Aurora Oil & Gas 10-Q 2001 Q1 Quarterly report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[ x]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: March 31, 2001
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM:

Commission File Number: 0-25170

ROYAL SILVER MINES, INC.
(Exact name of registrant as specified in its charter)

UTAH
(State or other jurisdiction of Identification Number) 87-0306609
(I.R.S. Employer Incorporation or organization)

6 East Rose Street
Walla Walla, Washington 99362
(Address of Principal Executive Offices, including Zip Code.)

(509) 526-3491
(Registrant's telephone number, including area code.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ x ] No [ ]

The number of shares outstanding at March 31, 2001:32,679,565 shares

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS OF ROYAL SILVER MINES, INC. (Hereinafter referred to as Registrant or Company)

Condensed financial statements, and an accompanying independent accountants' report, are filed as part of this Quarterly Report at pages. In management's opinion, these financial statements present fairly in all material respects Registrant's financial condition and changes in condition as of March 31, 2001, and the results of operations, stockholders' equity and cash flows for the six months ended March 31, 2001, 2000 and 1999 and from inception on February 17, 1994 through March 31, 2001, in conformance with generally accepted accounting principles.

The accompanying financial statements consolidate the financial statements of Celebration Mining Company and Royal Silver Mines, Inc. due to the Reorganization discussed in Note 1 of the financial statements following this Report. All significant intercompany accounts and transactions have been eliminated. Also, the consolidation required a change in fiscal year-end, from November 30 (Celebration) to September 30 (Royal). The financial statements account for the Reorganization using the purchase method of accounting (see Note 1 to the financial statements). Celebration is treated as the acquiring company for financial reporting purposes because its shareholders constitute greater than 50 percent of the combined shareholder group. In conformity with generally accepted accounting principles and the Company's accounting policy, Celebration is recognized as the predecessor entity. Consequently, Celebration's assets and liabilities were not adjusted in the accompanying financial statements. The financial statements for the period from the inception of Celebration on February 17, 1994 to November 30, 1994 ("Fiscal 1994") do not include the balance sheet data or results of operations of Consolidated Royal Mines, Inc. The accompanying financial statements represent the activities of Royal Silver Mines and Celebration, but are not considered consolidated financial statements since Royal Silver is the successor to Celebration.

As discussed in greater detail under Item 2 below, a substantial portion of Registrant's assets consist of investments in mineral properties for which additional exploration is required to determine if they contain ore reserves that are economically recoverable. The realization of these investments is contingent to large extent upon the success of Registrant's property transactions as a whole, the existence of economically recoverable reserves, the ability of the Company to obtain financing or make other arrangements for development, and upon future profitable production. Accordingly, the accompanying financial statements make no provision for any asset impairment or other adjustment that might result from the outcome of this uncertainty.

The Board of Directors
Royal Silver Mines, Inc.
(A Development Stage Company)
Spokane, Washington

ACCOUNTANT'S REVIEW REPORT

We have reviewed the accompanying balance sheet of Royal Silver Mines, Inc. (a development stage company) as of March 31, 2001, and the related statements of operations and comprehensive loss, stockholders' equity, and cash flows for the six months ended March 31, 2001, and for the period from February 17, 1994 (inception) through March 31, 2001. All information included in these financial statements is the representation of the management of Royal Silver Mines, Inc.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

The financial statements for the year ended September 30, 2000 were audited by us and we expressed an unqualified opinion on them in our report dated January 8, 2001. We have not performed any auditing procedures since that date.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 13 to the financial statements, the Company's significant operating losses raise substantial doubt about its ability to continue as a going concern. Management's plans are also discussed in Note 13. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Williams & Webster, P.S.
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
May 16, 2001

F-1

ROYAL SILVER MINES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS

							March 31, 2001 (Unaudited)			September 30, 2000
ASSETS
CURRENT ASSETS
		Cash					$		11,072	$	15,915
		Notes receivable							14,628		14,628
		Deposit							_______150 ____25,850 ___698,847		_______150 ____30,693 ___698,847
				TOTAL CURRENT ASSETS
MINERAL PROPERTIES
PROPERTY AND EQUIPMENT
		Mining equipment							-		8,343
		Furniture and equipment							1,440		1,440
		Less accumulated depreciation							___(1,440) ________-		___(6,497) ____3,286
				TOTAL PROPERTY AND EQUIPMENT
		OTHER ASSETS
					Investments		$		___106,506 831,203 =========	$	___236,428 969,254 =========
		TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
		CURRENT LIABILITIES
					Accounts payable		$		___106,867 ___106,867	$	___109,115 ___109,115
						TOTAL CURRENT LIABILITIES
LONG-TERM DEBT									________-		_________-
COMMITMENTS AND CONTINGENCIES									________-		_________-
STOCKHOLDERS' EQUITY
	Common stock, $.01 par value; 40,000,000 shares authorized, 32,679,565 and 23,992,065 shares issued and outstanding, respectively								326,795		239,920
	Additional paid-in capital								11,659,599		11,540,074
	Stock subscriptions receivable								(87,958)		-
	Deficit accumulated during development stage								(11,028,850)		(10,885,466)
	Accumulated other comprehensive income (loss)								__(145,250)		___(34,389)
			TOTAL STOCKHOLDERS' EQUITY						___724,336		___860,139
	TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY							$	831,203 ========	$	969,254 ========

See accountant's review report and accompanying notes.
F-2

ROYAL SILVER MINES, INC
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS AND COMPRESHENSIVE LOSS

			Three Months Ended March 31,						Six Months Ended March 31,						February 17, 1994 (Inception) Through March 31, 2001 (Unaudited)
			2001 (Unaudited)		2000 (Unaudited)		1999 (Unaudited)		2001 (Unaudited)		2000 (Unaudited)		1999 (Unaudited)
REVENUES			$	______-	$	______-	$	______-	$	______-	$	______-	$	______-	$	______-
GENERAL AND ADMINISTRATIVE EXPENSES
	Mineral property expense			64		5,095		-		234		5,095		-		569,858
	Depreciation and amortization			-		3,139		10,200		402		6,302		15,047		235,016
	Officers' and directors' compensation			-		-		2,000		-		15,000		59,540		1,416,760
	General and administrative			40,268 40,332 (40,332)		10,825 19,059 (19,059)		51,562 63,762 (63,762)		110,990 111,626 (111,626)		49,707 76,104 (76,104)		67,266 141,853 (141,853)		3,900,645 6,122,279 (6,122,279)
		Total expenses
OPERATING LOSS
OTHER INCOME (EXPENSES)
Interest income				20		99		-		49		182		7,058		59,004
Interest expense				(1,186)		-		-		(4,010)		-		-		(78,358)
Gain on property interest sold				-		-		-		-		-		-		1,875,281
Gain (loss) on disposition and impairment of assets				(30,209) (31,375) (71,707)		57,409 57,508 38,449		(247,111) (247,111) (310,873)		(27,797) (31,758) (143,384)		(51,777) (51,595) (127,699)		(247,112) (240,054) (381,907)		(6,762,498) (4,906,571) (11,028,850)
Total other income (expense) LOSS BEFORE TAXES
INCOME TAXES				______-		______-		______-		______-		______-		______-		______-
NET LOSS				(71,707)		38,449		(310,873)		(143,384)		(127,699)		(381,907)		(11,028,850)
OTHER COMPREHENSIVE INCOME (LOSS)
	Unrealized gain (loss) on market value of investments			(47,394)		305,284		______-		(110,861)		272,141		______-		(145,250)
COMPREHENSIVE LOSS			$ $	(119,101) ======= Nil =======	$ $	343,733 ======= Nil =======	$ $	(310,873) ======= Nil =======	$ $	(254,245) ======= (0.01) =======	$ $	144,442 ======= (0.01) =======	$ $	(381,907) ======= (0.02) =======	$ $	(11,174,100) ======== (0.78) ========
NET LOSS PER COMMON SHARE BASIC AND DILUTED
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED			28,330,398 ========		20,362,065 ========		19,833,121 ========		26,315,417 ========		20,356,292 ========		19,260,323 ========		14,371,637 ========

See accountant's review report and accompanying notes.
F-3

ROYAL SILVER MINES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY

	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Stockholders' Equity
	Number Of Shares	Amount
Balance, February 17, 1994	-	$	-	$	-	$	-	$	-
Issuance in May 1994 of shares at $.002 per share To officers and directors in Exchange for assignment of mining property option	2,250,000		22,500		(18,500)		- -		4,000
Issuance in July 1994 of shares for cash at $.402 in private placement, net of costs	1,050,000		10,500		411,116		- -		421,616
Issuance in August 1994 of shares to a director in exchange for services valued at $.417 per share	150,000		1,500		61,000		- -		62,500
Net loss for the year ended November 30, 1994	______-		______-		______-		(211,796)		(211,796)
Balance November 30, 1994	3,450,000		34,500		453,616		(211,796)		276,320
Issuance of share in debt offering at $.03 per share	416,250		4,163		9,712		- -		13,875
Issuance of shares for mineral properties valued at prices ranging from $1.00 to $3.25 per share	1,062,500		10,625		2,790,001		- -		2,800,626
Issuance of shares for cash at Prices ranging from $1.00 to $2.00 per share	181,000		1,810		262,190		- -		264,000
Stock issuance costs	-		-		(58,202)		-		(58,202)
Issuance of shares to acquire Consolidated Royal Mines, Inc. at $.15 per share	2,434,563		24,346		335,750		______-		360,096
Balance forward	7,544,313	$	75,444	$	3,793,067	$	(211,796)	$	3,656,715

See accountant's review report and accompanying notes.
F-4

ROYAL SILVER MINES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY

	Common Stock						Additional Paid-in Capital		Accumulated Deficit			Total Stockholders' Equity
	Number of Shares		Amount
Balance forward		7,544,313		$	75,444	$		3,793,067		$	(211,796)	$	3,656,715
Issuance of shares to directors and employees for services at prices ranging from $2.00 to $2.50 per share		12,750			127			29,473			- -		29,600
Issuance of shares in exchange for debt at $1.50 per share		200,000			2,000			298,000			- -		300,000
Net loss for the ten months ended September 30, 1995		______-			______-			______-			(750,939)		(750,939)
Balance September 30, 1995		7,757,063			77,571			4,120,540			(962,735)		3,235,376
Issuance of shares for cash at prices ranging from $0.75 to $2.20 per share		1,841,832			18,419			2,757,645			- -		2,776,064
Issuance of shares to directors and employees for services at $1.50 per share		438,034			4,380			652,671			- -		657,051
Issuance of shares in exchange for debt at $1.50 per share		406,050			4,060			605,015			- -		609,075
Issuance of warrants for cash at $.05 per warrant		- -			- -			41,068			- -		41,068
Issuance of shares for cash to directors and employees at prices ranging from $1.62 to $2.08 per share		107,500			1,075			181,175			- -		182,250
Cancellation of 35,000 shares received in exchange for return of mining property		(35,000)			(350)			(109,025)			- -		(109,375)
Payment to Centurion Mines for option to repurchase stock		______-			______-			______-			(50,000)		(50,000)
Balance forward		10,515,479		$	105,155	$		8,249,089		$	(1,012,735)	$	7,341,509

See accountant's review report and accompanying notes.
F-5

ROYAL SILVER MINES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY

	Common Stock						Additional Paid-in Capital			Accumulated Deficit			Total Stockholders' Equity
	Number of Shares		Amount
Balance forward		10,515,479		$	105,155	$		8,249,089	$		(1,012,735)	$		7,341,509
Issuance of shares for joint venture in mining property at $1.50 per share		100,000			1,000			149,000			- -				150,000
Repurchase of 25,000 shares issued for joint venture at $1.40 per share		(25,000)			(250)			(34,750)			- -				(35,000)
Issuance of shares for mining property at $1.50 per share		20,000			200			29,800			- -				30,000
Issuance of shares to noteholders for Extension of notes at $1.50 per share		39,375			394			58,669			- -				59,063
Stock issuance costs		-			-			(15,000)			-				(15,000)
Net loss for the year ended September 30, 1996		_________-			_________-			_________-			(2,045,082)				(2,045,082)
Balance, September 30, 1996		10,649,854			106,499			8,436,808			(3,057,817)				5,485,490
Issuance of shares to directors, employees and others for services at prices ranging from $0.75 to $1.25 per share		306,378			3,063			309,844			- -				312,907
Issuance of shares for cash at $0.75 per share		2,491,000			24,910			1,843,340			-				1,868,250
Stock issuance costs		-			-			(30,000)			-				(30,000)
Issuance of shares for mining property at $1.00 per share		60,000			600			59,400			- -				60,000
Cancellation of 25,000 shares received in Exchange for return of mining property		(25,000)			(250)			(81,000)			- -				(81,250)
Payment for extension of warrants for one year		-			-			5,500			-				5,500
Net loss for the year ended September 30, 1997		_________-			_________-			_________-			(1,770,711)				(1,770,711)
Balance, September 30, 1997		13,482,232		$	___134,822	$		10,543,892	$		(4,828,528)	$			5,850,186

See accountant's review report and accompanying notes.
F-6

ROYAL SILVER MINES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY

	Common Stock			Additional Paid-in Capital		Subscription Receivable		Accumulated Deficit		Total Stockholders' Equity
	Number of Shares	Amount
Balance forward	13,482,232	$	134,822	$	10,543,892	$	-	$	(4,828,528)	$	5,850,186
Issuance of shares for cash at prices ranging from $0.15 to $0.75 per share	1,923,333		19,233		275,266 >		- -		- -		294,499
Issuance of shares to directors, consultants and employees for services at prices varying from $0.34 to $0.91 per share	398,000		3,980		202,680		- -		- -		206,660
Issuance of shares for mining property at $0.75 per share	200,000		2,000		148,000		- -		- -		150,000
Issuance of shares in exchange for cash and note at $0.25 per share	3,000,000		30,000		720,000		(700,000)		- -		50,000
Net loss for year ended September 30, 1998	______-		______-		______-				(2,637,568)		(2,637,568)
Balance September 30, 1998	19,003,565		190,035		11,889,838		(700,000)		(7,466,096)		3,913,777
Issuance of shares to officers, directors and consultants for services at prices varying from $0.04 per share to $0.06 per share	1,876,000		18,760		89,469		- -		- -		108,229
Issuance of shares for cash, investment and receivable	1,070,000		10,700		66,500		(50,000)		- -		27,200
Shares returned to treasury for cancellation of receivable	(2,000,000)		(20,000)		(680,000)		700,000		- -		- -
Stock issuance costs	-		-		(133)		-		-		(133)
Issuance of shares for cash at prices varying from $0.04 per share to $0.07 per share	1,800,000		18,000		63,000		- -		- -		81,000
Payment of stock subscription	______-		______-		______-		50,000		______-		50,000
Balance forward	21,749,565	$	217,495	$	11,428,674	$	______-	$	(7,466,096)	$	4,180,073

See accountant's review report and accompanying notes.
F-7

ROYAL SILVER MINES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY

	Common Stock			Additional Paid-in Capital		Subscription Receivable		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders' Equity
	Number Of Shares	Amount
Balance forward	21,749,565	$	217,495	$	11,428,674	$	-	$	(7,466,096)	$	-	$	4,180,073
Shares returned to treasury for cancellation of receivable and exchange of investments	(1,450,000)		(14,500)		- -		- -		- -		- -		(14,500)
Net loss for year ended September 30, 1999	______-		______-		______-		______-		(2,991,050)		______-		(2,991,050)
Balance, September 30, 1999	20,299,565		202,995		11,428,674		- -		(10,457,146)		- -		1,174,523
Shares issued to consultants for services at $0.05 per share	62,500		625		2,500		- -		- -		- -		3,125
Shares issued to officers for debt at $0.04 per share	2,200,000		22,000		66,000		- -		- -		- -		88,000
Shares issued to officers for investment at $0.04 per share	1,430,000		14,300		42,900		- -		- -		- -		57,200
Net loss for the year ended September 30, 2000	______-		______-		______-		______-		(428,320)		(34,389)		(462,709)
Balance, September 30, 2000	23,992,065		239,920		11,540,074		- -		(10,885,466)		(34,389)		860,139
Shares issued to consultants and others for services at prices varying from $0.02 to $0.07 per share	2,487,500		24,875		57,525		- -		- -		- -		82,400
Shares issued to officers for investment and receivable at $0.02 per share	6,200,000		62,000		62,000		(87,958)		- -		- -		36,042
Net loss for six months ended March 31, 2001	- -		- -		- -		- -		(143,384)		- -		(143,384)
Unrealized loss on market value of investments	________-		______-		______-		______-		________-		(110,861)		(110,861)
Balance, March 31, 2001 (Unaudited)	32,679,565 ========	$	326,795 ======	$	11,659,599 ======	$	(87,958) ======	$	(11,028,850) =======	$	(145,250) ======	$	724,336 ======

See accountant's review report and accompanying notes.
F-8

ROYAL SILVER MINES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS

			For the Six Months Ended March 31,						From February 17, 1994 (Inception) Through March 31, 2001 (Unaudited)
			2001 (Unaudited)		2000 (Unaudited)		1999 (Unaudited)
Cash flows from operating activities:
Net loss			$	(143,384)	$	(127,699)	$	(381,907)	$	(11,028,850)
Adjustments to reconcile net loss to net cash used by operating activities:
		Investment given for officers' compensation		-		-		-		5,000
		Loss (gain) on sale of equipment		(115)		113,686		-		98,754
		Loss (gain) on sale of investments		27,912		-		-		27,912
		Equipment traded for services		-		4,137		-		4,137
		Depreciation and amortization		402		6,302		15,047		230,225
		Issuance of common stock for services		82,400		3,125		75,540		1,462,471
		Write-off of option costs		-		-		-		517,871
		Write off of joint venture costs		-		-		-		160,000
		Write-off of mineral properties		-		-		-		2,673,301
		Loss on devaluation of investments		-		-		-		3,121,060
Changes in assets and liabilities:
		Note receivable		-		(3,000)		350,000		(14,628)
		Deposit		-		(150)		-		(150)
		Interest receivable		-		-		17,106		-
		Prepaid expenses		-		-		1,747		(28,438)
		Other assets		-		-		-		(9,801)
		Mineral properties		-		-		-		(4,674)
		Accounts payable		(2,248)		13,218		4,800		106,867
		Accrued expenses		-		-		-		43,188
		Payable to related parties		______-		27,000		(2,500)		___344,000
Net cash provided (used) by operating activities				(35,033)		36,619		79,833		(2,291,755)
Cash flows from investing activities:
Purchase of investments				(4,400)		(128,215)		-		(3,280,302)
Purchase and development of mineral properties				-		-		100,533		(1,986,690)
Purchase of fixed assets				-		-		-		(325,687)
Sale of mineral properties				-		-		(83,333)		1,093,750
Sale of investments				31,590		119,246		(45,000)		392,192
Sale of fixed assets				__3,000		______-		(100,000)		____8,685
Net cash provided (used) by investing activities				30,190		(8,969)		(127,800)		(4,098,052)
Cash flows from financing activities:
	Stock issuance and offering costs			-		-		19,868		(189,468)
	Proceeds received on long-term debt			-		-		-		675,000
	Payments made on notes payable			-		-		-		(174,206)
	Issuance of common stock for cash			-		-		60,000		6,030,764
	Issuance of common stock for accrued interest			-		-		-		38,158
	Issuance of common stock for extension of notes payable maturation			-		-		-		59,063
	Payment for return of stock issued for mining property interest			-		-		-		(35,000)
	Payment of joint venture costs			-		-		-		(50,000)
	Issuance of warrants or warrants extensions for cash			______-		______-		______-		___46,568
Net cash provided by financing activities				______-		______-		_79,868		6,400,879
Net increase (decrease) in cash			$	_(4,843)	$	_27,650	$	_31,901	$	___11,072

See accountant's review report and accompanying notes.
F-9

ROYAL SILVER MINES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS

		For the Six Months Ended March 31,						From February 17, 1994 (Inception) through March 31, 2001 (Unaudited)
		2001 (Unaudited)		2000 (Unaudited)		1999 (Unaudited)
Net increase (decrease) in cash (balance forward)		$	(4,843)	$	27,650	$	31,901	$	11,072
Cash, beginning of period			__15,915		__28,147		___3,147		_______-
Cash, end of period		$	11,072 =======	$	55,797 =======	$	35,048 =======	$	11,072 =======
Supplemental cash flow disclosure:
	Income taxes paid	$	-	$	-	$	-	$	350
	Interest paid	$	-	$	-	$	-	$	25,655
Non-cash investing and financing activities:
	Common stock issued for services rendered	$	82,400	$	3,125	$	75,540	$	1,462,471
	Common stock issued for mineral properties	$	- -	$	- -	$	- -	$	3,190,626
	Common stock issued for exchange for debt	$	- -	$	- -	$	- -	$	922,950
	Common stock issued in acquisition of Consolidated Royal Mines, Inc.	$	- -	$	- -	$		$	360,096
	Option rights acquired in exchange for a payable	$	- -	$	- -	$	- -	$	79,000
	Common stock issued for assignment of mining property options	$	- -	$	- -	$	- -	$	4,000
	Common stock issued in exchange for Investments	$	- -	$	- -	$	7,200	$	7,200
	Common stock issued for payment to related party	$	- -	$	- -	$	- -	$	88,000
	Common stock issued for investment and stock subscription receivable	$	124,000	$	- -	$	- -	$	124,000
	Investment given for officers' compensation	$	- -	$	- -	$	- -	$	5,000

See accountant's review report and accompanying notes.
F-10

ROYAL SILVER MINES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2001

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

Royal Silver Mines, Inc. ("Royal") was incorporated in April of 1969 under the laws of the State of Utah primarily for the purpose of acquiring and developing mineral properties. Royal conducts its business as a "junior" natural resource company, meaning that it intends to receive income from property sales or joint ventures with larger companies. The Company has elected a September 30 fiscal year-end.

Celebration Mining Company ("Celebration"), currently a wholly-owned subsidiary of Royal, was incorporated for the purpose of identifying, acquiring, exploring and developing mining properties. Celebration was organized on February 17, 1994, as a Washington corporation. Celebration has not yet realized any revenues from its planned operations.

On August 8, 1995, Royal and Celebration completed an agreement and plan of reorganization whereby the Company issued 4,143,750 shares of its common stock and 1,455,000 warrants in exchange for all of the outstanding common stock of Celebration. Pursuant to the reorganization, the name of the Company was changed to Royal Silver Mines, Inc. Immediately prior to the agreement and plan of reorganization, the Company had 2,375,463 common shares issued and outstanding.

The acquisition was accounted for as a purchase by Celebration of Royal, because the shareholders of Celebration controlled the Company after the acquisition. Therefore, Celebration is treated as the acquiring entity. There was no adjustment to the carrying value of the assets or liabilities of Royal in the exchange as the market value approximated the net carrying value. Royal is the acquiring entity for legal purposes and Celebration is the surviving entity for accounting purposes.

The $698,847 cost of mineral properties included in the accompanying balance sheet as of March 31, 2001 is related to exploration properties. The Company has not determined whether the exploration properties contain ore reserves that are economically recoverable. The ultimate realization of the Company's investment in exploration properties is dependent upon the success of future property sales, the existence of economically recoverable reserves, the ability of the Company to obtain financing or make other arrangements for development and upon future profitable production. The ultimate realization of the Company's investment in exploration properties cannot be determined at this time and, accordingly, no provision for any asset impairment that may result in the event the Company is not successful in developing or selling these properties, has been made in the accompanying financial statements.

F-11

ROYAL SILVER MINES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2001

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (Continued)

The Company is seeking additional capital and management believes the properties can ultimately be sold or developed to enable the Company to continue its operations. However, there are inherent uncertainties in mining operations and management cannot provide assurances that it will be successful in this endeavor. Furthermore, the Company is in the development stage, as it has not realized any significant revenues from its planned operations.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of Royal Silver Mines, Inc. is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

Accounting Method

The Company's financial statements are prepared using the accrual method of accounting.

Development Stage

The company is in the development stage and has not commenced the sale of any products.

Estimates

The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.

Loss Per Share

Loss per share was computed by dividing the net loss by the weighted average number of shares outstanding during the year. The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time they were outstanding. Outstanding warrants were not included in the computation of diluted loss per share because the exercise price of the outstanding warrants is higher than the market price of the stock, thereby causing the warrants to be antidilutive.

F-12

ROYAL SILVER MINES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2001

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Mineral Properties

Costs of acquiring, exploring and developing mineral properties are capitalized by project area. Costs to maintain the mineral rights and leases are expensed as incurred. When a property reaches the production state, the related capitalized costs will be amortized, using the units of production method on the basis of periodic estimates of ore reserves.

Mineral properties are periodically assessed for impairment of value and any losses are charged to operations at the time of impairment.

Should a property be abandoned, its capitalized costs are charged to operations. The Company charges to operations the allocable portion of capitalized costs attributable to properties sold. Capitalized costs are allocated to properties sold based on the proportion of claims sold to the claims remaining within the project area.

Provision For Taxes

At March 31, 2001, the Company had net operating loss carryforwards of approximately $6,560,000 that may be offset against future taxable operating income through 2015. Additionally, the Company has capital loss carryovers of approximately $4,577,000. No tax benefit has been reported in the financial statements as the Company believes there is a significant chance the net operating and capital loss carryforwards will expire unused. Accordingly, the potential tax benefits of these loss carryforwards are offset by a valuation allowance of the same amount.

Impaired Asset Policy

In March 1995, the Financial Accounting Standards Board issued a statement titled "Accounting for Impairment of Long-lived Assets." In complying with this standard, the Company reviews its long-lived assets quarterly to determine if any events or changes in circumstances have transpired which indicate that the carrying value of its assets may not be recoverable. Because of write-downs and write-offs taken throughout fiscal 1998, fiscal 1999, and fiscal 2000, the Company does not believe any further adjustments are needed to the carrying value of its assets at March 31, 2001. See Note 3.

Financial Accounting Standards

The Company has adopted the fair value accounting rules to record all transactions in equity instruments for goods or services.

F-13

ROYAL SILVER MINES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2001

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Principles of Consolidation

The financial statements include those of Royal Silver Mines, Inc. and Celebration Mining Company. All significant inter-company accounts and transactions have been eliminated. The financial statements are not considered consolidated statements since Royal Silver Mines, Inc. was the successor by merger to Celebration Mining Company.

Derivative Instruments

In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value.

At March 31, 2001, the Company has not engaged in any transactions that would be considered derivative instruments or hedging activities.

Change in Accounting Policies

During the year ended September 30, 1999, the Company changed its method of accounting for organization costs to conform to the requirements of Statement on Position 98-5, which requires start-up and organization costs to be expensed as incurred. The effect of the change was to increase net loss for the year ended September 30, 1999, by $3,502 ($0.0002 per share). The change has no effect on prior years.

Investments

Investments, consisting of equity securities of private and small public companies, are stated at current market value.

Fair Value of Financial Instruments

The carrying amounts for cash, receivables, deposits, payables, and advances from related parties approximate their fair value.

Interim Financial Statements

The interim financial statements as of and for the six months ended March 31, 2001 included herein have been prepared for the Company without audit. They reflect all adjustments, which are, in the opinion of management, necessary to present fairly the results of operations for these periods. All such adjustments are normal recurring adjustments. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year.

F-14

ROYAL SILVER MINES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2001

NOTE 3 - MINERAL PROPERTIES

Utah Mining Property Joint Venture

In October 1994, Celebration and United Silver Mine, Inc., (United) entered into a joint venture agreement, whereby Celebration could acquire up to an 80% interest in a mining property located in the State of Utah. Under the terms of the agreement, United was to contribute real properties for an initial 75% interest in the joint venture, and Celebration was to remove all liens associated with the real properties by paying $175,000 to a bank which was the primary lien holder for its initial 25% interest in the venture. Celebration expended $175,000 to purchase the aforementioned promissory note. The property was auctioned in a public auction in May 1995 and by virtue of Celebration's first position lien, Celebration was able to successfully bid the full amount of the underlying promissory note. Although additional expenditures have been made on the property through September 30, 1998, no further funds towards the joint venture have been expended by Celebration, which owns an undivided 25% interest in the property.

Washington and Idaho Mineral Properties

During the year ended September 30, 1995, Celebration purchased, through the issuance of 800,000 shares of its common stock, various mineral properties located in the states of Washington and Idaho. The mineral properties were recorded at the fair market value of the shares paid on the date of issuance ranging from $3.13 to $3.25 per share for a total purchase price of $2,538,126. In May 1996, the Company sold back the Frisco Standard Silver Mine to its original seller in exchange for the same price (35,000 shares of Royal stock) received by the seller when the mine was purchased. The shares received were canceled and no gain or loss was recorded on the transaction.

Other Domestic Properties

In February 1999, in connection with the settlement agreement with Grand Central (described in Note 11), the Company received a number of patented mining claims in Utah and a number of unpatented mining claims in Idaho. In aggregate, these mining claims were recorded at $45,000.

In the fourth quarter of the year ended September 30, 2000, the Company elected to write off all of its interests in three mineral properties, which were known as Western Continental, Brush Prairie and Bismark. The net effect of this write down was to record a loss on asset impairment of $251,947.

* * *

The Company's proposed future mining activities will be subject to laws and regulations controlling not only the exploration and mining of mineral properties, but also the effect of such activities on the environment. Compliance with such laws and regulations may necessitate additional capital outlays, affect the economics of a project, and cause changes or delays in the Company's activities. The Company's mineral properties are valued at the lower of cost or net realizable value.

F-15

ROYAL SILVER MINES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2001

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Major additions and improvements are capitalized. Minor replacements, maintenance and repairs that do not increase the useful life of the assets are expensed as incurred. Depreciation of property and equipment is determined using the straight-line method over the expected useful lives of the assets of five years. Depreciation expense for the six months ended March 2001, 2000 and 1999 was $402, $6,302 and $15,047, respectively.

NOTE 5 - INVESTMENTS

The Company's securities investments are classified as available for sale securities which are recorded at fair value in investments and other assets on the balance sheet, with the change in fair value during the period excluded from earnings and recorded net of tax as a component of other comprehensive income. The Company has no securities which are classified as trading securities.

During 1999, certain investments were written down to their estimated realizable value. The amount of the loss, $281,498, was charged to operations in 1999.

At March 31, 2001 and September 30, 2000, the market values of investments were as follows:

		March 31, 2001		September 30, 2000
Elite Logistics, Inc. Envirogold LLC Integrated Pharmaceuticals, Inc. Rigid Airship USA, Inc. Ashington Mining Company Metalline Mining Company Advanced Process Technologies, Inc. Sterling Mining Co. Trend Mining Company Silver Belle Mining Co.	$	14,011 8,000 1,573 3,100 7,200 32,267 - - 4,313 36,042 _______-	$	150,588 8,000 - - 3,100 7,200 37,288 4,301 5,951 - - __20,000
	$	106,506 =======	$	236,428 =======

Other information regarding the Company's investments follows:

F-16

ROYAL SILVER MINES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2001

NOTE 5 - INVESTMENTS (Continued)

Grand Central Silver Mines, Inc.

During the quarter ended March 31, 1998, the Company sold a 35% working interest in a joint venture (with Metalline Mining Co.) engaged in exploration and development of the Sierra Mojada District, Coahuila, Mexico. In connection with this transaction, the Company acquired 735,000 shares of common stock (in Grand Central Silver Mines, inc.) which was valued at $1,424,062 and also acquired a promissory note of $350,000 from Grand Central. The promissory note was satisfied in February 1999 through a settlement agreement with Grand Central. (See Note 11.)

Rigid Airship USA, Inc.

On June 26, 1998, the Company traded six patented mining claims acquired in Shoshone County Idaho in 1995 for 50,000 shares of SynFuels Technology, Inc. which was then trading at $8.00 per share. The Company acquired an additional 10,000 shares of SynFuels Technology, Inc. common stock in September 1998 in exchange for another mining property. (See Note 3.) SynFuel Technology, Inc. changed its name to Rigid Airship in November 1998. As of March 31, 2001, the stock had a market value of $3,100.

Envirogold, LLC

During January 2000, the Company announced that together with Nuvotec, Inc. (Nuvotec), it has formed Envirogold LLC (Envirogold). Envirogold is 50% owned by each and has signed a revised technology licensing agreement with Integrated Environmental Technologies (Integrated) for the development and use of certain patented technology for applications in the mining and mineral processing industries. Exclusive rights to the technology is expected to be acquired over the next 36 months. Envirogold will operate as licensee of the technology and will be managed by two of the Company's directors and two Nuvotec directors. See Note 12.

Under terms of the aforementioned agreement, the Company will assign to the LLC its license agreement and will also supply concentrates needed for bulk tests required to acquire the exclusive rights. Nuvotec will pay for the costs of the tests and provide technical and management expertise to oversee the project. Upon successful completion of the tests, each party will be responsible for one-half of all future costs. See Note 12.

Metalline Mining

During May 2000, the Company traded equipment for 15,000 restricted common shares of Metalline Mining Company which was then trading at $4.12 per share. As of March 31, 2001, the Company's investment in Metalline Mining Company stock had a market value of $32,267.

F-17

ROYAL SILVER MINES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2001

NOTE 6 - COMMON STOCK

During the year ended November 30, 1994, the Company issued 150,000 shares of common stock to directors for services rendered, valued at $0.417 per share, which was the fair market value of the share on the date of issuance. Other issuances during the year ended November 20, 1994 were 2,250,000 shares issued to officers and directors in exchange for the assignment of mining property options valued at $4,000 and 1,050,000 shares issued for cash at $0.402 per share.

During the year ended September 30, 1995, the Company issued 12,750 shares of common stock to directors and employees for services rendered, valued at prices ranging from $2.00 to $2.50 per share, 1,062,500 shares of its common stock in exchanges for mineral properties valued at $2,800,626 and sold 181,000 shares of common stock for $264,000 cash. The Company also issued 200,000 shares of its common stock valued at $1.50 per shares in payment of $300,000 of outstanding debt that was owed to Centurion Mines Corporation (Centurion), a related entity. The stock was issued at $1.50 per share in payment of $300,000 of outstanding debt and 277,500 shares in connection with the issuance of notes payable. The shares were valued at the fair market value on the date of issuance.

During the year ended September 30, 1996, the Company sold 1,949,332 shares of its common stock for $2,958,314 in cash. The Company also issued 438,034 shares to directors and employees for services rendered valued at $1.50 per share, which is the fair market value of the share on the date of issuance. Also during the year ended September 30, 1996, the Company issued 100,000 shares of its common stock for a joint venture in a mining property and 20,000 common shares for a mining property. The stock issued was valued at $1.50 per share, which is the fair market value of the shares at the date of issuance. In the same twelve-month period, the Company also issued 406,050 shares of its common stock in payment of outstanding debt of $570,917 and accrued interest of $38,158. The stock was issued at $1.50 per share for a total value of $609,075. In addition, the Company issued 39,375 shares of common stock to noteholders for extending the maturity date of their loans. Again, the shares were valued at $1.50 each, which was the fair market value of the shares when issued. The Company also cancelled 35,000 shares of stock previously issued and returned the mining property valued at $109,375 and repurchased 25,000 shares of its previously issued stock for $35,000.

In the year ended September 30, 1997, the Company issued 306,378 shares of its common stock for services received and 60,000 shares of its common stock for mining property. The shares were valued at their fair market value at the dates of issuance which ranged from $0.75 to $1.25 per share. The Company also sold 2,491,000 shares of its common stock for $1,868,250. During the same twelve-month period, the Company cancelled 25,000 shares of its previously issued common stock in exchange for the return of mining property valued at $81,250.

F-18

ROYAL SILVER MINES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2001

NOTE 6 - COMMON STOCK (Continued)

During the year ended September 30, 1998, the Company issued 398,000 shares of common stock for services received and 200,000 shares of common stock for mining property. The shares were valued at their fair market value at the date of issuance which ranged from $0.34 to $0.91 per share. Also during the same twelve months, the Company sold 4,923,333 shares of its common stock for $344,500 in cash and $700,000 in stock subscriptions receivable.

Because of a subsequent decrease in the market value of the Company's stock, the Company and shareholder renegotiated the aforementioned transaction. In November 1998, the aforementioned shareholder returned 2,000,000 shares of stock to the Company for cancellation and in return the company rescinded the $700,000 note, which was previously recorded as stock subscriptions receivable at September 30, 1998. The net effect of the renegotiated stock transaction was a sale of common stock at $0.05 per share for cash only.

During the year ended September 30, 1999, the Company sold 1,070,000 shares of its common stock valued at $0.06 per share for cash, investment and a short-term note receivable which included 220,000 shares of its common stock to Ashington Mining for a short-term note in the amount of $5,000 and 100,000 shares of Ashington Mining stock valued at $7,200. (See Note 5.) An additional 1,800,000 shares of common stock were sold in January 1999 at $0.04 per share. Also during the year ended September 30, 1999, the Company issued 1,876,000 shares of common stock for services received. The shares were valued at their fair market value at the date of issuance, which ranged from $0.04 to $0.06.

As part of a settlement agreement with Grand Central Silver Mines, Inc. and other parties, Royal received 1,450,000 shares of Royal Silver Mines, Inc. stock, which were returned to treasury and cancelled. See Note 11.

During the year ended September 30, 2000, the Company issued 62,500 shares of common stock for services, 2,200,000 shares of common stock for payment of related party payables and 1,430,000 shares of common stock for investments. The shares were valued at their fair market value at the date of issuance, which ranged from $0.04 to $0.05.

During the six months ended March 31, 2001, the Company issued 2,487,500 shares of common stock to officers, consultants and others for services and 6,200,000 shares of common stock were issued to officers for investments and receivables. The shares were valued at their fair market value at the date of issuance, which ranged from $0.02 to $0.07.

F-19

ROYAL SILVER MINES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2001

NOTE 7 - COMMON STOCK OPTIONS AND WARRANTS

In January 1992, the shareholders of Royal approved a 1992 Stock Option and Stock Award Plan under which up to ten percent of the issued and outstanding shares of the Company's common stock could be awarded based on merit of work performed. As of December 31, 2000, 12,750 shares of common stock have been awarded under the Plan.

On January 9, 1996, the board of directors approved the issuance of warrants to two of its officers to purchase a total of 300,000 shares for a purchase price of $2.50 per share, exercisable from the date of issuance until January 9, 1999. None of these warrants were exercised before they expired.

On March 22, 1996, the board of directors approved the issuance of warrants to purchase 625,000 shares of common stock of the Company to an investor in partial completion of a private placement of stock. These warrants were exercisable until September 30, 1998, at which time they expired unused.

On April 10, 1996, following the close of the second quarter of fiscal 1996, the board of directors authorized the issuance of 420,666 warrants to unaffiliated investors as part of the private placement of stock. These warrants were exercisable until April 12, 1998 at prices ranging from $2.50 to $2.625 per share. Ultimately, 320,666 of these warrants were issued (but not exercised) for a total amount of $46,568, with the balance of 100,000 warrants expiring unused.

In the quarter ending March 31, 1997, the Company sold 2,491,000 "units" to unaffiliated investors as part of a private placement of stock. Each unit consisted of a share of the Company's common stock and one warrant enabling the investor to purchase one additional share of common stock for a purchase price of $1.25 per share during the next two years. None of the warrants were exercised before they expired.

NOTE 8 - COMPANY STOCK OPTION AND AWARD PLAN

The Company has a stock-based compensation plan whereby the Company's board of directors may grant common stock to its employees and directors. At March 31, 2001, 1,455,000 options have been granted under the plan although none have been exercised in the period ending March 31, 2001. The old existing options are attributed to the merger of Celebration Mining Company with Royal in August 1995.

Of the total of 2,500,000 common stock shares authorized for issuance under the plan, 179,000 shares at values ranging from $0.34 to $0.91 per share were issued to employees and directors during the year ended September 30, 1998 and 1,259,000 shares at values ranging from $0.04 to $0.07 per share were issued to employees and directors during the year ended September 30, 1999.

F-20

ROYAL SILVER MINES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2001

NOTE 8 - COMPANY STOCK OPTION AND AWARD PLAN (Continued)

Following is a summary of the stock options during the year ended September 30, 2000 and the six months ended March 31, 2001.

		Number of Shares		Weighted Average Exercise Price
Outstanding at 10/1/1999		1,455,000	$	1.03
Granted
Exercised		-		___-
Forfeited		(255,000)		1.50
Outstanding at 9/30/2000		1,200,000	$	0.93
Options exercisable at 9/30/2000		1,200,000	$	0.93
Weighted average fair value of options granted during the year ended 9/30/2000	$	_______-
Outstanding at 10/1/2000		1,200,000	$	0.93
Granted		-		-
Exercised		-		-
Forfeited		_______-		____-
Outstanding at 3/31/2001		1,200,000 =======		$ 0.93 ====
Options exercisable at 3/31/2001		1,200,000 =======		$ 0.93 ====
Weighted average fair value of options granted during the period ended 3/31/2001	$	- =======

NOTE 9 - STOCK OPTION AGREEMENT WITH CENTURION MINES CORPORATION

In September 1996, the Company executed an agreement with Centurion Mines Corporation ("Centurion") whereby the Company acquired an option from Centurion to purchase up to 800,000 shares of its common stock held by Centurion for the exercise price of $1.75 per share during the two-year period ending September 30, 1998. The cost of this two-year stock purchase option was $50,000 which was paid by the Company and charged to stockholders' equity (accumulated deficit).

F-21

ROYAL SILVER MINES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2001

NOTE 9 - STOCK OPTION AGREEMENT WITH CENTURION MINES CORPORATION (Continued)

Effective April 15, 1997, the aforementioned stock option agreement was renegotiated (at no cost to the Company) and amended to extend the exercise period until September 30, 1999 and to revise the exercise price to $1.50 per share during this same period.

At March 31, 2001, no shares were acquired from Centurion under this option agreement which lapsed.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

The Company was a defendant in a lawsuit alleging that the Company failed to transfer common stock in exchange for a mining property interest. In June 1999, Box Elder County Superior Court rejected the plaintiff's lawsuit and let stand the Company's countersuit alleging fraudulent misrepresentation. Although the plaintiff has filed an appeal (regarding the originally filed lawsuit) with the Utah Supreme Court, the Company believes that the appeal is completely without merit and will not be sustained.

In its countersuit, the Company is seeking both full title to the aforementioned mineral property and punitive damages. The Company believes its countersuit will prevail.

In July 1998, the Company filed an action in Federal Court in Boise, Idaho for declaratory judgment regarding the validity of its Crescent Mine mineral lease. Defendants in the action include the U.S. Environmental Protection Agency, Shoshone County, and Fawcett International. In 1999, the Company elected to write off its interest in the Crescent Mine mineral lease. During the quarter ended December 31, 2000, the Company withdrew from the lawsuit and is no longer a party to the action.

For commitments and contingencies regarding the Company's investment in Envirogold LLC, see Note 5.

NOTE 11 - SETTLEMENT AGREEMENTS

In February 1999, the Company entered into a settlement arrangement wherein Grand Central Silver Mines, Inc. (hereinafter "Grand") transferred equipment, mining claims, and securities (including 450,000 shares of Royal Silver Mines, Inc. stock) to Royal in full settlement of a $350,000 promissory note (and accrued interest) owed by Grand to Royal. In connection with the same transaction, the Company transferred to an individual 154,375 shares of Grand common stock (previously held by Royal) and in turn received from this same individual 1,000,000 shares of Royal Silver Mines, Inc. common stock and 333,333 shares of Summit Silver, Inc. common stock. While this settlement agreement involved mutual releases of

F-22

ROYAL SILVER MINES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2001

NOTE 11 - SETTLEMENT AGREEMENTS (Continued)

liability for all parties affected, the net effect of the settlement was the Company's recording losses in 1999 of $247,112 from assets disposed in the second quarter and $810,469 in the third quarter as this transaction was finalized. (See Note 5).

The Company was a defendant in a lawsuit filed by some of its shareholders for alleged financial improprieties. Although the directors of the Company vigorously disputed the plaintiffs' claims, the directors elected to settle this matter out of court in September 1999 after receiving advice from counsel that the costs of defending the litigation would exceed the costs of settling out of court. In the resulting settlement, the Company agreed to pay the plaintiffs $60,000 in cash and in addition, two Company officers agreed to transfer personally owned investments to the plaintiffs. Accordingly, in turn, the Company indemnified the aforementioned corporate officers by transferring to them stock in Summit Silver Mines, Inc. and a mineral property interest in the Imperial Mine. The transaction resulted in a charge to operations of $103,950.

NOTE 12 - LICENSING AGREEMENT

In January 1999, the Company entered into a technology licensing agreement with Integrated Environmental Technologies, LLC (IET), a New York limited liability company, to acquire, develop and exploit mineral deposits using IET technology. IET technology involves high temperature systems that utilize plasma technology for processing materials and includes trade secrets, inventions, (whether patented or unpatented), information, data and experience. Upon completion of agreed upon conditions, the Company will be granted a worldwide exclusive license to practice IET technologies necessary for the extraction and recovery of copper from enargite ores and gold and silver from arsenic rich ores or residual process streams from milling and smelting operations not to include certain properties in and around the Yuma, Arizona region. During the year ended September 30, 2000, the Company renegotiated certain terms and conditions of the licensing agreement and assigned its interest in the license agreement to Envirogold, LLC. See Note 5.

NOTE 13 - GOING CONCERN

As shown in the accompanying financial statement, the Company has no revenues, has incurred a net loss of $143,384 for the six months ended March 31, 2001 and has an accumulated deficit of $11,028,850 since inception. These factors indicate that the Company may be unable to continue in existence. The financial statements do not include any adjustments related to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.

F-23

ROYAL SILVER MINES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
March 31, 2001

NOTE 13 - GOING CONCERN (Continued)

The Company's management has strong beliefs that significant and imminent private placements will generate sufficient cash for the Company to operate for the next few years. The Company also believes that the occasional sale of its equity investments will provide cash as needed for operations.

NOTE 14 - RELATED PARTIES

The Company sublets office space on a month to month basis from one of its officers in Walla Walla, Washington for $300 per month. Total rent paid for this office space during the six months ended March 31, 2001 and the year ended September 30, 2000 was $1,800 and $1,200, respectively.

Other related party transactions are disclosed in Notes 5 and 12.

NOTE 15 - SUBSEQUENT EVENTS

Subsequent to the date of these financial statements, on April 23, 2001, the Company's stockholders voted to increase the authorized capital to 100,000,000 shares of common stock and to create a class of preferred stock.

On April 23, 2001, subsequent to the date of these financial statements, the stockholders authorized a 1 for 20 reverse stock split of common stock to stockholders of record.

The Company voted to change its name to Cadence Resources Corporation on April 23, 2001, subsequent to the date of these financial statements.

F-24

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES. There is considerable risk in any mining venture, and there can be no assurance that the Company's operations will be successful or profitable. Exploration for commercially minable ore deposits is highly speculative and involves risks greater than those involved in the discovery of mineralization. Mining companies use the evaluation work of professional geologists, geophysicists, and engineers in determining whether to acquire an interest in a specific property, or whether or not to commence exploration or development work. These estimates are not always scientifically exact, and in some instances result in the expenditure of substantial amount of money on a property before it is possible to make a final determination as to whether or not the property contains economically minable ore bodies. The economic viability of a property cannot be finally determined until extensive exploration and development work, plus a detailed economic feasibility study, has been performed. Also, the market prices for mineralization produced are subject to fluctuation and uncertainty, which may negatively affect the economic viability of properties on which expenditures have been made. During the development stage of the Company, from inception to March 31, 2001, the Company accumulated a deficit of $11,028,850.

At March 31, 2001, $698,847 of the Company's total assets of $831,203 were investments in mineral properties. Additional exploration is required to substantiate or determine whether these mineral properties contain ore reserves that are economically recoverable. The realization of these investments is dependent upon the success of future property sales, the existence of economically recoverable reserves, the ability of the Company to obtain financing, the Company's success in carrying out its present plans or making other arrangements for development, and upon future profitable production. The ultimate outcome of these investments cannot be determined at this time; accordingly, no provision for any asset impairment that may result, in the event the Company is not successful in developing or selling these properties, has been made in the Company's financial statements.

LIQUIDITY AND CAPITAL RESOURCES. The Company currently has no revenues and, as explained above, has an accumulated deficit. Because it has sustained recurring losses from operations, the Company cannot assure that it will be able to fully carry out its plans as budgeted without additional operating capital. At March 31, 2001, the Company had negative working capital of $81,017. At September 30, 2000, the Company had negative working capital of $78,422. These amounts represent general deterioration in liquidity and capital resources from the Company's positive working capital in prior years. The largest single element of negative working capital is accounts payable which decreased from $109,115 at September 30, 2000 to $106,867 at March 31, 2001. While sales of the Company's stock have traditionally constituted its primary source of cash generation, depressed metals prices in recent years have lessened the Company's ability to obtain cash from sales of its stock. Company sales of its stock generated the following cash amounts: $0 in the eighteen months ending March 31, 2001, $158,200 in the year ending September 30, 1999; and $344,500 in the year ending September 30, 1998. In adjusting to smaller cash resources, the Company has substantially decreased its expenses for office, personnel and compensation, and consulting expenses.

In the second quarter of fiscal 2001, the Company decreased its accounts payable by $2,248 while current assets and cash balances decreased by $4,843 since September 30, 2000. The Company had no long-term debt at September 30, 2000 or at March 31, 2001.

The Company has estimated that it will need minimal capital resources of approximately $20,000-25,000 per month to meet its estimated expenditures for fiscal 2001. In recent years, several key members of management, met with experienced financial and investment firms throughout Europe and North America and negotiated preliminary terms and arrangements for capital fund raising. During the fiscal year ending September 30, 1999, the Company raised $158,200 in funds, (primarily through the private placement of shares) and during the fiscal year ending September 30, 1998, the Company raised $344,500 in funds from private placement of its shares. The Company is continuing with the previously described negotiations and various alternatives to raise capital.

The Board of Directors reasonably believes that the Company is able to engage in nearly any size operation or scope of mining activity depending on the circumstances and merits of each proposed operation or mining activity. Accordingly, the Board has not limited the size of operation or scope of project which it believes is reasonable for management to consider in achieving the Company's business plan. Therefore, management has been authorized to consider and review numerous proposals and, upon satisfactory assessment, to then make a specific determination as to an estimated range of funding amounts that each such proposal reasonably might require.

Inasmuch as the Company has not yet determined in detail the specifications of the project, operation or mining activity that it intends to undertake, management is not able at this time to provide a detailed listing or exact range of operation costs, including increases in general and administrative expense, if any. However, the Company plans to fund any increases in general and administrative expense principally from joint venture revenues or funds it may receive or savings it may realize through corporate restructuring or business combination arrangements. Funds required to finance the Company's exploration and development of mineral properties are expected to come primarily from the contributions of its joint venture participants, and from the funds generated from such joint ventures and other lease or royalty arrangements.

The Company currently is seeking alternate sources of working capital sufficient to increase the funding of additional general and administrative expenses that may become necessary as the Company's business plan develops, and to continue meeting its ongoing payment obligations for its leases to governmental entities.

RESULTS OF OPERATIONS

COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 2001, RESPECTIVELY.

General and administrative expenses increased from $49,707 during the first two quarters of fiscal 2000 to $110,990 during the first half of fiscal 2001. This increase is principally due to greater than normal consulting expenses. In the six months ended March 31, 2000, the Company recorded a loss on disposition and impairment of assets of $51,577, while in the six months ended March 31, 2001 the loss was $27,797. As a result, during the first half of fiscal 2000 compared to the first half of 2001, the net loss increased from $127,699 to $267,384 while the net loss per share remained unchanged at $0.01.

The Company is unable to fully determine the impact of future transactions on its operating capital. Hence, the Company has determined not to incur and does not have any commitments or plans for material capital expenditures during the remainder of its current fiscal year for which it does not have a reasonably available source of payment. It is uncertain what effect this decision may have with respect to restricting capital expenditures.

On the one hand, if the Company were to continue such restriction, the likely effect might be adverse to the preservation of its assets and capital base, thereby narrowing the scope of plans for future operations and constricting liquidity. On the other hand, if the Company were to discontinue such restriction without an increase in sustained cash flow, the likely effect of that might be an increase in accumulated deficits which could be adverse to the Company's financial condition with respect to liabilities and stockholders' equity.

Therefore, while the Company continues to seek a joint venture participant and additional sources of capital for financing operations during the remainder of its current fiscal year, the Company will continue to carefully monitor its capital expenditures.

On April 23, 2001, the Company held its annual stockholders meeting, at which time the stockholders voted to increase the authorized capital to 100,000,000 shares of common stock, and to create a class of preferred stock. In addition the shareholders authorized a 1 for 20 reverse stock split and voted to change the name of the Company to Cadence Resources Corporation.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The Company was a defendant in a lawsuit alleging that the Company failed to transfer common stock in exchange for a mining property interest. In June 1999, Box Elder County Superior Court rejected the plaintiff's lawsuit and let stand the Company's countersuit alleging fraudulent misrepresentation. Although the plaintiff has filed an appeal (regarding the originally filed lawsuit) with the Utah Supreme Court, the Company believes that the appeal is completely without merit and will not be sustained.

In its countersuit, the Company is seeking both full title to the aforementioned mineral property and punitive damages. The Company believes its countersuit will prevail.

Item 2. Changes in Securities.

None.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits and Reports on Form 8-K.

None.

SIGNATURES

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

Dated this 18^th day of May, 2001.

ROYAL SILVER MINES, INC.

BY: /s/ Howard Crosby
Howard Crosby
Its: Chief Executive Officer