1.������������ Going concern:

��������������� The Company is in the mineral exploration business and has not yet determined whether its resource properties contain reserves that are economically recoverable.� The recoverability of amounts capitalized for resource properties is dependent upon the existence of economically recoverable reserves in its resource properties, the ability of the Company to arrange appropriate financing to complete the development of its properties, confirmation of the Company�s interest in the underlying properties (Note 4(f)), the receipt of necessary permitting and upon future profitable production or proceeds from the disposition thereof.

��������������� The Company has incurred significant operating losses and has an accumulated deficit of $27,654,000 at December 31, 2001.� Furthermore, the Company has working capital of $366,000 as at December 31, 2001, which is not sufficient to achieve the Company�s planned business objectives.� These financial statements have been prepared on a going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of business.� The Company�s ability to continue as a going concern is dependent on continued financial support from its shareholders and other related parties, the ability of the Company to raise equity financing, and the attainment of profitable operations, external financings and further share issuances to meet the Company�s liabilities as they become payable.� These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary, should the Company be unable to continue as a going concern.�

2.������������ Significant accounting policies:

(a)���������� Basis of presentation:

��������������� These consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned except for Sara Kreek Resource Corporation N.V., in which the Company holds an 80% interest, and Minera Aztec Silver Corporation, in which the Company holds a 63% interest at December 31, 2001, 2000 and 1999.� All significant intercompany transactions and balances have been eliminated.

��������������� These consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles, which conform in all material respects to those in the United States, except as disclosed in note 12.�

(b)���������� Cash and cash equivalents:

��������������� Cash and cash equivalents include cash and short-term liquid investments having terms to maturity when acquired of three months or less.�� Short-term investments having terms to maturity when acquired of greater than three months and less than one year are included in marketable securities.�

(c)���������� Marketable securities:

��������������� Marketable securities includes investments in shares of companies and other investments capable of reasonably prompt liquidation.� Share investments are carried at the lower of cost and quoted market value at the reporting date.� Short term deposits and other short-term investments are carried at the lower of cost plus accrued interest and quoted market value.�

2.������������ Significant accounting policies (continued):

�(d)��������� Resource properties:

��������������� All costs related to investments in resource properties are capitalized on a property-by-property basis.� Such costs include mineral property acquisition costs and exploration and development expenditures, net of any recoveries.� The costs related to a property from which there is production, together with the costs of mining equipment, will be amortized using the unit-of-production method.� When there is little prospect of further work on a property being carried out by the Company or its partners or when a property is abandoned or when the capitalized costs are not considered to be economically recoverable, the related property costs are written down to the amount recoverable.

��������������� The amounts shown for resource properties represent costs incurred to date, less write-downs, and are not intended to reflect present or future values.

(e)���������� Capital assets:

��������������� Capital assets are recorded at cost and, for those assets subject to amortization, the Company uses the declining balance method at rates varying from 20% to 30% annually.� Amortization on capital assets used directly on exploration projects is not charged against operations until the related property is in production.

(f)����������� Stock-based compensation plan:�

��������������� The Company has a fixed stock option plan that is described in note 6(b).� No compensation expense is recognized when stock options are granted to directors, employees and consultants.� Any consideration paid by directors, employees and consultants on exercise of stock options is credited to share capital.� Should a director, employee� or consultant elect to utilize a share appreciation right instead of their stock option, the quoted market value of the common shares issued is charged to compensation expense.

(g)���������� Income taxes:

��������������� The Company uses the asset and liability method of accounting for income taxes.� Under this method of tax allocation, future income tax assets and liabilities are determined based on differences between the financial statement carrying values of existing assets and liabilities and their respective income tax bases (temporary differences).� Future income tax assets and liabilities are measured using the enacted tax rates expected to be in effect when the temporary differences are likely to reverse.� The effect on future income tax assets and liabilities of a change in tax rates is included in operations in the period in which the change is enacted or substantively enacted.� The amount of future income tax assets recognized is limited to the amount of the benefit that is more likely than not to be realized.�

(h)���������� Loss per share:

��������������� Loss per share is calculated based on the weighted average number of shares outstanding during the year.� During 2001, the Company retroactively adopted the new recommendations of the Canadian Institute of Chartered Accountants (�CICA�) for accounting for earnings per share, which requires the use of the treasury stock method for calculating diluted earnings per share.� However, diluted loss per share has not been presented as the exercise of options and warrants would reduce the calculated loss per share.

2.������������ Significant accounting policies (continued):

�(i)���������� Foreign currency translation:

��������������� The Company uses the United States dollar as its reporting currency and accounts denominated in currencies other than the United States dollar have been translated as follows:

��������������� Ÿ��� Revenue and expense items at the rate of exchange in effect on the transaction date;

��������������� Ÿ��� Non-monetary assets and liabilities at historical exchange rates; and

��������������� Ÿ��� Monetary assets and liabilities at the exchange rate at the balance sheet date.

��������������� Exchange gains and losses are recorded as income or expense in the period in which they occur.

(j)����������� Use of estimates:

��������������� The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.� Significant areas requiring the use of management estimates include recoverability of resource properties, amortization periods for capital assets and valuation allowances for future income tax assets.� Actual results could differ from those estimates.

(k)���������� Fair value of financial instruments:

��������������� The fair values of the Company�s cash and cash equivalents, receivables and accounts payable and accrued liabilities approximate their carrying values due to the short terms to maturity.� The fair value of marketable securities is set out in note 3.� It is not practicable to determine the fair value of amounts due to or from related parties due to their related party nature and the absence of a market for such instruments.

3.������������ Marketable securities:

��������������� The quoted market value of shares of companies is approximately $391,300 (2000 - $178,900) at December 31, 2001 and the fair value of short-term deposits approximated their carrying amount.� Included in investment in shares of companies is shares of Consolidated Magna Ventures Ltd., (�Magna�), a company with certain common directors (note 7).� At December 31, 2001, these shares had a cost of $324,000 (2000 - $630,000), a carrying value of $49,000 (2000 - $101,200) and a quoted market value of approximately $114,300 (2000 - $101,200).� During 2001, the Company transferred 720,000 shares of Magna that it held to a related party in settlement of Cdn$72,000 of the amounts due to a related party.

4.������������ Resource properties:�

(a)���������� British Columbia:

��������������� (i)����������� New Polaris:

������������������������������� The New Polaris property, which is located in the Atlin Mining Division, British Columbia, is 100% owned by the Company subject to a 15% net profit interest which may be reduced to a 10% net profit interest within one year of commercial production by issuing 150,000 common shares to Rembrandt Gold Mines Ltd.� During fiscal 2001, the Company wrote-down the property by $3,187,104 to reflect management�s estimate of the property�s recoverable value.�

��������������� (ii)���������� Eskay Creek:

������������������������������� The Company owns a one-third carried interest in the Eskay Creek property, Skeena Mining Division, British Columbia, pursuant to a joint venture with Barrick Gold Corp. (formerly Homestake Canada Inc.).� The property is subject to a 2% net smelter return in favour of a related company.

(b)���������� Bellavista, Costa Rica:

��������������� The Company owns an 18.3% carried interest in this property, which is located near San Jose, Costa Rica.� A property agreement giving Wheaton River Minerals Ltd. (�Wheaton�) the right to earn a 100% working interest in the property calls for pre-production payments to be made to the Company in the amount of $117,750 annually up to and including the year commercial production commences.� During 2001, in addition to the cash pre-production payment for 2001, Wheaton made the pre-production payments due for the years ending December 31, 2002 and 2003 by paying cash of $58,875 and issuing 529,000 common shares of Wheaton.�

4.������������ Resource properties (continued):

�(c)��������� Suriname:

��������������� (i)����������� Sara Kreek:

������������������������������� The Company holds 80% of the shares of Sara Kreek Resource Corporation N.V., the company that holds the Sara Kreek concession.� The Company may be required to issue an additional 200,000 shares to the vendor upon completing a feasibility study and commencing commercial production of the underground deposits.

��������������� (ii)���������� Benzdorp:

������������������������������� In April 1996, the Company entered into an option agreement to earn up to an 80% interest in the Benzdorp property by making cumulative cash payments of $750,000 and property expenditures totalling $5 million over a four year period. The agreement provides for escalated advance royalty payments commencing in October 2000 in connection with the timing of completion of a feasibility study.� The Company has earned a 40% interest in the Benzdorp property, but has exercised its right not to expend any further monies or to make any further payments until the property owner transfers the exploration rights on the property to the corporate entity contemplated in the agreement, as provided under the terms of the agreement.�

(d)���������� Mexico:

��������������� (i)����������� Clara:�

������������������������������� In March 2001, pursuant to a Letter of Intent with Teck Cominco Limited, the Company�s 63% owned subsidiary, Minera Aztec Silver Corporation (�Aztec�) was granted an option to acquire a 100% interest in two mineral claims located in Mexico in consideration of incurring exploration expenditures on the property in the aggregate of $500,000 and issuing an aggregate of 500,000 shares of Aztec over a four year period.� If Aztec is not listed on a stock exchange within two years, then Aztec will have the option to pay a series of cash payments totalling $185,000 over a four year period.� The optionor will retain a 2% net smelter return royalty of which 50% may be purchased by the Company for $1,000,000.� Completion of this Letter of Intent is subject to a due diligence review and the signing of a formal agreement.�

��������������� (ii)���������� Lobo properties:�

������������������������������� In 1998 and 1999, the Company acquired by staking a 100% interest in fourteen properties, known as the Lobo properties, located in the states of Zacatecas and San Luis Potosi, Mexico.

������������������������������� In 1998, options were granted to Minerales Noranda S.A. de C.V. (�Noranda�) on the Lobo 6, 7 and 8 properties.� The option on the Lobo 7 property was terminated during 1998.� The options on the Lobo 6 and Lobo 8 properties were terminated during 2000.� As of December 31, 2000, the Company ceased further exploration activity on these three properties and wrote‑off acquisition and exploration costs, net of recoveries, in the aggregate of $67,012.�

4.������������ Resource properties� (continued):

������������������������������� In March 1998, the Company granted an option to Mill City International Inc. (�Mill City�) to earn a 50% interest in the Lobo 3 property.� In early 2001, Mill City terminated its option and the Company ceased further exploration activity on the property.� Accordingly, the Company wrote off deferred costs, net of option payments and recoveries received from Mill City, of $7,615 at December 31, 2000.�

������������������������������� In February 1999, the Company granted an option to Far West Mining Ltd. (�Far West�) to earn a 50% interest in ten of the Lobo properties.��� In early 2001, Far West terminated its option and the Company ceased further exploration activity on the properties.� Accordingly, the Company wrote off the net deferred costs of $120,624 at December 31, 2000.� In 2001, the Company recovered $37,197 of expenditures previously incurred on the properties.�

��������������� (iii)��������� Nopalera properties:�

������������������������������� In August 1999, the Company entered into an option agreement to earn up to a 60% interest in three mineral claims located in the State of Chihuahua, Mexico, in consideration of making cash payments in the aggregate of Cdn$55,000 (Cdn$5,000 paid), issuing 250,000 common shares of the Company�s subsidiary, Aztec (50,000 shares issued), and incurring exploration expenditures of Cdn$1,000,000 over a four year period ending October 15, 2003.� In October 2000, the Company terminated the option and wrote-off acquisition and exploration costs in the aggregate of $49,808.�

(e)���������� Expenditure options:

��������������� To maintain the Company's interest and to fully exercise the options under various property agreements covering the properties located in British Columbia, Suriname and Mexico, the Company must incur exploration expenditures on the properties and make payments in the form of cash and/or shares to the optionors as follows:

4.������������ Resource properties (continued):

��������������� ⁽ⁱ⁾���� The timing of these option/advance royalty payments is dependent upon the owner transferring the exploration rights to the Benzdorp property to the corporate entity contemplated under the agreement.� Should this transfer not occur in 2002, these payments and the expenditure commitment, will each be extended by one year.�

��������������� ⁽ⁱⁱ⁾���� Shares of the Company�s subsidiary, Minera Aztec Silver Corporation, to be issued.�

These amounts may be reduced in the future as the Company determines which properties to continue to explore and which to abandon. These amounts do not include future cash payments payable to the Company and related exploration expenditures on properties optioned to third parties.

(f)����������� Resource properties contingencies:

��������������� The Company has diligently investigated rights of ownership of all of the resource properties/concessions to a level which is acceptable by prevailing industry standards with respect to the current stage of development of each property/concession in which it has an interest and, to the best of its knowledge, all agreements relating to such ownership rights are in good standing.� However, all properties/concessions may be subject to prior claims, agreements or transfers, and rights of ownership may be affected by undetected defects.

5.������������ Capital assets:

6.������������ Share capital:

(a)���������� Issued:

��������������� Common shares issued for consideration other than cash are recorded at the quoted market value of the shares as of the agreement date.

6.������������ Share capital (continued):

(b)���������� Stock option plan:

��������������� The Company has a stock option plan that allows it to grant options to its employees, officers and directors to acquire up to 7,956,450 common shares.� The exercise price of each option equals the high/low average price for the common shares on the Toronto Stock Exchange based on the last five trading days before the date of the grant.�� At the discretion of the Board, certain option grants provide the holder the right to receive the number of common shares, valued at the quoted market price at the time of exercise of the stock options, that represent the share appreciation since granting the options.� Options have a maximum term of ten years and terminate 30 days following the termination of the optionee�s employment, except in the case of death, in which case they terminate one year after the event.� Vesting of options is made at the discretion of the Board at the time the options are granted.

��������������� The continuity of stock options for the years ended December 31, 2001, 2000 and 1999 is as follows:

At December 31, 2001, the options outstanding are all exercisable and expire at various dates from March 27, 2005 to June 23, 2010 (note 11) with a weighted average remaining life of 6.4 years.

�(c)��������� Warrants:

��������������� Each warrant entitles the holder to purchase one common share of the Company.

6.������������ Share capital (continued):

�(d)��������� Shares reserved for issuance:

(e)���������� Shareholder rights plan:

��������������� On October 25, 1995, the shareholders of the Company approved a shareholders rights plan (the �Plan�).� The Plan became effective on November 14, 1995.

��������������� The Plan is intended to ensure that any entity seeking to acquire control of the Company makes an offer that represents fair value to all shareholders and provides the board of directors with sufficient time to assess and evaluate the offer, to permit competing bids to emerge, and, as appropriate, to explore and develop alternatives to maximise value for shareholders.� Under the Plan, each shareholder at the time of the Plan�s adoption was issued one Right for each common share of the Company held.� Each Right entitles the registered holder thereof to purchase from treasury one common share at Cdn$25, subject to certain adjustments intended to prevent dilution.� The Rights are exercisable after the occurrence of specified events set out in the Plan generally related to when a person, together with affiliated or associated persons, acquires, or makes a take-over bid to acquire, beneficial ownership of 20% or more of the outstanding common shares of the Company.� The Rights expire in November 2003.

7.������������ Related party transactions:

��������������� At December 31, 2001 and 2000, amounts due from related parties comprise balances owing from companies with certain common directors.� The amounts were for reimbursement of costs in the normal course of business.� During 2000, the Company received 1,553,960 common shares of Magna, one of the companies with certain common directors, in settlement of Cdn$233,094 of their debts to the Company (1999 � 666,383 shares of Magna in a settlement of Cdn$67,920 of debts) (note 3).� During 2000, the Company also received loans from Magna in the aggregate of Cdn$25,000 to assist in funding the Company�s operations.� At December 31, 2000, the Company had a balance due to Magna of Cdn$19,051.�� At December 31, 2001, the Company had a balance due from Magna of Cdn$9,220.�

��������������� General and administrative costs during 2001 include Cdn$90,660 (2000: Cdn$11,000 and 1999: Cdn$27,000) of consulting fees charged by a company controlled by a director of the Company, and a total of Cdn$27,695 (2000:� nil and 1999:� nil) of legal and consulting fees charged by directors of the Company.

��������������� During 1999, the Company issued 20,000 shares valued at $4,040 to a company related by virtue of two common directors as a bonus on a loan provided to the Company in a prior year.

8 .����������� Segment disclosures:

��������������� The Company has one operating segment, being mineral exploration, and substantially all assets of the Company are located in Canada except for certain resource properties as disclosed in Note 4 and $60,000 (2000 - $463,000) of mining equipment and vehicles which are located in Suriname.�

9.������������ Income taxes:

��������������� During 2000, the Company retroactively adopted the asset and liability method of accounting for income taxes in accordance with the new recommendations of the CICA.� However, there was no effect of the change in accounting policy on the 2000 or 1999 financial statements as the recognition criteria for future income tax assets has not been met.�

��������������� The reconciliation of income tax provision computed at statutory rates to the reported income tax provision is as follows:

��������������� The significant components of the Company�s future income tax assets as at December 31, 2001 and 2000 are as follows:�

��������������� At December 31, 2001, the Company has non-capital losses for Canadian tax purposes of approximately $4,635,000 which expire on various dates to 2008, and Canadian capital losses of approximately $99,000 which are without expiry.� In addition, the Company has operating losses in Suriname of approximately $7 million and operating losses in Mexico of approximately $400,000, which may be carried forward and used to reduce certain taxable income in future years.� The foreign losses expire at various dates prior to 2015.�

10.��������� Supplemental disclosure with respect to cash flows:�

��������������� Significant non-cash financing and investing activities:�

��������������� Supplemental cash flow information:�

11.��������� Subsequent event:

��������������� On January 16, 2002, the Company granted options to acquire an aggregate of 1,500,000 common shares exercisable at Cdn $0.17 per share on or before January 16, 2007 to directors, employees and consultants.�

12.��������� Differences between Canadian and United States generally accepted accounting principles:

��������������� Accounting practices under Canadian and United States generally accepted accounting principles (�GAAP�), as they affect the Company, are substantially the same, except for the following:�

��������������� Under U.S. GAAP, marketable securities considered trading securities would be recorded at market value with any unrealized gains (2001:� $91,719;� 2000:� $nil;� 1999: $29,226) being recorded in operations.

��������������� Canadian GAAP for stock-based compensation is similar to that allowed under U.S. GAAP, whereby share compensation in the form of options granted to employees is not recorded as a compensation expense, but recorded as an addition to share capital at the time the options are exercised.� However, U.S. GAAP requires additional disclosure of the effects of accounting for stock-based compensation as compensation expense using the fair value method.�

��������� In addition, under U.S. GAAP, stock options granted to non-employees for services rendered to the Company are required to be accounted for based on the fair value of the services provided or the consideration issued.� The compensation cost is to be measured based on the fair value of stock options granted, with the compensation cost being charged to operations.� The Company has not granted any options to non-employees during the years ended December 31, 2001, 2000 and 1999.�

12.��������� Differences between Canadian and United States generally accepted accounting principles� (continued):

������� Under Canadian GAAP until December 31, 1999, corporate income taxes were accounted for using the deferral method of income tax allocation whereby deferred taxes are provided on differences between accounting and taxable income due to the difference in the timing of recognition of items in income for accounting and tax purposes ("timing differences").� Under U.S. GAAP, corporate income taxes are accounted for using the liability method of income tax allocation, which is comparable to the Canadian standard adopted in 2000, whereby future taxes are provided on "temporary differences" which is a broader concept than "timing differences" and future tax liabilities and assets are not offset against each other, as under Canadian GAAP prior to 2000.� Under U.S. GAAP and Canadian GAAP in 2000 and 2001, future tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.� As at December 31, 1999, the Company did not recognize any future tax assets or liabilities for U.S. GAAP purposes as the available benefits were fully offset by a valuation allowance.

Financial Accounting Standards Board Statement No. 121 (�FAS 121�) �Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of� requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.� In performing the review for recoverability, the Company is to estimate the future cash flows expected to result from the use of the asset and its eventual disposition.� If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset,� an impairment loss is recognized.� SEC staff have recently indicated that their interpretation of FAS 121 requires resource property exploration costs to be expensed as incurred until commercially minable deposits are determined to exist within a particular property as cash flows cannot be reasonably estimated prior to such determination.� Accordingly, for all periods presented, the Company has expensed all resource property exploration costs for U.S. GAAP purposes.

For Canadian GAAP, cash flows relating to resource property exploration costs are reported as investing activities.� For U.S. GAAP, these costs would be characterized as operating activities.

��������������� The effect of the differences between Canadian GAAP and U.S. GAAP on the balance sheets and statements of operations and cash flows is summarized as follows:

12.��������� Differences between Canadian and United States generally accepted accounting principles (continued):

Auditors' Report to the Shareholders

We have audited the consolidated balance sheets of Canarc Resource Corp. as at December 31, 2001 and 2000 and the consolidated statements of operations and deficit and cash flows for each of the years in the three year period ended December 31, 2001. 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 conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

• President's Letter to Shareholders
• Notice to Reader
• Consolidated Balance Sheets
• Consolidated Statements of Operations and Deficit
• Consolidated Statements of Changes in Cash Flow
• Notes to Financial Statements
• Management Discussion and Analysis