Lightbridge (LTBR) 8-K Company poised for growth in nuclear energy industry

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES AND EXCHANGE ACT OF 1934

Date of Report (Date of Earliest Event Reported): October 11, 2006 (October 6, 2006)

THORIUM POWER, LTD.

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(Exact name of registrant as specified in its charter)

Nevada	000-28535	91-1975651
(State of Incorporation)	(Commission File No.)	(IRS Employer ID No.)

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8300 Greensboro Drive, Suite 800, McLean, VA 22102

(Address of Principal Executive Offices)

800-685-8082

(Registrant’s Telephone Number, Including Area Code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS

Consummation of the Merger

On October 6, 2006, Thorium Power, Ltd. (formerly Novastar Resources Ltd.) (“Thorium Ltd.”), a Nevada corporation, TP Acquisition Corp. (“Acquisition”), a wholly-owned subsidiary of Thorium Ltd., and Thorium Power Inc. (“Thorium Inc.”) consummated a business combination whereby Acquisition merged with and into Thorium Inc., with Thorium Inc. being the surviving entity and, as a result, becoming a wholly-owned subsidiary of Thorium Ltd. (the “Merger”).

The Merger was consummated pursuant to the terms of an Agreement and Plan of Merger among the parties that was entered into on February 14, 2006 and then amended on June 12, 2006 and August 8, 2006 (the “Merger Agreement”).

In accordance with the terms of the Merger Agreement, the following occurred with respect to the outstanding common shares, stock options and warrants of Thorium Inc. at the closing of the Merger:

·   all of the shares of common stock of Thorium Inc. were cancelled and each registered owner of outstanding shares Thorium Inc. common stock automatically became the registered owner of 25.6278 shares of common stock of Thorium Ltd for each share of Thorium Inc. common stock that they previously owned;

·   all of the Thorium Inc. warrants that had an exercise price of $1.00, were cancelled and each holder of such warrants automatically became the holder of 22.965 shares of common stock of Thorium Ltd. for each $1.00 warrant that they previously owned;

·   all of the Thorium Inc. warrants that had an exercise price of $5.00, were cancelled and each holder of such warrants automatically became the holder of 12.315 shares of common stock of Thorium Ltd. for each $5.00 warrant that they previously owned;

·   all of other outstanding warrants and options of Thorium Inc. were assumed by Thorium Ltd. and became exercisable for Thorium Ltd. common stock instead of Thorium Inc. common stock in an amount and at an exercise price that is consistent with the exchange ratio described above for the conversion of Thorium Inc. common stock

Additionally, the parties to the Agreement agreed to waive certain closing conditions.  Specifically, the parties waived the requirement that the Securities Exchange Agreements and the Securities Assumption Agreements be executed by all of the shareholders, warrant holders and stock option holders of Thorium Power prior to closing.

About Thorium Inc.

Thorium Inc. was incorporated on January 8, 1992. Thorium Inc. has patented proprietary nuclear fuel designs for use in certain existing commercial nuclear power plants. Its designs are for fuels that will serve

·   the market for U.S. and Russian weapons grade plutonium disposition;

·   the market for disposition of plutonium in spent nuclear fuel; and

·   the market for commercial nuclear fuel.

The above designs require additional developmental work to be used in reactors, and Thorium Inc. plans to fully develop and commercialize these fuel designs with the cooperation of U.S. and foreign governments and other nuclear businesses.

Thorium Inc. has built a project structure that includes access to several hundred nuclear scientists and engineers at several nuclear research institutes and fuel fabrication plants in Russia that are developing and testing the fuel designs.

Once the fuels are further developed and tested, Thorium Inc. plans to license its intellectual property rights to fuel fabricators, nuclear generators, and governments for use in commercial light water nuclear reactors, or sell the technology to a major nuclear company or government contractor or some combination of the two.

Thorium Inc. intends to offer fuel designs that will provide for effective and safe disposition of weapons-and reactor-grade plutonium in existing nuclear power plants at a lower cost than competing technologies. Thorium Inc. is working with the United States government and Russian nuclear institutes to effectuate the utilization of these fuel designs. From 1995 to 1999, Thorium Inc.'s collaborative research and development project with the Kurchatov Institute in Russia received three U.S. government matching grants totaling $1.45 million from the U.S. Department of Energy's Initiatives for Proliferation Prevention program. Furthermore, U.S. Congress provided a $4 million appropriation for fiscal year 2004 for the Kurchatov Institute to evaluate and test the thorium/weapons-grade plutonium disposition fuel technology for application in the Russian plutonium disposition program. Thorium Inc. intends to seek further funding support for the project from the U.S. government.

Thorium Inc.’s thorium/uranium nuclear fuel is designed to replace traditional uranium fuels currently used in commercial nuclear power plants worldwide and Thorium Inc. plans to adapt its fuel designs for next generation reactors, such as a high-temperature helium-cooled reactors and small light waters reactors.

For more information regarding Thorium Inc., see the post effective amendment to the registration statement on Form S-4 filed by Thorium Ltd. in connection with the Merger on October 2, 2006.

The foregoing description of the Merger is qualified in its entirety by reference to the full text of the Agreement and Plan of Merger filed in a current report on Form 8-K dated February 21, 2006, as amended on June 12, 2006, and August 8, 2006. A press release announcing the consummation of the Merger is attached hereto as Exhibit 99.1.

ITEM 5.03 AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS; CHANGE IN FISCAL YEAR

The merger is being accounted for as a reverse acquisition and Thorium Inc. is being treated as the accounting acquiror. Thorium Ltd.’s fiscal year end prior to the closing of the Merger was June 30 and it will remain June 30 from and after the closing of the Merger. However, since Thorium Inc., the accounting acquiror, has a fiscal year of December 31, retaining the June 30 fiscal year end of Thorium Ltd. constitutes a change of fiscal year. Thorium Ltd. will file a transition report for the period from January 1, 2006 through June 30, 2006 on Form 10-KSB.

ITEM 9.01 FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS

ITEM 9.Financial Statements and Exhibits

(a) Financial Statements of Business Acquired.

The audited financial statements and the related report of the independent registered public accounting firm, and the unaudited interim consolidated financial statements of Thorium Power Inc. follow the signature page of this report.

(b) Pro forma financial information.

Pro forma financial information required by Form 8-K appears following the signature page of this report.

(c)Shell Company Transactions

N/A

(d)Exhibits

Exhibit 23.1 Consent of Child, Van Wagoner & Bradshaw, P.L.L.C.

Exhibit 99.1Press Release Announcing Consummation of the Merger

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Thorium Power, Ltd.

Date: October 11, 2006

/s/ Seth Grae__________________

President and Chief Executive Officer

FINANCIAL STATEMENTS

The following financial statements listed below are included with this prospectus. These financial statements have been prepared on the basis of accounting principles generally accepted in the United States and are expressed in U.S. dollars.

UNAUDITED QUARTERLY FINANCIAL STATEMENTS - THORIUM POWER INC.
Thorium Power Inc. Balance Sheet as of June 30, 2006	F-2
Thorium Power Inc. Statements of Operations for the six months ended June 30, 2006 and 2005 and for the period from January 8, 1992 (inception) to June 30, 2006	F-3
Thorium Power Inc. Statement of Changes in Stockholders Equity for the period from January 8, 1992 (inception) to June 30, 2006	F-4
Thorium Power Inc. Statements of Cash Flows for the six months ended June 30, 2006 and 2005 and for the period from January 8, 1992 (inception) to June 30, 2006	F-5
Notes to Unaudited Quarterly Financial Statements	F-6
AUDITED FINANCIAL STATEMENTS - THORIUM POWER INC.
Report of Child Van Wagoner and Bradshaw, PLLC, Independent Auditor to Thorium Power Inc.	F-21
Thorium Power Inc. Audited Balance Sheets as of December 31, 2005 and 2004	F-22
Thorium Power Inc. Audited Statements of Operations for the years ended December 31, 2005 and 2004	F-24
Thorium Power Inc. Audited Statement of Changes in Stockholders Equity for the period from January 8, 1992 (inception) to December 31, 2006	F-25
Thorium Power Inc. Audited Statements of Cash Flows for the years ended December 31, 2005 and 2004 and for the period from January 8, 1992 (inception) to December 31, 2005	F-28
Notes to Audited Financial Statements	F-30
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS	F-43
UNAUDITED PRO FORMA BALANCE SHEET - JUNE 30, 2006	F-44
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS - JUNE 30, 2006	F-45

Thorium Power, Inc.

(A Development Stage Enterprise)

Table of Contents

THORIUM POWER, INC.

(A Development Stage Enterprise)

FINANCIAL STATEMENTS

(Unaudited)

___________

June 30, 2006

___________

F-1

Thorium Power, Inc.

(A Development Stage Enterprise)

Balance Sheet

June 30, 2006 (Unaudited)

ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	528,213
Prepaid expenses and other current assets		990
Due from Novastar Resources, Ltd.		264,741
Total Current Assets		793,944
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment		40,777
Accumulated depreciation		(19,243	)
Total Property, Plant and Equipment		21,534
OTHER ASSETS
Patent costs - net of accumulated amortization of $202,358		209,311
Security deposits		7,567
Total Other Assets		216,878
TOTAL ASSETS	$	1,032,356
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	468,081
Note payable		17,500
Current portion of long-term debt		3,913
Other current liabilities		5,882
Total Current Liabilities		495,376
LONG-TERM LIABILITIES
Note payable		12,657
Total Liabilities		508,033
STOCKHOLDERS' EQUITY
Common Stock-$.05 par value-authorized 20,000,000 shares; issued and outstanding 3,852,519 shares		192,626
Common stock and warrants - Additional paid-in capital		16,713,707
Deficit accumulated during the development stage		(16,382,010	)
Total Stockholders' Equity		524,323
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,032,356

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

F-2

Thorium Power, Inc.

(A Development Stage Enterprise)

Statements of Operations (Unaudited)

	For the six months ended June 30,					Cumulative from January 8, 1992 (Inception) through June 30,
	2006			2005		2006
Revenue
License revenue	$	-		$	-	$	624,985
Total Revenue		-			-		624,985
Costs and expenses
Research and development		10,000			30,000		3,902,158
Salaries		147,400			114,150		3,652,414
Professional fees		306,822			56,435		2,369,947
Allocated expenses - Novastar Resources Ltd		(264,741	)		-		(264,741	)
Other selling, general and administrative expenses		157,314			70,211		4,593,494
Total operating expenses		356,795			270,796		14,253,272
Loss from operations		356,795			270,796		13,628,287
Other (income) expenses
Interest (income) expense - net		1,253			-		(106,889	)
Other (income) expense		(200	)		-		(359	)
Foreign Currency Translation		4,500			-		4,500
Stock based compensation		-			-		2,229,871
Settlement costs		-			-		76,600
Contributions		550,000			-		550,000
Net Loss	$	912,348		$	270,796	$	16,382,010
Basic and diluted net loss per share	$	0.25		$	0.08
Number of shares used to compute per share data		3,691,805			3,297,027

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

F-3

Thorium Power, Inc.

(A Development Stage Enterprise)

Statements of Changes in Stockholders’ Equity (Unaudited)

	Common Stock				Additional			Accumulated			Stockholders’
	Shares		Amount		Paid-in Capital			(Deficit)			Equity
Balance - January 1, 2002		2,983,661	$	149,183	$	10,987,798		$	(8,940,174	)	$	2,196,807
Issuance of common stock and warrants for cash		5,000		250		49,750			-			50,000
Exercise of stock options and warrants		5,000		250		22,750			-			23,000
Issuance of common stock not previously recognized		1,000		50		(50	)		-			-
Net (loss) for the year ended December 31, 2002		-		-		-			(2,224,775	)		(2,224,775	)
Balance - January 1, 2003		2,994,661		149,733		11,060,248			(11,164,949	)		45,032
Issuance of common stock and warrants for cash		115,000		5,750		604,250						610,000
Exercise of stock options and warrants		106,300		5,315		157,685						163,000
Modifications of options and warrants		-		-		1,506,427						1,506,427
Issuance of common stock not previously recognized		5,000		250		(250	)					-
Net (loss) for the year ended December 31, 2003		-		-		-			(2,569,534	)		(2,569,534	)
Balance - January 1, 2004		3,220,961		161,048		13,328,360			(13,734,483	)		(245,075	)
Issuance of common stock and warrants for cash		63,500		3,175		254,576						257,751
Loan conversion into stock		1,750		88		6,913						7,000
Issuance of options to non-employees for services		-		-		351,253			-			351,253
Net (loss) for the year ended December 31, 2004		-		-		-			(974,674	)		(974,674	)
Balance - January 1, 2005		3,286,211		164,311		13,941,101			(14,709,158	)		(603,746	)
Issuance of common stock and warrants for cash		65,998		3,300		257,692						260,992
Loan conversion into stock		10,775		539		42,561						43,100
Issuance of options to non-employees for services		-		-		303,055			-			303,055
Net (loss) for the year ended December 31, 2005		-		-		-			(760,504	)		(760,504	)

Balance - January 1, 2006	3,362,984		168,149		14,544,410		(15,469,662	)		(757,103	)
Issuance of common stock and warrants for cash	488,510		24,426		2,165,248					2,189,674
Loan conversion into stock	1,025		51		4,049					4,100
Issuance of options to non-employees for services	-		-		-		-			0
Net (loss) for the six months ended June 30, 2006	-		-		-		(912,348	)		(912,348	)
Balance - June 30, 2006	3,852,519	$	192,626	$	16,713,707	$	(16,382,010	)	$	524,323

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

F-4

Thorium Power, Inc.

(A Development Stage Enterprise)

Statements of Cash Flows (Unaudited)

	For the six months ended June 30,						Cumulative from January 8, 1992 (Inception) through June 30,
	2006			2005			2006
Cash flows from operating activities:
Net (loss)	$	(912,348	)	$	(270,796	)	$	(16,382,010	)
Adjustments to reconcile net (loss) to net cash provided by (used by) operating activities:
Write-off of foreign patent, including amortization		-			-			75,000
Depreciation and amortization		12,926			13,017			284,251
(Gain) loss on disposition of fixed assets		-			-			86,855
Issuance of stock in exchange for technology and services		-			-			88,250
Due from Novastar Resources, Ltd.		(264,741	)		-			(264,741	)
Stock based compensation		-			-			2,229,870
(Increase) decrease in prepaid and other expenses		5,290			3,711			(990	)
Increase (decrease) in accrued expenses		(464,814	)		141,764			473,965
Net cash used by operating activities		(1,623,687	)		(112,304	)		(13,409,550	)
Cash flows from investing activities:
Patent costs		(6,664	)		(2,311	)		(411,669	)
Security deposits		-			32			(7,567	)
Purchase of equipment		(4,682	)		(22,217	)		(278,866	)
Loans granted - related parties		-			-			(160,365	)
Repayment of loans - related parties		-			-			160,365
Proceeds from sale of fixed assets		-						13,583
Net cash used by investing activities		(11,346	)		(24,496	)		(684,519	)
Cash flows from financing activities:
Proceeds from issuance of stock		2,193,774			72,992			14,485,012
Proceeds from loans - related parties		-			42,590			388,790
Repayment of loans - related parties		(28,430	)		-			(268,090	)
Proceeds from loan from payroll service		-			-			42,663
Repayment of loan from payroll service		-						(42,663	)
Net changes in current portion of long-term debt					2,625
Proceeds from issuance of long-term debt		61			18,953			21,995
Principal repayments of long-term debt		(2,444	)		-			(5,425	)
Net cash provided by financing activities		2,162,961			137,160			14,622,282
Net increase in cash and cash equivalents		527,928			360			528,213
Cash and cash equivalents - beginning		285			462			-
Cash and cash equivalents - end	$	528,213		$	822		$	528,213
Supplemental disclosures
Cash paid - interest	$	1,253		$	2,621		$	6,063
Cash paid - taxes		-			-			-
Non-Cash Transactions:
Conversion of debt to equity	$	4,100		$	38,100		$	103,200

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

F-5

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

1. The Company and Business Operations

Radkowsky Thorium Power Corp., incorporated in the state of Delaware on January 8, 1992 (“Inception”), changed its name to Thorium Power, Inc. in Apri1 2001. Thorium Power, Inc. (the “Company”) is engaged in the development, promotion and marketing of its three patented nuclear fuel designs: (1) Thorium/weapons-grade plutonium disposing fuel, (2) Thorium/reactor-grade plutonium disposing fuel, and (3) Thorium/uranium nuclear fuel. These fuels are designed to be used in existing light water reactors. Presently, the Company is focusing most of its efforts on demonstrating and testing its thorium/weapons-grade plutonium disposing fuel for the Russian VVER-1000 reactors.

Once the fuels are further developed and tested, Thorium Power plans to license its intellectual property rights to fuel fabricators, nuclear generators, and governments for use in commercial light water nuclear reactors, or sell the technology to a major nuclear company or government contractor or some combination of the two.

Substantially all of the Company’s present research activities are in Russia. The Company’s research operations are subject to various political, economic, and other risks and uncertainties inherent in the country of Russia.

The Company’s nuclear fuel process is dependent on the ability of suppliers of the mineral Thorium, to provide it to the Company’s future customers on a timely basis and also on favorable pricing terms. The loss of certain principal suppliers of Thorium or a significant reduction in Thorium availability from principal suppliers could have a material adverse effect on the future operations of the Company.

The Company participates in a highly regulated industry that is characterized by governmental regulation. The Company’s results of operations are affected by a wide variety of factors including general economic conditions, decreases in the use or public favor of nuclear power, the ability of its technology, the ability to safeguard the production of nuclear power and safeguarding its patents and intellectual property from competitors. Due to these factors, the Company may experience substantial period-to-period fluctuations in future operating results.

The Company in the future may be designated as a potentially responsible party (PRP) by federal and state agencies with respect to certain sites with which the Company may have direct or indirect future involvement. Such designations can be made regardless of the extent of the Company’s involvement.

Operations to date have been devoted primarily to filing for patents, developing strategic relationships within the industry, securing political and financial support from the United States and Russian governments, continued development of the fuel designs and administrative functions. The Company, therefore, prepares its financial statements as a Development Stage Enterprise.

F-6

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

Merger Agreement

On February 14, 2006, Novastar Resources Ltd. (“Novastar Resources”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with the Company and TP Acquisition Corp., a direct wholly-owned subsidiary of Novastar Resources formed in connection with the transactions contemplated by the Merger Agreement. Concurrently therewith, Novastar Resources (1) adopted its 2006 Stock Plan, (2) entered into an employment agreement with Seth Grae, President and Chief Executive Officer of Thorium Power, (3) granted certain nonqualified stock options to Mr. Grae and (4) entered into a subscription agreement with Thorium Power for the purchase of 150,000 shares of common stock of Thorium Power for $4.00 per share.

Under the Merger Agreement, each common share of Thorium Power will be converted into securities of Novastar Resources such that Thorium Power’s current stockholders will own approximately 54.5% of the combined company, and each share of Novastar Resources common stock will remain outstanding. In addition, Novastar Resources anticipates the appointment of new directors and officers following the merger. The combined company will be headquartered in the Washington D.C. area, where Thorium Power is presently based.

The merger is conditioned upon completion of due diligence reviews by both companies, the declaration of effectiveness of a registration statement by the Securities and Exchange Commission and any other necessary regulatory approvals.

2. Summary of Significant Accounting policies

A summary of significant accounting policies follows:

a. Revenue Recognition - 

All of the Company’s revenue to date had been derived from licensing fees from nuclear industry commercial partners.

Once the company’s technology has advanced to the level when it is funded by the US Government on an ongoing basis as part of the plutonium disposition program, the company will seek to license its technology to major government contractors or nuclear companies, working for the US and other governments. We expect that our revenue from license fees will be recognized on a straight-line basis over the expected period of the related license term.

F-7

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

The Company may receive employment and research grants from various U.S. governmental agencies, and these grants will be recognized in earnings in the period in which the related expenditures are incurred. Capital grants for the acquisition of equipment will be recorded as reductions of the related equipment cost and reduce future depreciation expense.

Total subsidies and grants from the US government totaled $5.45 million, cumulative from inception to June 30, 2006. These amounts were not paid to us but paid directly from the US government to third party research and development companies that work on our project, as well as other projects.

b.   Patent Costs - Patent costs represent legal fees and filing costs capitalized and amortized over their estimated useful lives of 20 years. Amortization expense for Patents was $8,564 and $8,522 for the six month periods ended June 30, 2006 and 2005 and $202,358 for the cumulative period from January 8, 1992 (Inception) to June 30, 2006.

c.   Cash Equivalents - Cash equivalents consist of cash and cash investments with maturities of three months or less at the time of purchase.

d.   Start-Up Costs - The Company, in accordance with the provisions of the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities”, expenses all start-up and organizational costs as they are incurred.

e.   Property, Plant and Equipment - Property, Plant and Equipment is comprised of leasehold improvements, an automobile, and office equipment and is stated at cost less accumulated depreciation. Depreciation of furniture, computer and office equipment is computed over the estimated useful life of the asset, generally five and seven years respectively, utilizing the double declining balance methodology. Depreciation for the leasehold improvements is computed using the straight-line method over the 5 year term of the lease. Upon disposition of assets, the related cost and accumulated depreciation are eliminated and any gain or loss is included in the statement of income. Expenditures for major improvements are capitalized. Maintenance and repairs are expensed as incurred.

f.   Long-Lived Assets - Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable.

F-8

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted cash flows. We measure the impairment loss based on the difference between the carrying amount and estimated fair value.

g.   Estimates and Assumptions - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

The financial statements include some amounts that are based on management’s best estimates and judgments. The most significant estimates relate to contingencies, and the valuation of stock options, stock warrants and stock issued for services. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant.

h.   Stock-based Compensation - Employees. When stock based compensation is issued to employees and directors, in connection with their services as directors, the revised Statement of Financial Accounting Standards No. 123 ‘Accounting for Stock Based Compensation’ (“SFAS 123(R)”) requires companies to record compensation cost for stock based employee compensation plans at fair value. From inception through 2003, the Company accounted for stock based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, ‘Accounting for Stock Issued to Employees’ (“APB No. 25”). APB No. 25 requires no recognition of compensation expense for the stock based compensation arrangements provided by the Company where the exercise price is equal to the market price at the date of the grants.

Non-Employees - When stock based compensation is issued to non-employees, the Company records these transactions at the fair market value of the equity instruments issued or the goods or services received whichever is more reliably measurable.

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment, (FAS-123R). This statement replaces FAS-123, Accounting for Stock-Based Compensation, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FAS-95, Statement of Cash Flows. FAS-123R requires companies to apply a fair-value-based measurement method in accounting for shared-based payment transactions with employees and to record compensation cost for all stock awards granted after the required effective date and for awards modified, repurchased, or cancelled after that date. The scope of FAS-123R encompasses a wide range of share-based compensation arrangements, including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.

F-9

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

FAS-123R is effective for our Company January 1, 2006, however the Company has decided to adopt FAS-123R in 2004. Companies are permitted to apply the modified retrospective method either (a) to all prior periods presented for which FAS-123 was effective or (b) to prior interim periods of the year in which FAS-123R is adopted. Under the modified retrospective method, the recognition of compensation cost under FAS-123R is generally the same as the accounting under the modified prospective method discussed previously for (a) awards granted, modified, or settled subsequent to the adoption of FAS-123R, and (b) awards granted prior to the date of adoption of FAS-123R for which the requisite service period has not been completed (i.e., unvested awards). There were no restatements or transition adjustments recorded.

i.   Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carry-forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

j.   Earnings per Share - Basic net earnings (loss) per common share is computed by dividing net earnings (loss) applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net earnings (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

F-10

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

k.   New Accounting Pronouncements - In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29”.SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, with earlier application permitted. The adoption of SFAS 153 is not expected to have a material impact on our results of operations or financial position.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” (FIN 47). FIN 47 is an interpretation of SFAS No. 143, “Asset Retirement Obligations,” which was issued in June 2001. FIN 47 was issued to address diverse accounting practices that have developed with regard to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. According to FIN 47, uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than December 31, 2005 for our company. The Company is currently evaluating the impact of the adoption of FIN 47 on its financial statements.

In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, “Accounting Changes and Error Corrections” (SFAS No. 154) which replaces APB No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements - an Amendment of APB Opinion No. 28”. SFAS No. 154 provides guidance on the methods issuers should use to account for and reporting accounting changes and error corrections. Specifically, this statement requires that issuers retrospectively apply any voluntary change in accounting principles to prior period financial statements, if it is practicable to do so. This principle replaces APB No. 20, which required that most voluntary changes in accounting principle be recognized by including the cumulative effect of the change to the new accounting principle on prior periods in the net income reported by the issuer in the period in which it instituted the change. SFAS No. 154 also redefines the term “restatement” to mean the correction of an error by revising previously issued financial statements. Unless adopted early, SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of SFAS No. 154 to have an impact on its financial position or result of operations.

The Company is currently evaluating the effect of other new accounting pronouncements on its future statements of financial position and results of operations.

F-11

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

3. Status of the Company

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has sustained operating losses while not generating steady revenues. However, the Company’s business plan anticipates the Company’s current products will become ready for market and revenue generating sometime between 2008 and 2009. Therefore, the Company makes use of issuances of stock to provide funds for operations.

Until such time as the Company’s products become ready for market and revenue generating, the Company’s ability to operate is dependent upon receiving additional corporate funding in the form of issuances of stock, new debt, or government funding.

The financial statements do not include any adjustments relating to the recovery and classification of recorded asset amounts and classifications of liabilities that might be necessary should the Company be unable to meet its current obligations and, therefore, be unable to continue as a going concern.

4. Research and Development Costs

Research and development costs amounted to $10,000 and $30,000 for the six months ended June 30, 2006 and 2005, respectively and $3,902,158 from January 8, 1992 (Inception) to June 30, 2006

5. Property Plant and Equipment

The following represents the detail of Thorium Power’s property, plant and equipment at June 30, 2006:

	Original		Accumulated		Net Book
	Costs		Depreciation		Value
Furniture, computer and office equipment	$	18,560	$	12,383	$	6,177
Automobile		22,217		6,860		15,357
	$	40,777	$	19,243	$	21,534

F-12

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

6. Stock Options and Warrants

The Company maintains no formal plan for stock options and warrants. Options are issued to employees, directors and others for services provided to the Company. Warrants are issued in connection with sales of stock. Since the Company’s stock is not publicly traded, there is insufficient historical information about the past volatility of the Company’s stock, and there are no similar public entities for which stock information is available. We have estimated the expected volatility of the Company’s stock using a fair value method, as shown below. As a result, options granted to both employees and non-employees for services are accounted for under the calculated value method, as described in paragraphs A43-A48 of SFAS 123(R), using a Black-Scholes option-pricing model with the following weighted average assumptions:

	2002 and prior			2003			2004-2005
Expected life of options	Actual life			Actual life			Actual life
Risk-free interest rate		5	%		4	%		4	%
Volatility of stock		100	%		100	%		32	%
Expected dividend yield		-			-			-

The calculated value method under SFAS 123(R) permits for non-public companies substitution of the historical volatility of an appropriate industry sector index for the expected volatility of the Company’s stock price as an assumption in the valuation model. The Company identified and selected the Standard & Poor’s 600 small-cap index for the U.S. energy sector as the one most closely reflecting the present size of the Company and the industry in which the Company operates. The volatility in the Black-Scholes valuation model used by the Company is calculated based on the historical volatility of the above industry sector index, as measured by the standard deviation of daily historical closing values for the period of time prior to the grant date of stock options that is equal in length to the expected term of the granted stock options. If historical closing values of the above index are not available for the entire expected term, then the Company uses the closing values for the longest period of time available.

F-13

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

Presented below is a summary of the options and warrants activity since January 1, 1993 to June 30, 2006:

					In Connection		Issued		Converted
	Beginning		In Exchange		with purchase		as		to stock/							Ending
	Balance		for Services		of stock		Incentive		Exercised			Expired	Repriced			Balance
1/1/1993																12/31/1993
$1 per share		0		1,040,000		35,000		15,000		(10,000	)						1,080,000
$5 per share		0				220,000											220,000
$10 per share		0															0
																	1,300,000
1/1/1994																	12/31/1994
$1 per share		1,080,000		95,000													1,175,000
$5 per share		220,000		50,000		25,000											295,000
$10 per share		0		55,000		36,100											91,100
																	1,561,100
1/1/1995																	12/31/1995
$1 per share		1,175,000								(10,000	)			25,000			1,190,000
$5 per share		295,000		155,000										(25,000	)		425,000
$10 per share		91,100		30,000		41,500		5,000									167,600
																	1,782,600
1/1/1996																	12/31/1996
$1 per share		1,190,000								(34,000	)			100,000			1,256,000
$5 per share		425,000		60,000										(82,500	)		402,500
$10 per share		167,600		25,000		30,300		14,000						(17,500	)		219,400
																	1,877,900
1/1/1997																	12/31/1997
$1 per share		1,256,000								(47,500	)			81,000			1,289,500
$5 per share		402,500												(42,500	)		360,000
$10 per share		219,400		118,000		56,700				(3,500	)			(38,500	)		352,100
																	2,001,600

F-14

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

					In Connection		Issued			Converted
	Beginning		In Exchange		with purchase		as			to stock/									Ending
	Balance		for Services		of stock		Incentive			Exercised			Expired			Repriced			Balance
01/01/1998																			12/31/1998
$1 per share		1,289,500									(232,500	)		(95,000	)		55,000			1,017,000
$5 per share		360,000									(47,500	)		(172,500	)		(50,000	)		90,000
$10 per share		352,100		2,500		9,500											(5,000	)		359,100
																				1,466,100
01/01/1999																				12/31/1999
$1 per share		1,017,000									(5,000	)		(20,000	)					992,000
$5 per share		90,000									(25,000	)								65,000
$10 per share		359,100									(5,250	)		(26,850	)					327,000
																				1,384,000
01/01/2000																				12/31/2000
$1 per share		992,000									(60,000	)								932,000
$5 per share		65,000				600,000					(5,000	)								660,000
$10 per share		327,000									(37,000	)		(13,500	)					276,500
																				1,868,500
01/01/2001																				12/31/2001
$1 per share		932,000									(5,000	)								927,000
$5 per share		660,000									(20,000	)								640,000
$10 per share		276,500		223,000		700,000		625,000			(3,600	)		(51,200	)					1,769,700
																				3,336,700
01/01/2002																				12/31/2002
$1 per share		927,000		-		-		-			(3,000	)		(7,000	)		-			917,000
$5 per share		640,000		-		-		-			-			-			-			640,000
$10 per share		1,769,700		-		10,000		(625,000	)		(2,000	)		(97,700	)		-			1,055,000
																				2,612,000
01/01/2003																				12/31/2003
$1 per share		917,000		-		-		-			(100,000	)		-			1,200,000			2,017,000
$5 per share		640,000		-		40,000		-			-			-			(600,000	)		80,000
$10 per share		1,055,000		-		20,000		1,590			(1,300	)		(62,795	)		(600,000	)		412,495
																				2,509,495

F-15

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

					In Connection		Issued		Converted
	Beginning		In Exchange		with purchase		as		to stock/							Ending
	Balance		for Services		of stock		Incentive		Exercised			Expired		Repriced		Balance
01/01/2004																12/31/2004
$1 per share		2,017,000		-		-		-		-			-		-		2,017,000
$4 per share		0		250,000		-		-		-			-		-		250,000
$5 per share		80,000		-		-		-		-			-		-		80,000
$9.73-$10 per share		412,495		-		-		600		-			-		-		413,095
																	2,760,095
01/01/2005																	12/31/2005 & 6/30/2006
$1 per share		2,017,000		-		-		-		(1,000	)		-		-		2,016,000
$4 per share		250,000		225,000		-		-		-			-		-		475,000
$5 per share		80,000		-		-		-		-			-		-		80,000
$9.60-$10 per share		413,095		-		-		705		-			-		-		413,800
																	2,984,800

F-16

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

The 625,000 incentive warrants issued in 2001 were contingent upon achieving certain goals, including raising private capital. By December 31, 2002, these goals had not been met and, therefore, the warrants were voided. In addition, included in the 223,000 options issued in 2001, 100,000 are to a director of which all 100,000 have vested at December 31, 2005.

In September 2003, the Company reached an agreement with certain shareholders whereby, in exchange for certain concessions and a release of claim against the company, 1,200,000 warrants at $5 and $10 exercise price were repriced to $1. In addition, 300,000 of those warrants had their expiration date extended three years from December 2004 to 2007. In connection with this repricing, the Company recorded a non-cash expense in the amount of $1,506,427 in 2003. The Company also acknowledged certain prior obligations in connection with government negotiation and raising of capital totalling approximately $130,000. The Company also gave antidilution rights to these shareholders for a period of three years from September 2003.

Also in 2003, pursuant to an antidilutive agreement with a shareholder, 50,000 options were repriced from $10 to $9.84 and 1,590 stock options were issued. 795 of these stock options expired in 2003. In 2004 and 2005, the price of those warrants was further reduced from $9.84 to $9.73 and from $9.73 to $9.60 and an additional 600 and 705 stock options were issued respectively.

The following summarizes information for options and warrants currently outstanding and exercisable at June 30, 2006:

March 31, 2006	Number		Weighted average Remaining Life		Weighted- average exercise price
Range of Prices
$1.00		2,016,000		1.8 years	$	1.00
$4.00		475,000		4.3 years	$	4.00
$5.00		80,000		1.7 years	$	5.00
$9.60-10.00		413,800		1.1 years	$	9.95
		2,984,800			$	2.83

Of the total number of stock options and warrants outstanding at June 30, 2006, 1,662,700 were stock options and the remaining 1,322,100 were warrants. All of the stock options and warrants outstanding at June 30, 2006 have vested.

7. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting and the amounts recognized for income tax purposes. The significant components of deferred tax assets as of June 30, 2006 are as follows:

F-17

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

Assets
Approximate net operating loss		6,552,804
Less: valuation allowance		(6,552,804	)
	$	-

Management believes that it is more likely than not that forecasted taxable income will not be sufficient to utilize the tax carryforwards before their expiration in 2012 and 2025 to fully recover the asset. As a result, the amount of the deferred tax assets considered realizable was reduced 100% by a valuation allowance. In the near term, if estimates of future taxable income are increased, such an increase will change the valuation allowance. The Company has no other deferred tax assets or liabilities.

8. Profit Sharing Plan

The Company established and maintained until the end of 2003 a profit-sharing plan that covered all employees who had attained twenty-one years of age and satisfied a one-year service requirement. Contributions to the plan were at the discretion of the board of directors; however, the contribution could not exceed 15% of compensation for the eligible employees in any single tax year. Since inception through the end of 2003, profit sharing expense amounted to $51,000. This plan was dissolved in 2003, and all contributions were distributed back to the plan’s participants.

9. Research Agreement

The Company is party to an agreement whereby certain research is being performed by the Russian Research Centre, known as the Kurchatov Institute (“RRC”), on the Company’s fuel designs. All the funding under this agreement is supplied by the Company. The Company is also a party to another agreement whereby research relating only to thermal-hydraulic testing is performed by the Brookhaven National Laboratory in cooperation with the RRC. The funding is supplied by the United States Department of Energy Initiatives for Proliferation Prevention Program (DOE-IPP) and the Company directly to Brookhaven National Laboratory. At June 30, 2006, the Company fulfilled its funding obligation in full with respect to this agreement.

10. Commitments and Contingencies

Firm Price Commitments

The Company entered into a firm price commitment agreement in connection with its participation in the pre-conceptual design phase for the construction of a high-temperature test and research reactor in Texas. The agreement has created a firm commitment by the Company for a minimum of $1.25 million financial contribution toward the project. A minimum payment of $50,000 on the agreement was due and paid on February 22, 2006, with 10 additional payments totaling $1.2 million due by December 31, 2006. A total of $550,000 has been paid as of June 30, 2006.

The Company also executed an amendment to its cooperative research agreement with Kurchatov Institute, expanding the scope of work and committing $65,000 (paid $10,000) toward those research and development activities. The work to be performed under this amendment is to be completed sometime in July 31, 2006.

F-18

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

Lease Commitments

The Company leases office space. Future estimated rental payments under these operating leases are as follows:

	Dollars
Year ending December 31, 2006		24,000

11. Related Parties

The Company has both made loans to and received loans from related parties since its inception. In 2001, Thorium Power made a $50,000 loan, which was repaid during the year, to a related party. Thorium Power received $1,361 in interest income from the related party associated with this loan. Since inception, Thorium Power has made approximately $285,000 in loans to related parties. Of this amount, $125,000 was a note received from a related party in exchange for the purchase of the Company’s stock. These loans, which generated $1,648 of interest income from related parties, were repaid, with the exception of approximately $1,000 written off in 1998. At June 30, 2006, $17,500 was due to related parties.

The Company charged Novastar Resources for certain shared expenses. These expenses consisted of legal fees that were incurred by on behalf of Novastar, in connection with the upcoming merger. The Company believes that its allocation method for these expenses is reasonable. Amounts charged by the Company have directly decreased the Company's general and administrative expenses by $264,741 for the six month period ended June 30, 2006. This amount remains payable as at June 30, 2006, and accordingly is shown as a current asset under the caption "Due from Novastar Resources Ltd.

12. Capital Stock Transactions

For the six month period ended June 30, 2006, we sold 327,035 shares of our common stock in a private placement to 27 accredited investors and received proceeds from the sale of these shares totalling $1,539,674. We also sold 162,500 shares of our common stock to Novastar Resources Ltd ($4 per share) for total proceeds of $650,000. This stock sale was made in accordance with the merger agreement (see note 1).

F-19

THORIUM POWER, INC.

(A Development Stage Enterprise)

FINANCIAL STATEMENTS

December 31, 2005

________

F-20

Child, Van Wagoner & Bradshaw, PLLC

A PROFESSIONAL LIMITED LIABILITY COMPANY OF CERTIFIED PUBLIC ACCOUNTANTS

1284 W. Flint Meadow Dr., Suite D, Kaysville, UT 84037	PHONE: (801) 927-1337 FAX: (801) 927-1344
5296 S. Commerce Dr., Suite 300, Salt Lake City, UT 84107	PHONE: (801) 281-4700 FAX: (801) 281-4701

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors

Thorium Power, Inc.

Washington, DC

We have audited the accompanying balance sheets of Thorium Power, Inc.(a development stage enterprise) as of December 31, 2005 and 2004, and the related statements of operations, statement of changes in stockholders’ equity, and cash flows for the years then ended and for the period from January 1, 2002 to December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements from January 8, 1992 (date of inception), to December 31, 2001. Those statements were audited by other auditors, whose report dated March 29, 2002, gave an unqualified opinion thereon.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting, as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Thorium Power, Inc. (a development stage enterprise) as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the two years then ended and for the period from January 1, 2002 to December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

Child, Van Wagoner & Bradshaw, PLLC

Salt Lake City, Utah

April 5, 2006

F-21

Thorium Power, Inc.

(A Development Stage Enterprise)

Balance Sheet

December 31, 2005 and December 31, 2004

	2005			2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	283		$	462
Prepaid expenses and other current assets:
Prepayment of premium for directors & officers liability insurance		3,881			3,881
Prepayment of premium for life insurance		911			911
Other prepaid expenses and current assets		1,488			2,014
Total Current Assets		6,563			7,268
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment		36,096			31,235
Accumulated depreciation		(14,881	)		(22,156	)
Total Property, Plant and Equipment		21,215			9,079
OTHER ASSETS
Patent costs - net of accumulated amortization of $193,794 and $176,524 respectively		211,211			223,959
Security deposits		7,567			7,412
Total Other Assets		218,778			231,371
TOTAL ASSETS	$	246,556		$	247,718

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

F-22

Thorium Power, Inc.

(A Development Stage Enterprise)

Balance Sheet

December 31, 2005 and December 31, 2004

	2005			2004
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt	$	4,135		$	-
Accrued expenses and accounts payable:
Accrued salaries		387,500			205,000
Accrued legal fees		207,276			238,405
Other accrued expenses and accounts payable		338,090			346,560
Note payable		45,930			55,600
Other current liabilities		5,910			5,899
Total Current Liabilities		988,841			851,464
LONG-TERM LIABILITIES
Note payable		14,818			-
Total Liabilities		1,003,659			851,464
STOCKHOLDERS' DEFICIENCY
Common Stock-$.05 par value-authorized 20,000,000 shares; issued and outstanding 3,362,984 shares and 3,286,211 shares, respectively		168,149			164,311
Common stock and warrants - Additional paid-in capital		14,544,410			13,941,101
Deficit accumulated during the development stage		(15,469,662	)		(14,709,158	)
Total Stockholders' Deficiency		(757,103	)		(603,746	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY	$	246,556		$	247,718

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

F-23

Thorium Power, Inc.

(A Development Stage Enterprise)

Statements of Operations

							Cumulative
							From
							January 8, 1992
	For the years ended December 31						Through
							December 31,
	2005			2004			2005
Revenue
License revenue	$	-		$	-		$	624,985
Total Revenue		-			-			624,985
Costs and expenses
Research and development		17,500			-			3,892,158
Salaries		257,383			231,271			3,505,014
Professional fees		14,527			32,257			2,063,125
Stock based compensation		303,055			351,253			2,229,871
Other selling, general and administrative expenses		168,093			359,998			4,436,180
Total operating expenses		760,558			974,779			16,126,348
Loss from operations		760,558			974,779			15,501,363
Other (income) expenses
Interest income		-			0			(108,142	)
Other income		(54	)		(105	)		(159	)
Settlement costs		-			0			76,600
Net Loss	$	760,504		$	974,674		$	15,469,662
Basic and diluted net loss per share	$	0.23		$	0.30
Number of shares used to compute per share data		3,314,862			3,249,421

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

F-24

Thorium Power, Inc.

(A Development Stage Enterprise)

Statements of Changes in Stockholders’ Equity

	Common Stock				Additional		Accumulated			Stockholders’
	Shares		Amount		Paid-in Capital		(Deficit)			Equity
Inception - January 8, 1992
Authorized 2,500,000 shares - $.05 par value		-	$	-	$	-	$	-		$	-
Issuance of common stock for technology and service		1,200,000		60,000		-		-			60,000
Net (loss) for the period ended		-		-		-		(60,000	)		(60,000	)
Balance - January 1, 1993		1,200,000		60,000		-		(60,000	)		-
Issuance of common stock and warrants for cash		258,500		12,925		535,030		-			547,955
Issuance of stock in exchange for services		47,000		2,350		20,000		-	��		22,350
Exercise of stock options and warrants		10,000		500		99,500					100,000
Net (loss) for the year ended December 31, 1993		-		-		-		(81,526	)		(81,526	)
Balance - January 1, 1994		1,515,500		75,775		654,530		(141,526	)		588,779
Authorized 10,000,000 shares - $.05 par value
Issuance of common stock and warrants for cash		26,200		1,310		260,690		-			262,000
Issuance of stock in exchange for services		10,000		500		9,500		-			10,000
Issuance of options to non-employees for services		-		-		15,400		-			15,400
Net (loss) for the year ended December 31, 1994		-		-		-		(639,861	)		(639,861	)
Balance - January 1, 1995		1,551,700		77,585		940,120		(781,387	)		236,318
Issuance of common stock and warrants for cash		41,500		2,075		412,925		-			415,000
Issuance of stock in exchange for services		7,800		390		7,410		-			7,800
Exercise of stock options and warrants		10,000		500		9,500		-			10,000
Net (loss) for the year ended December 31, 1995		-		-		-		(1,088,082	)		(1,088,082	)
Balance - January 1, 1996		1,611,000		80,550		1,369,955		(1,869,469	)		(418,964	)
Issuance of common stock for cash		30,300		1,515		301,485		-			303,000
Issuance of common stock for services		8,000		400		7,600		-			8,000
Exercise of stock options and warrants		34,000		1,700		32,300		-			34,000
Issuance of options to non-employees for services		-		-		7,950		-			7,950
Net (loss) for the year ended December 31, 1996		-		-		-		(763,179	)		(763,179	)
Balance - December 31, 2005		1,683,300	$	84,165	$	1,719,290	$	(2,632,648	)	$	(829,193	)

Continued

F-25

Thorium Power, Inc.

(A Development Stage Enterprise)

Statements of Changes in Stockholders’ Equity

	Common Stock				Additional		Accumulated			Stockholders’
	Shares		Amount		Paid-in Capital		(Deficit)			Equity
Balance - January 1, 1997		1,683,300	$	84,165	$	1,719,290	$	(2,632,648	)	$	(829,193	)
Issuance of common stock and warrants for cash		56,700		2,835		564,165		-			567,000
Exercise of stock options and warrants		51,000		2,550		79,450		-			82,000
Issuance of options to non-employees for services		-		-		15,960		-			15,960
Net (loss) for the year ended December 31, 1997		-		-		-		(598,718	)		(598,718	)
Balance - January 1, 1998		1,791,000		89,550		2,378,865		(3,231,366	)		(762,951	)
Issuance of common stock and warrants for cash		66,536		3,327		662,033		-			665,360
Exercise of stock options and warrants		280,000		14,000		456,000		-			470,000
Issuance of options to non-employees for services						1,325					1,325
Net (loss) for the year ended December 31, 1998		-		-		-		(792,185	)		(792,185	)
Balance - January 1, 1999		2,137,536		106,877		3,498,223		(4,023,551	)		(418,451	)
Issuance of common stock for cash		35,675		1,784		354,966		-			356,750
Exercise of stock options and warrants		35,250		1,762		180,738		-			182,500
Net (loss) for the year ended December 31, 1999		-		-		-		(822,803	)		(822,803	)
Balance - January 1, 2000		2,208,461		110,423		4,033,927		(4,846,354	)		(702,004	)
Issuance of common stock for cash		284,600		14,230		2,831,770		-			2,846,000
Issuance of common stock for services		102,000		5,100		449,900		-			455,000
Net (loss) for the year ended December 31, 2000		-		-		-		(1,487,354	)		(1,487,354	)
Balance - January 1, 2001		2,595,061		129,753		7,315,597		(6,333,708	)		1,111,642
Issuance of common stock and warrants for cash		350,000		17,500		3,468,031		-			3,485,531
Issuance of common stock for settlement		10,000		500		36,100		-			36,600
Exercise of stock options and warrants		28,600		1,430		139,570		-			141,000
Modification of options		-		-		28,500		-			28,500
Net (loss) for the year ended December 31, 2001		-		-		-		(2,606,466	)		(2,606,466	)
Balance Forward		2,983,661	$	149,183	$	10,987,798	$	(8,940,174	)	$	2,196,807

See notes to financial statements.

F-26

Thorium Power, Inc.

(A Development Stage Enterprise)

Statements of Changes in Stockholders’ Equity

	Common Stock				Additional			Accumulated			Stockholders’
	Shares		Amount		Paid-in Capital			(Deficit)			Equity
Balance - January 1, 2002		2,983,661		149,183		10,987,798			(8,940,174	)		2,196,807
Issuance of common stock and warrants for cash		5,000		250		49,750			-			50,000
Exercise of stock options and warrants		5,000		250		22,750			-			23,000
Issuance of common stock not previously recognized		1,000		50		(50	)		-			-
Net (loss) for the year ended December 31, 2002		-		-		-			(2,224,775	)		(2,224,775	)
Balance - January 1, 2003		2,994,661		149,733		11,060,248			(11,164,949	)		45,032
Issuance of common stock and warrants for cash		115,000		5,750		604,250						610,000
Exercise of stock options and warrants		106,300		5,315		157,685						163,000
Modifications of options and warrants		-		-		1,506,427						1,506,427
Issuance of common stock not previously recognized		5,000		250		(250	)					-
Net (loss) for the year ended December 31, 2003		-		-		-			(2,569,534	)		(2,569,534	)
Balance - January 1, 2004		3,220,961	$	161,048	$	13,328,360		$	(13,734,483	)	$	(245,075	)
Issuance of common stock and warrants for cash		63,500		3,175		254,576						257,751
Loan conversion into stock		1,750		88		6,913						7,000
Issuance of options to non-employees for services		-		-		351,253			-			351,253
Net (loss) for the year ended December 31, 2004		-		-		-			(974,674	)		(974,674	)
Balance - January 1, 2005		3,286,211	$	164,311	$	13,941,101		$	(14,709,158	)	$	(603,746	)
Issuance of common stock and warrants for cash		65,998		3,300		257,692						260,992
Loan conversion into stock		10,775		539		42,561						43,100
Issuance of options to non-employees for services		-		-		303,055			-			303,055
Net (loss) for the year ended December 31, 2005		-		-		-			(760,504	)		(760,504	)
Balance Forward		3,362,984	$	168,149	$	14,544,410		$	(15,469,662	)	$	(757,103	)

See notes to financial statements.

F-27

Thorium Power, Inc.

(A Development Stage Enterprise)

Statements of Cash Flows

							Cumulative
							From
							January 8, 1992
	For the years ended December 31						Through
							December 31,
	2005			2004			2005
Cash flows from operating activities:
Net loss	$	(760,504	)	$	(974,674	)	$	(15,469,662	)
Adjustments to reconcile net (loss) to net cash
provided by (used by) operating activities:
Write-off of foreign patent, including amortization		-			-			75,000
Depreciation and amortization		22,704			40,700			271,325
(Gain) loss on disposition of fixed assets		3,710			80,227			86,855
Issuance of stock in exchange for technology and services		-			-			88,250
Stock based compensation		303,055			351,253			2,229,870
(Increase) decrease in prepaid and other expenses		525			38,651			(6,280	)
Increase (decrease) in accrued and other expenses		142,913			198,279			938,777
Net cash used by operating activities		(287,597	)		(265,564	)		(11,785,865	)
Cash flows from investing activities:
Patent costs		(4,523	)		(40,238	)		(405,005	)
Security deposits		(154	)		(1,520	)		(7,567	)
Purchase of equipment		(22,217	)		-			(274,184	)
Loans granted - related parties		-			-			(160,365	)
Repayment of loans - related parties		-			-			160,365
Proceeds from sale of property and equipment		937			12,596			13,583
Net cash used by investing activities		(25,957	)		(29,162	)		(673,173	)
Cash flows from financing activities:
Proceeds from issuance of stock		260,992			257,750			12,295,338
Proceeds from loans - related parties		85,227			26,750			384,690
Repayment of loans - related parties		(51,796	)		(15,550	)		(239,659	)
Proceeds from loan from payroll service		-			-			42,663
Repayment of loan from payroll service		-			-			(42,663	)
Net changes in current portion of long-term debt		4,135			-			4,135
Proceeds from issuance of long-term debt		18,082			-			18,082
Principal repayments of long-term debt		(3,265	)		-			(3,265	)
Net cash provided by financing activities		313,375			268,950			12,459,321
Net increase (decrease) in cash and cash equivalents		(179	)		(25,776	)		283

See notes to financial statements.

F-28

Thorium Power, Inc.

(A Development Stage Enterprise)

Statements of Cash Flows

					Cumulative
					From
					January 8, 1992
	For the years ended December 31				Through
	��				December 31,
	2005		2004		2005
Cash and cash equivalents - beginning		462		26,238		-
Cash and cash equivalents - end	$	283	$	462	$	283
Supplemental disclosures
Cash paid - interest	$	2,621	$	-	$	4,810
Non-Cash Transactions:
Conversion of debt to equity		43,100		7,000		99,100

See notes to financial statements.

F-29

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

1. The Company and Business Operations

Radkowsky Thorium Power Corp., incorporated in the state of Delaware on January 8, 1992, changed its name to Thorium Power, Inc. in Apri1 2001. Thorium Power, Inc. (the “Company”) is engaged in the development, promotion and marketing of its three patented nuclear fuel designs: (1) Thorium/weapons-grade plutonium disposing fuel, (2) Thorium/reactor-grade plutonium disposing fuel, and (3) Thorium/uranium nuclear fuel. These fuels are designed to be used in existing light water reactors. Presently, the Company is focusing most of its efforts on demonstrating and testing its thorium/weapons-grade plutonium disposing fuel for the Russian VVER-1000 reactors.

The Company’s future customers may include nuclear fuel fabricators and/or nuclear power plants, and/or U.S. or foreign governments.

Substantially all of the Company’s present research activities are in Russia. The Company’s research operations are subject to various political, economic, and other risks and uncertainties inherent in the country of Russia.

The Company’s nuclear fuel process is dependent on the ability of suppliers of the mineral Thorium, to provide it to the Company’s future customers on a timely basis and also on favorable pricing terms. The loss of certain principal suppliers of Thorium or a significant reduction in Thorium availability from principal suppliers could have a material adverse effect on the future operations of the Company being able to license its patent.

The Company participates in a highly regulated industry that is characterized by governmental regulation. The Company’s results of operations are affected by a wide variety of factors including general economic conditions, decreases in the use or public favor of nuclear power, the ability of its technology, the ability to safeguard the production of nuclear power and safeguarding its patents and intellectual property from competitors. Due to these factors, the Company may experience substantial period-to-period fluctuations in future operating results.

The Company in the future may be designated as a potentially responsible party (PRP) by federal and state agencies with respect to certain sites with which the Company may have direct or indirect future involvement. Such designations can be made regardless of the extent of the Company’s involvement.

Operations to date have been devoted primarily to filing for patents, developing strategic relationships within the industry, securing political and financial support from the United States and Russian governments, continued development of the fuel designs and administrative functions. The Company, therefore, prepares its financial statements as a Development Stage Enterprise.

F-30

2. Summary of Significant Accounting policies

A summary of significant accounting policies follows:

a. Revenue Recognition - 

All of the Company’s prior revenue had been derived from licensing fees from nuclear industry commercial partners.

Once the company’s technology has advanced to the level when it is funded by the US Government on an ongoing basis as part of the plutonium disposition program, the company will seek to license its technology to major government contractors or nuclear companies, working for the US and other governments. We expect that our revenue from license fees will be recognized on a straight-line basis over the expected period of the related license term.

The Company may receive employment and research grants from various U.S. governmental agencies, and these grants will be recognized in earnings in the period in which the related expenditures are incurred. Capital grants for the acquisition of equipment will be recorded as reductions of the related equipment cost and reduce future depreciation expense.

Total subsidies and grants from the US government totaled $5.45 million cumulative from inception to December 31, 2005. These amounts were paid directly from the US government to third party research and development companies and were not recognized in income because of the direct payment from the US Government to third party researchers on the Thorium project. 

b.   Patent Costs - Patent costs represent legal fees and filing costs capitalized and amortized over their estimated useful lives of 20 years. Amortization expense for Patents was $17,270 and $17,044 for the years ended December 31, 2005 and 2004 and $193,794 for the cumulative period from Inception to December 31, 2005.

c.   Cash Equivalents - Cash equivalents consist of cash and cash investments with maturities of three months or less at the time of purchase.

d.   Start-Up Costs - The Company, in accordance with the provisions of the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities”, expenses all start-up and organizational costs as they are incurred.

F-31

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

e.   Property, Plant and Equipment - Property, Plant and Equipment is comprised of leasehold improvements, an automobile, and office equipment and is stated at cost less accumulated depreciation. Depreciation of furniture, computer and office equipment is computed over the estimated useful life of the asset, generally five and seven years respectively, utilizing the double declining balance methodology. Depreciation for the leasehold improvements is computed using the straight-line method over the 5 year term of the lease. Upon disposition of assets, the related cost and accumulated depreciation are eliminated and any gain or loss is included in the statement of income. Expenditures for major improvements are capitalized. Maintenance and repairs are expensed as incurred.

f.   Long-Lived Assets - Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable.

For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted cash flows. We measure the impairment loss based on the difference between the carrying amount and estimated fair value.

g.   Estimates and Assumptions - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

The financial statements include some amounts that are based on management’s best estimates and judgments. The most significant estimates relate to contingencies, and the valuation of stock options, stock warrants and stock issued for services. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant.

h.   Stock-based Compensation - Employees. When stock based compensation is issued to employees and directors, in connection with their services as directors, the revised Statement of Financial Accounting Standards No. 123 ‘Accounting for Stock Based Compensation’ (“SFAS 123(R)”) requires companies to record compensation cost for stock based employee compensation plans at fair value. From inception through 2003, the Company accounted for stock based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, ‘Accounting for Stock Issued to Employees’ (“APB No. 25”). APB No. 25 requires no recognition of compensation expense for the stock based compensation arrangements provided by the Company where the exercise price is equal to the market price at the date of the grants.

F-32

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

Non-Employees - When stock based compensation is issued to non-employees, the Company records these transactions at the fair market value of the equity instruments issued or the goods or services received whichever is more reliably measurable.

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment, (FAS-123R). This statement replaces FAS-123, Accounting for Stock-Based Compensation, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FAS-95, Statement of Cash Flows. FAS-123R requires companies to apply a fair-value-based measurement method in accounting for shared-based payment transactions with employees and to record compensation cost for all stock awards granted after the required effective date and for awards modified, repurchased, or cancelled after that date. The scope of FAS-123R encompasses a wide range of share-based compensation arrangements, including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.

FAS-123R is effective for our Company January 1, 2006, however the Company has decided to adopt FAS-123R in 2004 as reflected in its financial position at December 31, 2005 and 2004 for its results of operations for the years then ended. Companies are permitted to apply the modified retrospective method either (a) to all prior periods presented for which FAS-123 was effective or (b) to prior interim periods of the year in which FAS-123R is adopted. Under the modified retrospective method, the recognition of compensation cost under FAS-123R is generally the same as the accounting under the modified prospective method discussed previously for (a) awards granted, modified, or settled subsequent to the adoption of FAS-123R, and (b) awards granted prior to the date of adoption of FAS-123R for which the requisite service period has not been completed (i.e., unvested awards). There were no restatements or transition adjustments recorded.

i.   Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

F-33

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

j.   Earnings per Share - Basic net earnings (loss) per common share is computed by dividing net earnings (loss) applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net earnings (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.

k.   New Accounting Pronouncements - In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29”.SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, with earlier application permitted. The adoption of SFAS 153 is not expected to have a material impact on our results of operations or financial position.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” (FIN 47). FIN 47 is an interpretation of SFAS No. 143, “Asset Retirement Obligations,” which was issued in June 2001. FIN 47 was issued to address diverse accounting practices that have developed with regard to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. According to FIN 47, uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than December 31, 2005 for our company. The Company is currently evaluating the impact of the adoption of FIN 47 on its financial statements.

Continued

F-34

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

3. Status of the Company

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has sustained operating losses while not generating steady revenues. However, the Company’s business plan anticipates the Company’s products will become ready for market and revenue generating sometime between 2010 and 2012. Therefore, the Company makes use of issuances of stock to provide funds for operations.

Until such time as the Company’s products become ready for market and revenue generating, the Company’s ability to operate is dependent upon receiving additional corporate funding in the form of issuances of stock, new debt, or government funding.

The financial statements do not include any adjustments relating to the recovery and classification of recorded asset amounts and classifications of liabilities that might be necessary should the Company be unable to meet its current obligations and, therefore, be unable to continue as a going concern.

4. Research and Development Costs

Research and development costs amounted to $17,500 and nil for the years ended December 31, 2005 and 2004 respectively and $3,892,158 cumulative from inception date through December 31, 2005.

5. Property Plant and Equipment

The following represents the detail of Thorium Power’s property, plant and equipment at December 31, 2005 and 2004:

December 31, 2005	Original		Accumulated		Net Book
	Costs		Depreciation		Value
Furniture, computer and office equipment		13,879		11,821		2,058
Automobile		22,217		3,060		19,157
	$	36,096	$	14,881	$	21,215

F-35

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

December 31, 2004	Original		Accumulated		Net Book
	Costs		Depreciation		Value
Furniture, computer and office equipment		31,235		22,156		9,079
	$	31,235	$	22,156	$	9,079

6. Stock Options and Warrants

The Company maintains no formal plan for stock options and warrants. Options are issued to employees, directors and others for services provided to the Company. Warrants are issued in connection with sales of stock. Since the Company’s stock is not publicly traded, there is insufficient historical information about the past volatility of the Company’s stock, and there are no similar public entities for which stock information is available. We have estimated the expected volatility of the Company’s stock using a fair value method, as shown below. As a result, options granted to both employees and non-employees for services are accounted for under the calculated value method, as described in paragraphs A43-A48 of SFAS 123(R), using a Black-Scholes option-pricing model with the following weighted average assumptions:

	2002 and prior			2003			2004-2005
Expected life of options	Actual life			Actual life			Actual life
Risk-free interest rate		5	%		4	%		4	%
Volatility of stock		100	%		100	%		32	%
Expected dividend yield		-			-			-

The calculated value method under SFAS 123(R) permits for non-public companies substitution of the historical volatility of an appropriate industry sector index for the expected volatility of the Company’s stock price as an assumption in the valuation model. The Company identified and selected the Standard & Poor’s 600 small-cap index for the U.S. energy sector as the one most closely reflecting the present size of the Company and the industry in which the Company operates. The volatility in the Black-Scholes valuation model used by the Company is calculated based on the historical volatility of the above industry sector index, as measured by the standard deviation of daily historical closing values for the period of time prior to the grant date of stock options that is equal in length to the expected term of the granted stock options. If historical closing values of the above index are not available for the entire expected term, then the Company uses the closing values for the longest period of time available.

Continued

F-36

 

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

Presented below is a summary of the options and warrants activity since January 1, 1993:

					In Connection		Issued		Converted
	Beginning		In Exchange		with purchase		as		to stock/							Ending
	Balance		for Services		of stock		Incentive		Exercised			Expired	Repriced			Balance
1/1/1993																12/31/1993
$1 per share		0		1,040,000		35,000		15,000		(10,000	)						1,080,000
$5 per share		0				220,000											220,000
$10 per share		0															0
																	1,300,000
1/1/1994																	12/31/1994
$1 per share		1,080,000		95,000													1,175,000
$5 per share		220,000		50,000		25,000											295,000
$10 per share		0		55,000		36,100											91,100
																	1,561,100
1/1/1995																	12/31/1995
$1 per share		1,175,000								(10,000	)			25,000			1,190,000
$5 per share		295,000		155,000										(25,000	)		425,000
$10 per share		91,100		30,000		41,500		5,000									167,600
																	1,782,600
1/1/1996																	12/31/1996
$1 per share		1,190,000								(34,000	)			100,000			1,256,000
$5 per share		425,000		60,000										(82,500	)		402,500
$10 per share		167,600		25,000		30,300		14,000						(17,500	)		219,400
																	1,877,900
1/1/1997																	12/31/1997
$1 per share		1,256,000								(47,500	)			81,000			1,289,500
$5 per share		402,500												(42,500	)		360,000
$10 per share		219,400		118,000		56,700				(3,500	)			(38,500	)		352,100
																	2,001,600

Continued

F-37

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

					In Connection		Issued			Converted
	Beginning		In Exchange		with purchase		as			to stock/									Ending
	Balance		for Services		of stock		Incentive			Exercised			Expired			Repriced			Balance
01/01/1998																			12/31/1998
$1 per share		1,289,500									(232,500	)		(95,000	)		55,000			1,017,000
$5 per share		360,000									(47,500	)		(172,500	)		(50,000	)		90,000
$10 per share		352,100		2,500		9,500											(5,000	)		359,100
																				1,466,100
01/01/1999																				12/31/1999
$1 per share		1,017,000									(5,000	)		(20,000	)					992,000
$5 per share		90,000									(25,000	)								65,000
$10 per share		359,100									(5,250	)		(26,850	)					327,000
																				1,384,000
01/01/2000																				12/31/2000
$1 per share		992,000									(60,000	)								932,000
$5 per share		65,000				600,000					(5,000	)								660,000
$10 per share		327,000									(37,000	)		(13,500	)					276,500
																				1,868,500
01/01/2001																				12/31/2001
$1 per share		932,000									(5,000	)								927,000
$5 per share		660,000									(20,000	)								640,000
$10 per share		276,500		223,000		700,000		625,000			(3,600	)		(51,200	)					1,769,700
																				3,336,700
01/01/2002																				12/31/2002
$1 per share		927,000		-		-		-			(3,000	)		(7,000	)		-			917,000
$5 per share		640,000		-		-		-			-			-			-			640,000
$10 per share		1,769,700		-		10,000		(625,000	)		(2,000	)		(97,700	)		-			1,055,000
																				2,612,000
01/01/2003																				12/31/2003
$1 per share		917,000		-		-		-			(100,000	)		-			1,200,000			2,017,000
$5 per share		640,000		-		40,000		-			-			-			(600,000	)		80,000
$10 per share		1,055,000		-		20,000		1,590			(1,300	)		(62,795	)		(600,000	)		412,495
																				2,509,495

Continued

F-38

Thorium Power, Inc.

(A Development Stage Enterprise)

Notes to Financial Statements

					In Connection		Issued		Converted
	Beginning		In Exchange		with purchase		as		to stock/							Ending
	Balance		for Services		of stock		Incentive		Exercised			Expired		Repriced		Balance
01/01/2004																12/31/2004
$1 per share		2,017,000		-		-		-		-			-		-		2,017,000
$4 per share		0		250,000		-		-		-			-		-		250,000
$5 per share		80,000		-		-		-		-			-		-		80,000
$9.73-$10 per share		412,495		-		-		600		-			-		-		413,095
																	2,760,095
01/01/2005																	12/31/2005
$1 per share		2,017,000		-		-		-		(1,000	)		-		-		2,016,000
$4 per share		250,000		225,000		-		-		-			-		-		475,000
$5 per share		80,000		-		-		-		-			-		-		80,000
$9.60-$10 per share		413,095		-		-		705		-			-		-		413,800
																	2,984,800

Continued

F-39

The 625,000 incentive warrants issued in 2001 were contingent upon achieving certain goals, including raising private capital. By December 31, 2002, these goals had not been met and, therefore, the warrants were voided. In addition, included in the 223,000 options issued in 2001, 100,000 are to a director of which all 100,000 have vested at December 31, 2004.

In September 2003, the Company reached an agreement with certain shareholders whereby, in exchange for certain concessions and a release of claim against the company, 1,200,000 warrants at $5 and $10 exercise price were repriced to $1. In addition, 300,000 of those warrants had their expiration date extended three years from December 2004 to 2007. In connection with this repricing, the Company recorded a non-cash expense in the amount of $1,506,427 in 2003. The Company also acknowledged certain prior obligations in connection with government negotiation and raising of capital totalling approximately $130,000. The Company also gave antidilution rights to these shareholders for a period of three years from September 2003.

Also in 2003, pursuant to an antidilutive agreement with a shareholder, 50,000 options were repriced from $10 to $9.84 and 1,590 stock options were issued. 795 of these stock options expired in 2003. In 2004 and 2005, the price of those warrants was further reduced from $9.84 to $9.73 and from $9.73 to $9.60 and an additional 600 and 705 stock options were issued respectively.

The following summarizes information for options and warrants currently outstanding and exercisable at December 31, 2005 and 2004:

December 31, 2005	Number		Weighted average Remaining Life		Weighted- average exercise price
Range of Prices
$1.00		2,016,000		1.8 years	$	1.00
$4.00		475,000		4.3 years	$	4.00
$5.00		80,000		1.7 years	$	5.00
$9.60-10.00		413,800		1.1 years	$	9.95
		2,984,800			$	2.83

December 31, 2004	Number		Weighted average Remaining Life		Weighted- average exercise price
Range of Prices
$1.00		2,017,000		2.8 years	$	1.00
$4.00		250,000		5.0 years	$	4.00
$5.00		80,000		2.7 years	$	5.00
$9.73-10.00		413,095		2.1 years	$	9.97
		2,760,095			$	2.73

F-40

Of the total number of stock options and warrants outstanding at December 31, 2005, 1,662,700 were stock options and the remaining 1,322,100 were warrants. All of the stock options and warrants outstanding at December 31, 2005 have vested.

7. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting and the amounts recognized for income tax purposes. The significant components of deferred tax assets as of December 31, 2005 are as follows:

Assets
Net operating loss		12,850,000
Less: Valuation allowance		(12,850,000	)
	$	-

Management believes that it is more likely than not that forecasted taxable income will not be sufficient to utilize the tax carryforwards before their expiration in 2012 and 2025 to fully recover the asset. As a result, the amount of the deferred tax assets considered realizable was reduced 100% by a valuation allowance. In the near term, if estimates of future taxable income are increased, such an increase will change the valuation allowance. The Company has no other deferred tax assets or liabilities.

8. Profit Sharing Plan

The Company established and maintained until the end of 2003 a profit-sharing plan that covered all employees who had attained twenty-one years of age and satisfied a one-year service requirement. Contributions to the plan were at the discretion of the board of directors; however, the contribution could not exceed 15% of compensation for the eligible employees in any single tax year. Since inception through the end of 2003, profit sharing expense amounted to $51,000. This plan was dissolved in 2003, and all contributions were distributed to the plans participants.

9. Research Agreement

The Company is party to an agreement whereby certain research is being performed by the Russian Research Centre, known as the Kurchatov Institute (“RRC”), on the Company’s fuel designs. All the funding under this agreement is supplied by the Company. The Company is also a party to another agreement whereby research relating only to thermal-hydraulic testing is performed by the Brookhaven National Laboratory in cooperation with the RRC. The funding is supplied by the United States Department of Energy Initiatives for Proliferation Prevention Program (DOE-IPP) and the Company directly to Brookhaven National Laboratory. At December 31, 2005, the Company fulfilled its funding obligation in full with respect to this agreement.

10. Commitments and Contingencies

The Company leases office space. Future estimated rental payments under these operating leases are as follows:

	Dollars
Year ending December 31, 2006		6,000

F-41

11. Related Parties

The Company has both made loans to and received loans from related parties since its inception. In 2001, Thorium Power made a $50,000 loan, which was repaid during the year, to a related party. Thorium Power received $1,361 in interest income from the related party associated with this loan. Since inception, Thorium Power has made approximately $285,000 in loans to related parties. Of this amount, $125,000 was a note received from a related party in exchange for the purchase of the Company’s stock. These loans, which generated $1,648 of interest income from related parties, were repaid, with the exception of approximately $1,000 written off in 1998.

Since inception, Thorium Power has received approximately $385,000 in loans from related parties. Of this amount, $240,000 has been repaid, $99,100 was converted into capital and $45,930 remains outstanding at December 31, 2005.

12. Subsequent Events

a.   Merger Agreement

On February 14, 2006, Novastar Resources Ltd. (“Novastar Resources”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with the Company and TP Acquisition Corp., a direct wholly-owned subsidiary of Novastar Resources formed in connection with the transactions contemplated by the Merger Agreement. Concurrently therewith, Novastar Resources (1) adopted its 2006 Stock Plan, (2) entered into an employment agreement with Seth Grae, President and Chief Executive Officer of Thorium Power, (3) granted certain nonqualified stock options to Mr. Grae and (4) entered into a subscription agreement with Thorium Power for the purchase of 150,000 shares of common stock of Thorium Power for $4.00 per share.

Under the Merger Agreement, each common share of Thorium Power will be converted into securities of Novastar Resources such that Thorium Power’s current stockholders will own approximately 54.5% of the combined company, and each share of Novastar Resources common stock will remain outstanding. In addition, Novastar Resources anticipates the appointment of new directors and officers following the merger. The combined company will be headquartered in the Washington D.C. area, where Thorium Power is presently based.

The merger is conditioned upon, among other things, approvals by stockholders of Novastar Resources and Thorium Power of certain corporate matters, no legal impediment to the merger, the absence of any material adverse effect on Novastar Resources or Thorium Power, completion of due diligence reviews by both companies, the declaration of effectiveness of a registration statement by the Securities and Exchange Commission and any other necessary regulatory approvals.

b.   Firm Price Commitments

The Company entered into a firm price commitment agreement in connection with its participation in the pre-conceptual design phase for the construction of a high-temperature test and research reactor in Texas. The agreement has created a firm commitment by the Company for a minimum of $1.25 million financial contribution toward the project. A minimum payment of $50,000 on the agreement was due and paid on February 22, 2006, with 10 additional payments totaling $1.2 million due by December 31, 2006.

The Company also executed an amendment to its cooperative research agreement with Kurchatov Institute, expanding the scope of work and committing $65,000 toward those research and development activities. The work to be performed under this amendment is to be completed by July 31, 2006.

c.   Private equity financing

Subsequently to December 31, 2005, the Company has raised a total of $1.54 million in private equity investments. Of the $1.54 million, $550,000 was invested by Novastar Resources Ltd. and the remaining approximately $990,000 came from a private equity placement that was conducted in January 2006.

F-42

NOVASTAR RESOURCES, LTD.

UNAUDITED PRO FORMA FINANCIAL STATEMENTS

Basis of Presentation

On February 14, 2006, Novastar Resources Ltd., entered into a Share Exchange Agreement with Thorium Power, Inc. and its stockholders, pursuant to which Novastar Resources Ltd. acquired all of the issued and outstanding capital stock of Thorium Power, Inc. in exchange for a total of 135,638,023 shares of our common stock, constituting 54.5% shares of Novastar Resources Ltd. issued and outstanding common stock at the time of the merger agreement, $0.001 par value per share.

Novastar Resources Ltd expects to complete the acquisition of Thorium Power, Inc., pursuant to the Merger Agreement, in October 2006. The acquisition will be accounted for as a reverse merger effected by a share exchange, wherein Thorium Power, Inc. is considered the acquirer for accounting and financial reporting purposes.

The unaudited pro forma consolidated financial statements of Novastar Resources Ltd in the opinion of management include all material adjustments directly attributable to the share exchange contemplated by the Agreement. The unaudited pro forma consolidated balance sheet reflects the financial position of the company had the merger occurred on June 30, 2006. The pro forma consolidated statements of operations were prepared as if the transactions were consummated on June 30, 2005. These pro forma consolidated financial statements have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the transaction occurred on the date indicated and are not necessarily indicative of the results that may be expected in the future.

F-43

Novastar Resources Ltd.

Unaudited Pro Forma Consolidated Balance Sheet

June 30, 2006

Note: The merger for accounting purposes will be treated as a recapitalization of Thorium Power, Inc.

										Pro Forma
	Novastar			Thorium			Total			Adjustment			Pro Forma
ASSETS
Currrent Assets
Cash	$	14,431,407		$	528,213		$	14,959,620		$	0			14,959,620
Prepaid Expenses and othr current assets		808,425			990			809,415			0			809,415
Due From Novastar Resources Inc.		0			264,740			264,740	5		(264,740	)		0
Total Current Assets		15,239,832			793,943			16,033,775			(264,740	)		15,769,035
Property Plant and Equipment -net		0			21,534			21,534						21,534
Other Assets
Investment in Thorium Power		1,350,000			0			1,350,000	1		(1,350,000	)		0
Patent Costs - net		0			209,311			209,311						209,311
Security Deposits		0			7,567			7,567						7,567
Total Other Assets		1,350,000			216,878			1,566,878			(1,350,000	)		216,878
Total Assets	$	16,589,832		$	1,032,355		$	17,622,187		$	(1,614,740	)	$	16,007,447
Liabilities and Stockholders Equity
Current Liabilities
Current portion long term debt	$	0		$	3,913		$	3,913		$				3,913
Accounts Payable		463,354			131,478			594,832						594,832
Accrued Liabilities		103,541			336,502			440,043						440,043
Due to related party		128,675			17,500			146,175						146,175
Accrued payroll tax and other liability		635,000			5,983			640,983						640,983
Warrant Liability		3,678,278			0			3,678,278						3,678,278
Due to Thorium Power Inc.		264,740			0			264,740	5		(264,740	)		0
Total Current Liabilities		5,273,588			495,376			5,768,964			(264,740	)		5,504,224
Notes Payable - long term		0			12,657			12,657			0			12,657
Total Liabilities		5,273,588			508,033			5,781,621			(264,740	)		5,516,881
Common Stock with Registration Rights		12,041,373			0			12,041,373						12,041,373
Stockholders Equity
Common Stock		118,101			192,626			310,727						253,739
									1		(8,750	)
									2		135,638
									4		(183,876	)
Additional Paid in Capital - Stock and Warrants		14,913,153			16,713,706			31,626,859						12,850,947
									1		(1,341,250	)
									2		(135,638	)
									3		(17,482,900	)
									4		183,876
Accumulated deficit - development stage		(17,482,900	)		(16,382,010	)		(33,864,910	3		17,482,900			(16,382,010	)
Deferred stock compensation		(83,328	)		0			(83,328		��				(83,328	)
Common Stock and Warrants reserved future issue		1,807,445						1,807,445						1,807,445
Accumulated Other Comprehensive Income		2,400						2,400						2,400
Total Stockholders Equity		(725,129	)		524,322			(200,807			(1,350,000	)		(1,550,807	)
Total Liabilities and Stockholders Equity	$	16,589,832		$	1,032,355		$	17,622,187		$	(1,614,740	)	$	16,007,447
Pro-Forma Adjustments
Pro-Forma Adjustment - 1
Common Stock - Thorium		8,750
Additonal Paid in Capital - Thorium		1,341,250
Investment - Thorium Power					1,350,000
To eliminate Novastar's investment in Thorium
Pro-Forma Adjustment - 2
Additional paid in Capital		135,638
Common Stock					135,638
To record the issuance of Novastar stock pursuant to the merger agreement
Novastar will issue 135,638,023 common shares at $.001 par value granting Thorium
Sharholders a 54.5% interest in Novastar, prior to the private placement. In addition, Thorium management will control
the combined entity and Board of Directors, therefore this will be accounted for as a recapitalization of Thorium Power, Inc.
Novastar was a shell with minimal assets prior to the merger agreement and the fundraising that took place after the merger agreement
Pro-Forma Adjustment - 3
Additional Paid in Captial - Novastar		17,482,900
Retained Earnings - Novastar					17,482,900
To eliminate Novastar's retained earnings
Pro-Forma Adjustment - 4
Common Stock - Thorium		183,876
Additonal Paid In Capital					183,876
To eliminate Thorium's capital stock - recapitalization
June 30, 2006 Balance 192,626
Elimin. Of Novastar Invest (8,750)
Pro-Forma Adjustment - 5
Due to Thorium Power, Inc.		264,740
Due from Novastar Resources Ltd					264,740
To eliminate interco. balance

F-44

Novastar Resources Ltd.

Unaudited Pro Forma Consolidated Statement of Operations

Fiscal Year Ended June 30, 2006

						Pro Forma
		Novastar		Thorium		Adjustment		Pro Forma
Revenue	$	0	$	0	$		$	0
Operating Expenses	$	13,147,485	$	755,714	$		$	13,903,199
Other Income and Expense	$	197,050	$	803,867	$		$	1,000,917
Net Loss	$	13,344,535	$	1,559,581	$		$	14,904,116
Basic and Dilluted Loss Per Share	$	0.12	$		$		$	0.06
Common Shares Outstanding		111,913,155		1		135,638,023		247,551,178

 Proforma Adjustment - 1 

Novastar outstanding shares are restated to reflect the shares to be issued in the reverse merger, 135,638,023 and total outstanding shares post merger.

F-45