption of a new accounting policy (Note
2).





Marketable
securities as at March 31, 2007 were stated at lower of cost and net realisable
value. Details of movements in unrealised gains are included for comparative
purposes only.





As at
March 31, 2008, the Company held warrants in certain marketable securities which
are exercisable at its option to convert into equal number of common shares of
the said securities. The total exercise price of these warrants was $ 414,176
and the market value of the underlying securities was $377,322 as at that date.
These warrants and the underlying unrealised gains and losses have not been
accounted for in the financial statements since the Company has not yet
determined if it would exercise these warrants when they become
exercisable.





b.                Non-marketable
securities





The
following investments which are stated at cost since their market value was not
easily ascertainable as at March 31, 2008 and the management believes that it
approximates the cost.





(a)
            50,000
      preference shares held in a private corporation for a cost of US$50,000.
      (CDN$ 51,395)


(b)
            500,000
      Class A shares held in a private corporation for a cost of US$50,000.
      (CDN$ 51, 395)


(c)
            1,000,000
      common shares in a private corporation for a cost of $200,000. (see note
      12(x))





Based on
the management review of the affairs of the above investee companies and
discussions with their management, it was concluded that there was no other than
temporary impairment in the carrying costs of these investments as at March 31,
2008. The factors considered in our impairment review included length of time
the security was held, extent to which the fair value was below cost, current
financial conditions of the investee companies, near term prospects of the
investee companies and our ability and intent to hold the investment for a
period of time sufficient to allow for any anticipated recovery.








4.
            OFFICE
      EQUIPMENT AND FURNITURE




Cost
              
              
              Accumulated
      Amortisation
              
              
              Net
      Book Value
              
              
              Net
      Book ValueAs
      at March 31,
              
              2008
              
              
              2007Office
      furniture
              
              
              4,725
              
              
              
              473
              
              
              
              4,252
              
              
              
              -Computer
              
              
              2,298
              
              
              
              344
              
              
              
              1,954
              
              
              
              -$
              7,023
              
              
              $
              817
              
              
              $
              6,206
              
              
              $
   1,150,000
              issued
      on February 9, 2007 relating to their services for the contract year ended
      December 31, 20071,350,000
              issued
      on March 28, 2008 relating to their services for the contract year ending
      December 31, 2008.
   14




Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007








5.      PREPAID
CONSULTING SERVICES





Prepaid
consulting services relates to the fair value of shares and options issued under
the Company’s Consultants’ Stock Compensation and Stock  Option Plans
to consultants for services that will be performed during the period subsequent
to the balance sheet date. Changes during the year were as follows:




Balance
      at April 1, 2007
              
              
              Deferred
      during the year
              
              
              Canceled
      during the year
              
              
              Expensed
      during the year
              
              
              Balance
      at March 31, 2008Options
              
              $
              -
              
              
              $
              7,878
              
              
              $
              -
              
              
              $
              -
              
              
              $
              7,878Stocks
              
              
              276,146
              
              
              
              316,120
              
              
              
              -
              
              
              
              (314,248
              )
              
              
              278,018$
              276,146
              
              
              $
              323,998
              
              
              $
              -
              
              
              $
              (314,248
              )
              
              $
              285,896Balance
      at April 1, 2006
              
              
              Deferred
      during the year
              
              
              Canceled
      during the year
              
              
              Expensed
      during the year
              
              
              Balance
      at March 31, 2007Options
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Stocks
              
              
              314,208
              
              
              
              335,891
              
              
              
              (5,980
              )
              
              
              (367,973
              )
              
              
              276,146$
              314,208
              
              
              $
              335,891
              
              
              $
              (5,980
              )
              
              $
              (367,973
              )
              
              $
              276,146
  15





6.      OIL
AND GAS PROPERTIES INTERESTS





April
      1, 2007
              
              
              Exploration
      costs
              
              
              Amortization
              
              
              Write-off
              
              
              March
      31, 2008Interest
      in gas properties
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -$
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -April
      1, 2006
              
              
              Exploration
      costs
              
              
              Disposal
              
              
              Write
      off
              
              
              March
      31, 2007Interest
      in gas properties (i)
              
              
              -
              
              
              
              4,142
              
              
              
              -
              
              
              
              (4,142
              )
              
              
              -$
              -
              
              
              $
              4,142
              
              
              $
              -
              
              
              $
              (4,142
              )
              
              $
              -
  i.
Interest in gas property





In July 2006, the Company paid $4,142 (US$3,638) to the project contractor of a
gas exploration project in the State of Louisiana, USA (“the Project”) towards
its share of the cost


of open hole logging. The Company’s participation interest in the Project was
fully written off in fiscal 2006 due to a dry well. The Company does not expect
any further costs on


the Project.




16




Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





7.      CAPITAL
STOCK





(a)         Authorized





Unlimited number of common
shares





(b)         Issued





As
      at March 31
              
              
              2008
              
              
              2007Restated
      - refer to note 17Common
              
              
              
              
              
              CommonShares
              
              
              Amount
              
              
              Shares
              
              
              AmountBeginning
      of year
              
              
              
              28,430,203
              
              
              $
              32,413,811
              
              
              
              22,757,703
              
              
              $
              32,175,000Issued
      under a private placement
              
              
              
              -
              
              
              
              -
              
              
              
              4,500,000
              
              
              
              1,303,126Warrants
      issued
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              (1,263,914
              )Expenses
      relating to private placement
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              (130,313
              )Warrants
      exercised
              
              
              
              315,540
              
              
              
              122,446
              
              
              
              -
              
              
              
              -Expenses
      relating to warrants excercised
              (i)
              
              
              
              
              
              
              (12,245
              )
              
              
              -
              
              
              
              -Value
      of warrants transferred to capital stoock upon exercise
              
              
              
              
              
              
              
              61,356
              
              
              
              
              
              
              
              -Issued
      under 2003 Consultant Stock Compensation Plan
              
              
              
              -
              
              
              
              -
              
              
              
              42,500
              
              
              
              22,406Issued
      under 2007 Consultant Stock Compensation Plan
              (ii)
              
              
              1,350,000
              
              
              
              316,120
              
              
              
              1,150,000
              
              
              
              313,486Shares
      canceled
              
              
              
              -
              
              
              
              -
              
              
              
              (20,000
              )
              
              
              (5,980
              )30,095,743
              
              
              $
              32,901,488
              
              
              
              28,430,203
              
              
              $
              32,413,811




(i)
            Expenses
      relating to warrants exercised are  finder’s fees payable to
      Current Capital Corp., a related corporation, at the rate of 10% of the
      proceeds.





(ii)
            2007
      Consultant Stock Compensation Plan (“the
Plan”)





On
      January 16, 2007, the Company registered the Plan with Securities and
      Exchange Commission (‘SEC”) in a registration statement under the US
      Securities Act of 1933 (”the Act”). 1.5 million Common shares of the
      Company were registered under the Plan. On December 12, 2007, the Company
      registered an amendment to the Plan with the SEC under the Act. An
      additional 1 million common shares were registered under the amended Plan.
      2.5 million registered common shares were issued to three consultants as
      follows:





1,150,000
            issued
      on February 9, 2007 relating to their services for the contract year ended
      December 31, 2007 and


1,350,000
            issued
      on March 28, 2008 relating to their services for the contract year ending
      December 31, 2008.





17




Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





8.      STOCK
OPTION PLANS





The
following is a summary of all Stock Option Plans as at March 31,
2008::





Plan
              Date
      of registration *
              
              #
      of OptionsRegistered
              
              
              issued
              
              
              Expired
              
              
              Exercised
              
              
              Outstanding1999
      Stock option Plan
              April
      30, 2003
              
              
              3,000,000
              
              
              
              3,000,000
              
              
              
              -70,000
              
              
              
              -1,200,000
              
              
              
              1,730,0002003
      Stcok Option Plan
              July
      22, 2004
              
              
              2,500,000
              
              
              
              2,500,000
              
              
              
              -155,000
              
              
              
              -400,000
              
              
              
              1,945,000The
      Robinson Plan
              December
      5, 2005
              
              
              1,100,000
              
              
              
              1,100,000
              
              
              
              -
              
              
              
              -
              
              
              
              1,100,0002005
      Stock Option Plan
              December
      5, 2005
              
              
              1,000,000
              
              
              
              50,000
              
              
              
              -
              
              
              
              -
              
              
              
              50,0007,600,000
              
              
              
              6,650,000
              
              
              
              -225,000
              
              
              
              -1,600,000
              
              
              
              4,825,000


*   Registered
      with the Securities and Exchange Commission of the United States of
      America (SEC) as required under the Securities Act of
  1933.





All
options were fully vested on the dates of their grant.





(b)
            Movements
      in stock options during year are as
follows:


March
      31, 2008
              
              
              March
      31, 2007#
      of Options
              
              
              Weighted
      average exercise price in US $
              
              
              #
      of Options
              
              
              Weighted
      average exercise price in US $Issued
      and outstanding at beginning of year
              
              
              4,795,000
              
              
              $
              0.46
              
              
              
              4,795,000
              
              
              $
              0.46Issued
      during year (i)
              
              
              50,000
              
              
              $
              0.35Expired
      during year
              
              
              -20,000
              
              
              $
              0.75Issued
      and outstanding at end of year
              
              
              4,825,000
              
              
              $
              0.46
              
              
              
              4,795,000
              
              
              $
              0.46


(i)
            On
      March 28, 2008, 25,000 options were issued to each of the two members of
      the audit committee, who are the independent directors of the Company, for
      their services during the fiscal year 2009. The options are exercisable to
      convert into equal number of common shares of the Company at an exercise
      price of US$.35 per option. The options are valid for five
      years.





The
      fair value of these options has been estimated to be US$ 7,738 (CDN$
      7,878) using a Black-Scholes option price model with the following
      assumptions:





Risk free interest rate
            5%


Expected dividend
            nil


Expected volatility (based on previous 261 weeks average market
      price)
            170.26%


Expected life
            5
      years


Market
      pricefor Common Shares of the Company’s stock
            US$0.23




18




Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





8.      STOCK
OPTION PLANS - continued........





Option
      price models used for calculating fair value of options require 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 models do not necessarily provide a
      reliable measure of the fair value of the Company’s
    options.





(C)       Details
of weighted average remaining life of the options granted and outstanding are as
follows:




2008
              
              
              2007Options
      outstanding & excercisable
              
              
              Options
      outstanding & excercisableExercise
      price in US$
              
              
              Number
              
              
              Weighted
      average remaining contractual life (years)
              
              
              Number
              
              
              Weighted
      average remaining contractual life (years)0.35
              
              
              
              1,680,000
              
              
              
              1.67
              
              
              
              1,630,000
              
              
              
              2.330.50
              
              
              
              3,015,000
              
              
              
              1.85
              
              
              
              3,025,000
              
              
              
              2.370.75
              
              
              
              125,000
              
              
              
              1.38
              
              
              
              125,000
              
              
              
              2.391.00
              
              
              
              5,000
              
              
              
              1.38
              
              
              
              15,000
              
              
              
              2.380.46
              
              
              
              4,825,000
              
              
              
              1.78
              
              
              
              4,795,000
              
              
              
              2.36
  All
options were fully vested immediately as at March 31, 2008 and 2007. The options
can be exercised at any time after vesting within the exercise period in
accordance with the applicable option agreement. The exercise price was more
than the market price on the date of the grants for 1,995,000 options (2007:
1,965,000)and less than the market price for the balance of 2,830,000 (2007:
2,830,000) options. Upon expiry or termination of the contracts, vested options
must be exercised within 30 days for consultants and 90 days for
directors.




19




Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





9.
            WARRANTS





(a)
            Movement
      in warrants during the year are as
follows:




2008
              2007#
      of warrants
              Weighted
      average exercise price
              Fair
      value
              #
      of warrants
              Weighted
      average exercise price
              Fair
      value (Restated -see note 17)Issued
      and outstanding, beginning of year
              13,161,960
              0.44
              2,215,213
              5,667,410
              0.55
              951,299Issued
      during year
              -
              
              -
              7,540,000
              0.35
              1,263,914Exercised
      during year
              (315,540)
              
              (61,356)Expired
      during year
              
              
              -
              -45,450Issued
      and outstanding, end of year
              12,846,420
              0.44
              2,153,857
              13,161,960
              0.44
              2,215,213


(i)
            11,124,460
      warrants issued under 2006 private placement were expiring between March
      8, 2008 and April 15, 2008. On February 29, 2008, the board of directors
      of the Company revised certain terms of these warrants as
      follows:





a.
            the
      expiry dates of these warrants were extended by nine months from their
      current expiry dates.


b.
            Expiry
      date of these warrants may be brought forward at the option of the Company
      if following April 15, 2008; the closing price of the Company’s common
      shares exceeds US$0.50 for twenty consecutive business days. In the event
      of exercising its option by the Company, the warrants will expire on the
      date that is twenty business days following the issuance of a press
      release announcing the reduced warrant
term.




The fair value of these warrants on February 29, 2008, being the date on which
their terms changed, has been re-estimated using a Black-Scholes option price
model with the


following assumptions:




Risk free interest rate  5


Expected
dividendnil


Expected
volatility (based on previous 20 weeks average market price) 
98.92%


Expected
life2  75 days


Exercise
price  US$0.35


Market
price  US$0.30




The
value based on the above model came to $959,807. No revision was made to the
existing value of the warrants for extending their expiry dates, since the
expiry dates of the


warrants
were extended to enable the warrant holders to exercise the warrants and convert
them to equity.




Option price
models used for calculating fair value of warrants require 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 models do not necessarily provide a reliable measure of the fair value of
the Company’s


warrants.


20





Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





9.(a)           WARRANTS
– Continued.......





(ii)
            Correction
      of an error in valuation





During
      the fiscal years 2004 and 2006, 13,161,960 warrants were issued in
      connection with various private placements. These warrants together with
      common shares formed a Unit subscribed and paid for under the private
      placements. These warrants were originally valued at $6,961,152 using the
      black-scholes valuation model. This value was applied to the capital stock
      and resulted in a negative amount, which is not permitted under CICA
      handbook section 3861.22.





The
      management has therefore revised the valuation of these warrants using the
      relative fair value method allowed under both the Canadian and US
      accounting standards. Based on this valuation method, the revised value of
      the warrants issued came to $2,215,213. The excess value of $4,745,939 was
      credited to the capital stock..





These
      changes have no effect on the shareholders’ equity, the consolidated
      statement of operations, consolidated statement of cash flows and
      consolidated statement of comprehensive loss and accumulated other
      comprehensive loss.





(b)
            Details
      of weighted average remaining life of the options granted and outstanding
      are as follows:


2008
              
              
              2007Warrants
      outstanding & excercisable
              
              
              Warrants
      outstanding & excercisableExercise
      price in US$
              
              
              Number
              
              
              Weighted
      average remaining contractual life (years)
              
              
              Number
              
              
              Weighted
      average remaining contractual life (years)1.00
              
              
              
              1,721,960
              
              
              
              1.00
              
              
              
              1,721,960
              
              
              
              2.000.35
              
              
              
              11,124,460
              
              
              
              0.77
              
              
              
              11,440,000
              
              
              
              1.020.46
              
              
              
              12,846,420
              
              
              
              0.80
              
              
              
              13,161,960
              
              
              
              1.14





10.           LOSS
PER SHARE





Loss per share is calculated on the weighted average number of common shares
outstanding during the year, which were 28,840,653 shares for the year ended
March 31, 2008


2007 – 27,472,703, 2006 – 15,655,023).





The Company had approximately 12.8 million warrants and 4.8 million options,
which were not exercised as at March 31, 2008. Inclusion of these warrants and
options in the


computation
of diluted loss per share would have an anti-dilutive effect on loss per share
and are therefore excluded from the computation. Consequently, there is no
difference


between
loss per share and diluted loss per share.





21


Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





11.                 INCOME
TAXES





Income
tax expense differs from the amount that would be computed by applying the
Federal and Provincial statutory income tax rates to income before income taxes.
The reasons


for the differences are as follows:


2008
              
              
              2007
              
              
              2006Income
      tax recovery based on combined corporate income tax rate of 33.50% (2007
      and 2006: 36.12%)
              
              $
              (191,553
              )
              
              $
              (59,237
              )
              
              $
              (1,728,318
              )Increase(Decrease)
      in taxes resulting from:Investments
      in Subsidiary (BDC) written off on disolution of the
      subsidiary
              
              
              -50,280
              
              
              
              -
              
              
              
              -Non-deductible
      stock based compensation
              
              
              105,273
              
              
              
              132,912
              
              
              
              716,960Non-deductible
      meals & entertainment expenses
              
              
              11,199
              
              
              
              7,503
              
              
              
              9,210Gain
      on sale of short term investments
              
              
              -41,616
              
              
              
              -117,482
              
              
              
              -72,581Amortisation
              
              
              295
              
              
              
              -
              
              
              
              -Deductible
      capital cost allowance
              
              
              -
              
              
              
              -8,035
              
              
              
              -Income
      tax recovery
              
              
              -166,682
              
              
              
              -44,339
              
              
              
              -1,074,729Benefit
      of tax losses not recognised
              
              
              166,682
              
              
              
              44,339
              
              
              
              1,074,729Provision
      for income taxes
              
              $
              -
              
              
              $
              -
              
              
              $
              -


The
component of the future income tax asset and the country of origin at March 31,
2008 and 2007 are as follows (applying the combined Canadian federal and
provincial


statutory income tax rate of 33.50% (2007: 36.12%) and the US income tax rate of
34.00% for both the years):


Canada
              
              
              US2008
              
              
              2007
              
              
              2008
              
              
              2007in
      '000 $Future
      income tax assets:Non-capital
      losses carried forward
              
              $
              2,697
              
              
              $
              2,796
              
              
              $
              1,498
              
              
              $
              1,498Capital
      losses carried forward
              
              
              647
              
              
              
              698
              
              
              
              -
              
              
              
              -Unrealised
      losses on short term investments
              
              
              438Future
      tax assets
              
              
              3,782
              
              
              
              3,494
              
              
              
              1,498
              
              
              
              1,498Valuation
      allowance
              
              
              -3,782
              
              
              
              -3,494
              
              
              
              -1,498
              
              
              
              -1,498Future
      income taxes
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -


The Company has approximately $8 million (2007: $7.9 million) in Canadian
non-capital losses, $1.9 million (2007: $1.9 million) in capital losses and US$
4.4 million in US non-capital


losses available to claim against future taxable income. The benefits arising
from these losses has not been included in the financial statements as
management has determined


that it
is not more likely than not that the losses will be utilized.





22




Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





11.                 INCOME
TAXES – (Continued)





The
non-capital losses expire as follows:





Canadian in
CDN$                                                             US
in US$


In
000’$                                                                In
000’$





2009                                            $
1,007


2010                                                   232


2014                                               1,337


2015                                               1,319                                           2025                      $           1,050


2026                                               3,373                                           2026                                  
3,300


2027                                                  271                                           2027                                     25


2028                                                  510





$
8,049                                                                           $          4,375








12.           COMMITMENTS  AND
CONTINGENT LIABILITIES





(a)
            The
      Company entered into media relations and investor relations contracts with
      Current Capital Corp., a shareholder corporation, effective July 1, 2004
      initially for a period of one year and renewed automatically unless
      cancelled in writing by a 30-day notice for a total monthly fee of
      US$10,000.00





(b)
            The
      Company entered into a consulting contract with Mr. Kam Shah, the Chief
      Executive Officer and Chief Financial Officer on April 1, 2005 for a
      five-year term up to March 31, 2010.  The fee for each of the
      years is to be decided at the board meeting after the end of the third
      quarter of the calendar year. The fee for the calendar year ending
      December 31, 2008 consists of 450,000 common shares of the Company issued
      under 2007 Consultant compensation plan (refer note
      6(b)(ii)).  Mr. Shah was also approved cash fee of $10,000 plus
      taxes per month for the period from January 2008 to May 2008 for his
      services in connection with the new internal control compliance matters.
      Effective June 1, 2008,Mr. Shah is allowed to draw $10,000 per month in
      arrears until market price of the Company’s common shares reaches $0.50
      provided that such drawings will be considered as fee advances to be
      repaid when the market price of the common shares of the Company stays at
      $0.50 or above for a consecutive period of three months. . Further, the
      contract provides for a lump sum compensation of US$250,000 for early
      termination of the contract without cause. The contract also provides for
      entitlement to stock compensation and stock options under appropriate
      plans as may be decided by the board of directors from time to
      time.





(c)
            The
      Company entered into a consulting contract with Mr. Terence Robinson, a
      key consultant and a former Chief Executive Officer, on April 1, 2003 for
      a six-year term up to March 31, 2009. The contract provides for a monthly
      fee of $10,000 inclusive of taxes plus reimbursement of expenses and a
      lump sum compensation of $250,000 for early termination of the contract
      without cause.  Mr. Robinson accepted 550,000 common shares
      issued under 2007 Consultant Stock Compensation Plan as detailed in Note
      6(b)(ii), in lieu of his fees for the year ending December 31,
      2008.








23


Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





12.           COMMITMENTS
AND CONTINGENT LIABILITIES – (Continued)





(d) The Company has a consulting
      contract with Mr. John Robinson expiring in June 2007. Mr. John Robinson
      is sole owner of Current Capital Corp., a firm with which the Company has
      an ongoing contract for media and investor relations, and a brother of Mr.
      Terence Robinson who is a key consultant to the Company and a former Chief
      Executive Officer of the Company.  On March 28, 2008, the
      Company renewed the consulting contract with Mr. John Robinson for another
      year to June 30, 2009.  The consulting fee was agreed to be
      US$82,000 which was pre-paid by issuance of 350,000 common shares under
      2007 Consultant Stock Compensation Plan as detailed in Note
      6(b)(ii).  Mr. Robinson will provide services that include
      assisting the management in evaluating new projects and monitoring short
      term investment opportunities that the Company may participate in from
      time to time.


(e)The Company has
      agreed to payment of a finder’s fee to Current Capital Corp., a related
      party, at the rate of 10% of the proceeds from exercise of any of the
      outstanding warrants. The likely fee if all the remaining warrants are
      exercised will be approximately
US$562,000.





13.           RELATED
PARTY TRANSACTIONS





Transactions
with related parties are incurred in the normal course of business and are
measured at the exchange amount. Related party transactions and balances have
been listed below, unless they have been disclosed elsewhere in the financial
statements.





(i)
            Included
      in shareholders information expense is $124,231 (2007 – $136,249; 2006 –
      $143,391) to Current Capital Corp, (CCC) for media relation’s services.
      CCC is a shareholder corporation and a director of the Company provides
      accounting services as a
consultant.





(ii)
            CCC
      charged approximately $8,175 for rent, telephone and other office expenses
      (2007: $5,666 and 2006: $8,200).





(iii)
            Finders
      fees of $12,245 (2007: $740,043, 2006: $397,944) was charged by CCC in
      connection with the private placement. (The fee for 2007 included a cash
      fee of $130,313 and 1,040,000 warrants valued at $609,730 using the
      Black-Scholes option price model).





(iv)
            Business
      expenses of $15,771 (2006 - $10,279; 2006 - $15,805) were reimbursed to
      directors of the corporation and $118,774 (2006 - $85,862, 2006: $143,987)
      to a key consultant and a former chief executive officer of the
      Company.





(v)
            Shares
      issued to a director under the Consultant’s stock compensation plan –
      450,000 valued at $105,373 (2007 : 350,000 valued at $95,409, 2006:
      328,000 valued at $98,072,). Shares issued to a key consultant and a
      former chief executive officer of the Company under the Consultant stock
      compensation plan –550,000 valued at $ 128,790 (2007: 500,000 valued at $
      136,298, 2006: 480,000 valued at
$143,500).





(vi)
            Options
      issued to directors under Stock option plans – 2008: 50,000 valued at
      $7,878 (2007: nil, 2006:  nil). Options issued to a key
      consultant and a former chief executive officer of the Company under Stock
      option plans:  nil (2007: nil, 2006: 1,100,000 valued at
      $655,779 ).





(vii)
            Cash
      fee paid to directors for services of $33,871 (2007 and 2006: $ nil). Fees
      prepaid to a director $2,470 (2007 and 2006: $ nil). These fees are
      included under travel, promotion and consulting
  expenses.





24




Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





13.           RELATED
PARTY TRANSACTIONS – (Continued)





(viii)
            Accounts
      payable includes $9,384 (2007: $3,471, 2006: $7,145) due to CCC, $757
      (2006: $1,431, 2006: $1,758) due to a director and $6,577 (2006: $7,099,
      2006: $ 3,562) due to a key consultant and a former chief executive
      officer of the Company.





(ix)
            Interest
      income includes $ nil (2007: 1,398 & 2006: $nil) representing interest
      received from the Chief Executive
officer.





(x)
            Included
      in short term investments is an investment of $200,000 (2007 & 2006:
      $nil) in a private corporation controlled by a brother of the key
      consultant.





(xi)
            Included
      in short term investmentsis an investment of $1,929,049 carrying cost and
      $1,140,120 fair value (2007: $1,604,493 carrying cost and $2,710,760 fair
      value) in a public corporation controlled by a key shareholder of the
      Company. This investment represents common shares acquired in open market
      or through private placements and represents less than 1% of the said
      Corporation.





14.           SEGMENTED
INFORMATION





As at March 31, 2008 and 2007, the Company had only one major business
segment-





Energy sector:This segment includes the Company’s acquisition of interests in joint
ventures and projects relating to exploration and commercial drilling of oil and
gas and relate


products.





The accounting policies of the segments are same as those described in Note 2.
The Company evaluates each segment’s performance based on its contribution to
consolidated


net earnings. There are no inter-segmental charges or transactions.





The
Company had no business activity in the above segment.





The
Company is now seeking business participation opportunities in all sectors. This
may change the future major business segments for the Company.





Geographic
Information





The Company operates from one location in Canada. Its assets are located as
follows:





2008
              
              
              2007Canada
              
              $
              5,239,122
              
              
              $
              6,557,628USA
              
              
              -
              
              
              
              115,290$
              5,239,122
              
              
              $
              6,672,918
  25




Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





15.           FINANCIAL
INSTRUMENTS AND CONCENTRATION OF RISKS





The
Company is exposed in varying degrees to a number of risks arising from
financial instruments. Management’s close involvement in the operations allows
for the


identification
of risks and variances from expectations. The Company does not participate in
the use of financial instruments to mitigate these risks and has no
designated


hedging transactions.
The Board approves and monitors the risk management processes. The Board’s main
objectives for managing risks are to ensure liquidity, the fulfilment
of


obligations,
the continuation of the Company’s search for new business participation
opportunities, and limited exposure to credit and market risks while ensuring
greater returns


on
the surplus funds on hand. There were no changes to the objectives or the
process from the prior period.





The
types of risk exposure and the way in which such exposures are managed are as
follows:





(a) Concentration risk:





Concentration risks exist in cash and cash equivalents because significant
balances are maintained with one financial institution and two brokerage firms.
The risk is mitigated


because
the financial institution is a prime Canadian bank and the brokerage firms are
well known Canadian brokerage firms with good market reputation.




(b)
Market price risk:





Market risk
primarily arises from the Company’s short term investments in marketable
securities which accounted for approximately 69% of total assets of the Company
as at


March 31, 2008( 50% at March 31, 2007). Further, the Company’s holding in one
Canadian marketable security accounted for approximately 31% (2007: 50%) of the
total short term


investment
in marketable securities or 21% (2007: 24%) of total assets at March 31,
2008.





The management mitigates this risk by daily monitoring of all its investments by
experienced consultants.





(c)
Liquidity risk:





Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they become due.





The Company ensures there is sufficient capital to meet short term business
requirements. In addition, management and key consultants have opted to accept
the Company’s


common shares instead of cash towards their fee to ensure greater cash flow for
other operational and business needs.





One of management’s goals is to maintain an optimal level of liquidity through
the active management of the assets, liabilities and cash flows.





The Company’s maintains limited cash for its operational needs while most of its
surplus cash is invested in short term marketable securities which are available
on short notice to


fund the Company’s operating costs and other financial demands.




26





Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





15.           FINANCIAL
INSTRUMENTS AND CONCENTRATION OF RISKS – (Continued)





(d) Currency risk





The operating results and financial position of the Company are reported in
Canadian dollars. Significant part of cash and short term investments are held
in US dollars –


approximately 23% of total assets at March 31, 2008 (19% as at March 31, 2007).
The results of the Company’s operations are therefore subject to currency
transaction and


translation
risk.





The fluctuation of the US dollar in relation to the Canadian dollar will
consequently impact the loss of the Company and may also affect the value of the
Company’s assets and


the amount of shareholders’ equity.





Comparative foreign exchange rates as at March 31, 2008 are as
follows:


March
31,


2008                                  2007





US Dollar to CDN
Dollar                                                                       
1.0279                               1.1680





The Company has not entered into any agreements or purchased any foreign
currency hedging arrangements to hedge possible currency risks at this
time.








16.
            DIFFERENCES
      BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
      PRINCIPLES




These financial statements have been prepared in accordance with generally
accepted accounting principles in Canada ("Canadian GAAP").  Material
variations in the


accounting principles, practices and methods used in preparing these
consolidated financial statements from principles, practices and methods used in
the United States


("US GAAP")
and in SEC Regulation S-X are described and quantified below.





27




Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





16.
            DIFFERENCES
      BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
      PRINCIPLES – continued..........


(Restated
      - refer to note 17)
              
              
              
              
              
              (Restated
      - refer to note 17)Balance
      SheetsCurrent
      assets
              
              $
              5,232,916
              
              
              
              -
              
              
              $
              5,232,916
              
              
              $
              6,672,918
              
              
              
              959,701
              
              
              $
              7,632,619Long
      term assets
              
              
              6,206
              
              
              
              -
              
              
              
              6,206
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
      assets
              
              $
              5,239,122
              
              
              $
              -
              
              
              $
              5,239,122
              
              
              $
              6,672,918
              
              
              $
              959,701
              
              
              $
              7,632,619Current
      Liabilities
              
              
              59,024
              
              
              
              
              
              
              
              59,024
              
              
              
              48,452
              
              
              
              
              
              
              
              48,452Capital
      stock
              
              
              32,901,488
              
              
              
              
              
              
              
              32,901,488
              
              
              
              32,413,811
              
              
              
              
              
              
              
              32,413,811Warrants
              
              
              2,153,857
              
              
              
              
              
              
              
              2,153,857
              
              
              
              2,215,213
              
              
              
              
              
              
              
              2,215,213Accumulated
      other comprehensive income
              
              
              (1,306,768
              )
              
              
              -
              
              
              
              -1,306,768
              
              
              
              -
              
              
              
              1,412,673
              
              
              
              1,412,673Contributed
      surplus
              
              
              4,077,427
              
              
              
              
              
              
              
              4,077,427
              
              
              
              4,069,549
              
              
              
              
              
              
              
              4,069,549Deficit
              
              
              (32,645,906
              )
              
              
              -
              
              
              
              (32,645,906
              )
              
              
              (32,074,107
              )
              
              
              (452,972
              )
              
              
              (32,527,079
              )Liabilities
      and shareholders' equity
              
              $
              5,239,122
              
              
              $
              -
              
              
              $
              5,239,122
              
              
              $
              6,672,918
              
              
              $
              959,701
              
              
              $
              7,632,619


The
impact of significant US GAAP variations on the Consolidated Statement of
Operations is as follows:


Year
      ended March 31
              
              2008
              
              
              2007
              
              
              2006Net
      Loss for year, Canadian GAAP
              
              $
              (571,799
              )
              
              $
              (164,043
              )
              
              $
              (4,784,933
              )Reclassification
      of exchange loss (gain) on year end translation of foreign currency items
      and balances (ii)
              
              
              -
              
              
              
              111,659
              
              
              
              194,758Loss
      for year US GAAP
              
              $
              (571,799
              )
              
              $
              (52,384
              )
              
              $
              (4,590,175
              )Reclassification
      of exchange (loss) gain on year end translation of foreign currency items
      and balances (ii)
              
              
              -
              
              
              
              -111,659
              
              
              
              -194,758Unrealised
      losses on "available for sale" short term investments( i)
              
              
              (2,266,470
              )
              
              
              -
              
              
              
              -Unrealised
      gain on short term investments      (
      i)
              
              
              -
              
              
              
              959,701
              
              
              
              746,928Comprehensive
      Income(loss) for year, US GAAP
              
              $
              (2,838,269
              )
              
              $
              795,658
              
              
              $
              (4,038,005
              )Basic
      and diluted loss per share, US GAAP
              
              $
              (0.02
              )
              
              $
              0.00
              
              
              $
              (0.29
              )





There was
no impact of the above differences between Canadian GAAP and US GAAP on the
consolidated statement of cash flows.




28




Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





16.
            DIFFERENCES
      BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
      PRINCIPLES (Continued)





The following are brief explanations of the identified differences:





(i)  Short-term
Marketable securities




As explained in Note 2, CICA introduced a new handbook section 3855 to recognize
and measure financial instruments including marketable securities. This revision
brings the


Canadian GAAP in line with the Statement of Financial Accounting Standard
(“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity
Securities”, which


requires
that equity securities that have readily determinable fair values be classified
as either available-for-sale or trading securities, and that they be reported at
fair market


values. For available-for-sale securities, unrealized gains or losses are to be
reported as other comprehensive income, a separate component of shareholders’
equity, until realized.


All short term investments are classified as “available-for-sale”.




Since the Company implemented the new Canadian standard on a prospective basis
with no restatement of prior period financials, the reconciliation is presented
to provide


comparatives as per US GAAP





(ii) Exchange
gains and losses on translation of foreign currency items and
balances





Under Canadian GAAP, as revised under the handbook section 1651, foreign
currency translation gains and losses are generally included in the
determination of net income


unless they relate to self sustaining foreign subsidiary, in which case, such
translation gains and losses are included in the other comprehensive income
computation. For the


fiscal year 2008, all translation losses of the Company were sustained by the
entity whose functional currency is Canadian dollar and are therefore included
in the computation of


income.




The above treatment under Canadian GAAP is in line with the treatment required
Under FAS 52 (13) and FAS 130 of the US GAAP.


(iii)
Future U.S. accounting policy changes




In December 2007, The Financial Accounting Standard Board (FASB) issued a
revised Financial Accounting Standard (FAS)  141, “Business
Combinations” which broadens


the scope
and defines the acquirer. The standard applies to reporting periods beginning on
or after December 15, 2008. The Company will evaluate the effect on this
standard


on any
future acquisitions or business combination transactions.





In
December 2007, FASB issued a new FAS 160, “Noncontrolling interest in
Consolidated Financial Statements” – an amendment of ARB No. 51. This Statement
establishes


accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary and changes the way the consolidated income
is


presented. The
standard applies to reporting periods beginning on or after December 15, 2008.
The Company does not believe that implementation of this Statement will
have


any
effect on its financial statements.





29




Bontan
Corporation Inc.


Notes
to Consolidated Financial Statements


(Canadian
Dollars)


March
31, 2008 and 2007





16.
            DIFFERENCES
      BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
      PRINCIPLES (Continued)





In March
2008, FASB issued FAS 161, “Disclosures about Derivative Instruments and Hedging
Activities” – an amendment of FASB Statement No. 133. The Statement changes the
disclosure requirements for derivative instruments and hedging activities. The
standard applies to reporting periods beginning on or after November 15, 2008.
The Company does not currently have or anticipate to have in the near future any
derivative instruments or hedging activities.





In May
2008, FASB issued FAS 162, “The Hierarchy of Generally Accepted Accounting
Principles”.The Statement identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements. This Statement is not expected to result in any change in
the current practice.This
Statement is effective 60 days following the SEC’s approval of the PublicCompany Accounting
Oversight Board amendments to AU Section 411, The MeaningofPresent Fairly in
Conformity With Generally Accepted Accounting Principles. The Company does not
believe that implementation of this Statement will have any effect on its
financial statements.





In May
2008, FASB issued FAS 163, “Accounting for Financial Guarantee Insurance
Contracts” – an interpretation of FAS No. 60. This Statement applies only to
Insurance enterprises and is not applicable to the Company.








17
            RESTATEMENT
      OF PRIOR YEAR COMPARATIVES





During the fiscal years 2004 and 2006, 13,161,960 warrants were issued in
connection with various private placements. These warrants together with common
shares formed a Unit


subscribed and paid for under the private placements. These warrants were
originally valued at $6,961,152 using the black-scholes valuation model. This
value was applied to the


capital stock and resulted in a negative amount, which is not permitted under
CICA handbook section 3861.22.





The
      management has therefore revised the valuation of these warrants using the
      relative fair value method allowed under both the Canadian and US
      accounting standards. Based on this valuation method, the revised value of
      the warrants issued came to $2,215,213. The excess value of $4,745,939 was
      credited to the capital stock.





The
effect of the above mentioned restatement is as follows:


Fiscal year 2007


As
restated                                                   As
previously reported





Capital
stock                                                                           
32,413,811                                                     27,667,872


Warrants                                                                                  2,215,213                                                      
6,961,152




These
      changes have no effect on the shareholders’ equity, the consolidated
      statement of operations, consolidated statement of cash flows,
      consolidated statement of comprehensive loss and accumulated other
      comprehensive loss and basic and diluted loss per
  share.





30