To the Shareholders of

Millstream Mines Ltd.

We have audited the Balance Sheet of Millstream Mines Ltd. as at August31, 1996 and August 31, 1995 and the Statements of Income and Deficit and Changes in Financial Position for the years then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

 In our opinion, these financial statements present fairly, in all material respects, the financial position of the company as at August 31,1996, and as at August31, 1995 and the results of its operations and the changes in its financial position for the years then ended in accordance with generally accepted accounting principles.

Approved on behalf of the board:

 
 

_________________________  Director

________________________  Director

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Nature of Operations

The accompanying financial statements have been prepared on the basis of accounting principles applicable to going concern which presumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business.

 The Company is in the process of exploring its resource properties and has not yet determined whether the properties contain economically recoverable reserves. The recovery of the amounts shown for resource properties and the

related deferred expenditures is dependent upon the existence of economically recoverable reserves, confirmation of the Company's interest in the underlying mining claims, the ability of the Company to obtain necessary financing to complete the development, upon future profitable production and the support of the Company's trade creditors.

 The financial statements do not give effect to any adjustments to the amount of assets and liabilities that might be necessary should the Company be unable to continue as a going concern and therefore, be required to realize its assets and discharge its liabilities in other than the ordinary course of business.

Mining Claims

Mining claims are carried at cost until they are brought into production at which time they are depleted on a unit-of-production basis. Exploration expenditures relating to mining claims are deferred until the properties are brought into production at which time they are amortized or a unit-of-production basis.

 The cost of claims abandoned or sold and the deferred exploration costs relating to claims abandoned or sold are charged to operations in the current year.

 Administrative Expenses

 Administrative expenses are charged to operations in the year incurred.

 Oil and Gas Interests

 The Company follows the successful efforts method of accounting for oil and gas interests whereby all costs relating to the acquisition, exploration and development of petroleum and natural gas reserves are capitalized until their economic status has been evaluated.

 All costs of successful wells are amortized over their useful lives.

1. OIL AND GAS INTERESTS

 The Company holds a 6.25% interest in two producing wells in Canadian County, Oklahoma, U.S.A. with royalty interests not exceeding 25%. The wells are recorded or the books of the Company at the nominal value of $ 1 each.

 During the year, the company abandoned one its producing wells.

2. MINING CLAIMS AND DEFERRED EXPLORATION EXPENDITURES

1. Red Bluff Claims, Montana, U.S.A.

 The Company holds 14 unpatented mining claims located in the State of Montana, U.S.A. The vendor reserved an overriding royalty ranging from 2.5% to 6% depending on the average recovered value per ton of ore.

2. Ogden and Deloro Townships, Ontario

 The Company holds a 7.5% interest in a lease on 16 contiguous patented mining darns, subject to a 20% net profits royalty.

3. Gold properties, Czech Republic

The company holds a 65% interest in 5 gold properties located in the Czech Republic, formerly part of Czechoslovakia.

4. Potter Mine, Ontario

3. RELATED PARTY TRANSACTIONS

An officer and shareholder of the Company is also a shareholder of The Harrison Group of Companies. Edward Harrison is related to The Harrison Group of Companies.

 
 

Edward Harrison	$ 38,250
The Harrison Group of Companies	$ 1,521,420
	1,559,670
a) Less: short term portion	739,907
b) Long term portion	$ 819,763

 

a) This loan is not interest bearing and due on demand.

b) This loan is interest free until, and is due, September 1, 1999 or one year after production of the Czech Gold Project, whichever occurs first.

4. LOANS PAYABLE

These loans are non-interest bearing and due on demand.

5. COMMON SHARES

During the year:

a) 2,160,000 common shares were issued for a total of $ 306,000

b) 2,000,000 share options under the Company's stock option plan were issued at $0.13 per share expiring September 22, 2000. At August 31, 1996, 200,000 of these options were outstanding.

c) 1.000,000 share options under the company's stock option plan were issued at $0.63 per share expiring August 28, 2001

d) 180,000 warrants exercisable for up to 2 years from December 1995 at an exercise price of $0.50 during the first year and an exercise price of $0.75 during the second year.

Warrants outstanding at August 31, 1996 are as follows:

- 2,000,000 @ $0.75 expiring April 1997

- 3.000,000 @ $1.00 expiring April 1998

- 3,000,000 @ $1.25 expiring April 1999

- 180,000 @ $0.50 to $0.75 expiring December 1996 and December 1997

6. SUBSEQUENT EVENTS

In September 1996, 125,000 warrants as described in Note 5(d) were exercised at $0.50 each, and 100,000 share options as described in Note 5(c) were exercised at $0.63 each.

 
 

CASH PROVIDED BY (USED FOR) :	1996	1995
Operating Activities:
Net loss	$ (33,588)	$ (2,687)
Decrease (increase) in non-cash components of working capital.	(142,920)	4,280
	(176,508)	1,593
Financing Activities
Sale of common shares for cash	125,500
Financing Activities:
Deferred exploration expenditures	(52,618)
Increase (decrease) in cash	(103,626)	1,593
Cash, beginning of period	111,020	151
Cash, end of period	$ 7,394	$ 1,744

 

 
 

CASH PROVIDED BY (USED FOR) :	1997	1996
Operating activities:
Net loss	$ (46,055)	$(6,895)
Increase in non-cash components of working capital	(130,916)	(69,053)
Financing Activities:
Sale of common shares for cash	125,500	78,000
Common shares to be issued in consideration of flow through exploration expenditures	285,000	72,000
	410,500	150,000
Investing Activities:
Deferred exploration expenditures	(296,246)	(72,000)
Increase (decrease) in cash	(62,717)	2,052
Cash, beginning of period	111,020	151
Cash, end of period	$48,303	$2,203

 

LITVACK, ADELMAN
CHARTERED ACCOUNTANTS
146 West Beaver Creek Road Richmond Hill, Ont., Canada L4B 1C2
Telephone: 905-731-7353 Fax: 905-731-4210