North American Gem Inc V.NAG

RE: RE: RE: Nice Sedar Reports -> Resign Charles

[Porsche928S4]

NORTH AMERICAN GEM INC.

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010

CHARTERED

ACCOUNTANTS

MacKay LLP

1100 – 1177 West Hastings Street

Vancouver, BC V6E 4T5

Tel: [phone]

Fax: [phone]

Toll Free: 1-800-351-0426

www.MacKayLLP.ca

Independent Auditor's Report

To the Shareholders of

North American Gem Inc.

We have audited the accompanying consolidated financial statements of North American Gem Inc. and its subsidiaries,

which comprise the consolidated balance sheets as at December 31, 2010 and December 31, 2009, and the consolidated

statements of operations, comprehensive loss, accumulated other comprehensive loss and deficit and cash flows for the years

then ended, and a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance

with Canadian generally accepted accounting principles, and for such internal control as management determines is

necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether

due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our

audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with

ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the consolidated financial

statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated

financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of

material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk

assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the

consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the

purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the

appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as

evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our

audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial

position of North American Gem Inc. and its subsidiaries as at December 31, 2010 and December 31, 2009, and the

consolidated results of their operations and their cash flows for the years then ended in accordance with Canadian generally

accepted accounting principles.

Emphasis of matter

Without modifying our opinion, we draw attention to Note 1 to the consolidated financial statements which describes the

material uncertainty that may cast significant doubt about the ability of North American Gem Inc. and its subsidiaries to

continue as a going concern.

“MacKay LLP”

Chartered Accountants

Vancouver, British Columbia

April 29, 2011

mackay.ca refers to the Canadian firm MacKay LLP

NORTH AMERICAN GEM INC.

Consolidated Balance Sheets

December 31,

2010

-$-

ASSETS

Current assets

         Cash and cash equivalents

         HST recoverable

         Amounts receivable

         Marketable securities (Note 3)

         Prepaid expenses (Note 6)

         Due from related parties (Note 6)

         Loan receivable from related party (Note 6)

         Current assets of discontinued operations (Note 16)

December 31,

2009

-$-

 47,546

 40,069

  3,887

 12,150

 85,244

  1,680

    -

    -

190,576

   46,818

   25,221

1,945,679

  242,608

2,450,902

169,771

 36,647

    811

 14,500

 57,350

149,294

232,466

 98,361

759,200

  176,324

      -

6,789,412

   94,523

7,819,459

Exploration advances

Equipment (Note 2)

Mineral interests (Note 4)

Reclamation bonds (Notes 4 & 5)

LIABILITIES

Current liabilities

          Accounts payable and accrued liabilities

          Taxes payable

          Due to related party (Note 6)

399,638

 64,691

 21,412

485,741

 78,000

 68,408

    -

146,408

SHAREHOLDERS’ EQUITY

Share capital (Note 7)

Share subscription receivable (Note 7)

Contributed surplus (Note 7)

Accumulated other comprehensive losses

Deficit

 17,258,168

    (32,000)

  3,473,654

    (95,910)

(18,638,751)

  1,965,161

2,450,902

Note 1 - Nature of operations and going concern

Note 2 - Significant accounting policies

Note 11 - Commitments

Note 15 - Contingency

Note 17 - Subsequent events

On behalf of the Board:

“Charles Desjardins”

“Doug McFaul”

See Accompanying Notes

14,338,398

   (76,000)

 2,694,960

    (5,421)

(9,278,886)

 7,673,051

7,819,459

NORTH AMERICAN GEM INC.

Consolidated Statements of Operations, Comprehensive Loss, Accumulated Other

Comprehensive Loss, and Deficit

Year ended

December 31,December 31,

20102009

-$--$-

REVENUE

Coal revenue (Note 4)

Cost of coal sold (Note 4)

Cost of mining

Processing facility costs

Depletion

GROSS PROFIT (LOSS)

EXPENSES

Amortization expense

Bad debt

Business development

Consulting (Note 6)

Flow through assessments (Note 11)

Insurance

Investor communications

Mineral interests impairment charge (Note 4)

Office and miscellaneous

Professional fees (Note 6)

Property investigation

Rent and occupancy (Note 6)

Stock-based compensation (Note 7)

Transfer agent and regulatory fees

Wages, salaries and benefits (Note 6)

Total Expenses

LOSS FROM OPERATIONS

OTHER INCOME /(EXPENSE)

Accounts payable recovery

Bad debt recovery

Foreign exchange gain loss

Interest income

Loss on sales of marketable securities

NET LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

Future income tax recovery (Note 10)

NET LOSS FOR THE YEAR FROM CONTINUING OPERATIONS

DISCONTINUED OPERATIONS (Note 16)

NET LOSS FOR THE YEAR

OTHER COMPREHENSIVE GAIN/LOSS:

Loss on marketable securities included in loss for the year

Unrealized gain (loss) from marketable securities

Net of future income taxes

COMPREHENSIVE LOSS FOR THE YEAR

Unrealized gain (loss) from marketable securities

Unrealized foreign exchange gain (loss) on subsidiary

Net of future income taxes

Accumulated other comprehensive loss, end of year

Deficit, beginning of year

Net loss for the year

Deficit, end of year

Loss per share from continuing operations - basic and diluted

Loss per share from discontinued operations - basic and diluted

Net loss per share - basic and diluted

Weighted average shares outstanding

See Accompanying Notes

  86,592

 (94,924)

 (87,268)

(317,040)

  (4,450)

(417,090)

-

-

-

-

-

-

    3,852

  117,186

  495,883

  378,360

  248,508

   46,612

   32,842

5,486,617

  182,450

  175,678

   86,564

   67,935

  999,161

   43,571

  476,263

8,841,482

(9,258,572)

      -

      -

  193,415

  134,500

   21,037

   11,719

   81,185

1,199,523

   76,144

  121,533

      -

   68,514

  540,604

   36,951

  264,772

2,749,897

(2,749,897)

    -

    -

(15,128)

  1,794

    -

(13,334)

(9,271,906)

126,486

126,486

(9,145,420)

(214,445)

(9,359,865)

   -

(2,350)

   294

(9,361,921)

 (8,600)

(88,433)

  1,123

(95,910)

(9,278,886)

(9,359,865)

(18,638,751)

(0.06)

(0.00)

(0.06)

154,753,219

16,700

 3,000

(1,468)

28,893

  (479)

46,646

(2,703,251)

154,444

154,444

(2,548,807)

11,247

(2,537,560)

   479

12,771

(1,706)

(2,526,016)

(6,250)

   -

   829

(5,421)

(6,741,326)

(2,537,560)

(9,278,886)

(0.02)

(0.00)

(0.02)

119,924,148

NORTH AMERICAN GEM INC.

Consolidated Statements of Cash Flows

Year ended

December 31,December 31,

20102009

$$

CASH PROVIDED BY(USED FOR):

OPERATING

Net loss for the year from continuing operations

Non-cash items:

Unrealized foreign exchange gain

Depletion

Amortization expense

Accrued interest

Future income tax recovery

Loss on sale marketable securities

Stock-based compensation

Mineral interests impairment charge

Changes in non-cash working capital accounts

Accounts payable

Amounts receivable

HST recoverable

Prepaid expenses

Taxes payable

Cash flows related to continuing operations

Cash flows related to discontinued operations

Cash flows related to operating activities

INVESTING

Exploration advances

Reclamation Bonds

Sale of marketable securities

Purchase of equipment

Mineral interest acquisition and exploration costs

Loan receivable from related party

Due from related party

Accounts payable for mineral exploration

Cash flows related to continuing investing activities

Cash flows related to discontinued investing activities

Cash flows related to investing activities

FINANCING

Due to related party

Shares issued for cash

Subscriptions receivable

Share issuance costs

Net cash provided by financing activities

INCREASE (DECREASE) IN CASH

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

CASH AND CASH EQUIVALENTS, END OF YEAR

CASH AND CASH EQUIVALENTS CONSISTS OF:

Cash

Term deposit

 7,546

40,000

47,546

Supplemental cash flow information (Note 9)

See Accompanying Notes

134,771

 35,000

169,771

     -

(148,085)

     -

 (29,073)

(592,005)

 232,466

 147,614

  23,021

(366,062)

 (25,746)

(391,808)

   21,412

2,865,123

   44,000

  (75,290)

2,855,245

(122,225)

169,771

47,546

(176,324)

 (30,376)

  12,270

     -

(555,044)

 200,000

(120,409)

 (26,726)

(696,609)

(149,816)

(846,425)

   (5,557)

1,700,600

      -

  (92,930)

1,602,113

22,003

147,768

169,771

.

   298,617

    95,285

    (3,422)

   (27,894)

    (3,717)

(2,507,194)

   (78,468)

(2,585,662)

  34,960

 102,834

  70,930

  14,630

  19,459

(748,270)

  14,585

(733,685)

(9,145,420)

   (88,237)

     4,450

     3,852

       -

  (126,486)

       -

   999,161

 5,486,617

(2,866,063)

(2,548,807)

      -

      -

      -

  (28,438)

 (154,444)

      479

  540,604

1,199,523

 (991,083)

NORTH AMERICAN GEM INC.

Consolidated Statements of Acquisition Costs and Deferred Exploration Costs

For the Year Ended December 31, 2010

BALANCE OF COSTS,

Total acquisition costs

Total deferred exploration costs

BALANCE DECEMBER 31, 2009

ACQUISITION COSTS:

Cash

Shares

Total acquisition costs

EXPLORATION COSTS:

Assays

Consulting

General Expenses

Ground works

Lease

Legal

Licenses, filing fees, and permits

Mining exploration

Royalty

Storage

Travel, lodging and meals

Total exploration Costs

Cost Recovery

Depletion

Impairment

Option agreement

Total acquisition costs

Total deferred exploration costs

BALANCE December 31, 2010

Kentucky

Properties

   -$-

    105,528

    217,983

    323,511

Adamas Appalachia

PropertyCoal

   -$--$-

 142,5001,461,708

    2,967141,319

 145,4671,603,027

Delbonita,

 Alberta

   -$-

         1

         -

         1

Louise Lake,

  British

 Columbia

-$-

      181,765

    3,361,858

    3,543,623

Ranger

 Lake,

Ontario

  -$-

  85,000

  86,015

 171,015

Whiskey Gap

-$-

         -

         -

         -

Saskatchewan

Coal

-$-

       808,529

       177,216

       985,745

Total

  -$-

2,785,031

3,987,358

6,772,389

212,355

 36,054

248,409

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

212,355

 36,054

248,409

    398

 82,160

 50,904

  1,930

  6,498

119,050

 60,323

  4,242

198,601

    -

    -

524,106

     -

(140,427)

(140,356)

     -

 336,970

 478,273

 815,243

-

-

-

-

-

-

-

-

-

-

-

-

    -

    -

    -

    -

142,500

  2,967

145,467

10,650

   526

   -

   -

   503

   -

   157

   -

   -

   -

   -

11,836

       -

       -

(1,614,862)

       -

         1

       -

         1

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

1

-

1

20

   -

   -

   -

   -

   -

   -

   -

   -

 7,460

 3,200

10,680

       -

       -

(3,554,302)

       -

         1

       -

         1

  -

2,098

  -

  -

  -

  -

  -

  -

  -

  -

  -

2,098

     -

     -

(173,113)

     -

     -

     -

     -

  -

  -

  -

  -

  -

  -

  -

  -

  -

3,984

  -

3,984

   -

   -

(3,984)

   -

   -

   -

   -

-

-

-

-

-

-

-

-

-

-

-

-

   (779)

    -

    -

    -

808,529

176,437

984,966

 11,068

 84,784

 50,904

  1,930

  7,001

119,050

 60,480

  4,242

198,601

 11,444

  3,200

552,704

      (779)

  (140,427)

(5,486,617)

       -

 1,288,002

   657,677

 1,945,679

See Accompanying Notes

NORTH AMERICAN GEM INC.

Consolidated Statements of Acquisition Costs and Deferred Exploration Costs

- Kentucky Properties

For the Year Ended December 31, 2010

BALANCE OF COSTS,

Total acquisition costs

Total deferred exploration costs

BALANCE DECEMBER 31, 2009

ACQUISITION COSTS:

Cash

Shares

Total acquisition costs

EXPLORATION COSTS:

Assays

Consulting

General Expenses

Ground works

Lease

Legal

Licenses, filing fees, and permits

Mining exploration

Royalty

Total exploration Costs

Cost Recovery

Depletion

Impairment

Option agreement

Total acquisition costs

Total deferred exploration costs

BALANCE December 31, 2010

NAG Mine

   #1

   -$-

    3,310

  106,921

  110,231

NAG Mine

  #2

  -$-

      -

      -

      -

NAG Mine

   #3

   -$-

   88,920

   24,695

  113,615

Demps

Hollow

  -$-

   6,649

  10,866

  17,515

Granny

 Rose

  -$-

      -

      -

      -

Gilliam Hill

  South

-$-

          -

          -

          -

Patrick Engle

   Hollow

-$-

          6,649

         75,501

         82,150

Jamieson

5

   -$-

       -

       -

       -

Total

 -$-

 105,528

 217,983

 323,511

-

-

-

149,190

    -

149,190

37,941

   -

37,941

-

-

-

   -

36,054

36,054

24,865

   -

24,865

359

-

359

-

-

-

212,355

 36,054

248,409

   -

   -

25,746

   -

   -

   -

   -

   -

   -

25,746

     -

(135,977)

     -

     -

     -

     -

     -

   -

20,312

 2,006

   -

   -

31,159

   -

   -

14,752

68,229

    -

 (4,450)

    -

    -

149,190

 63,779

212,969

    -

 25,345

  4,604

  1,930

    -

 42,126

  8,951

  2,933

 19,893

105,782

    -

    -

    -

    -

126,861

130,477

257,338

    -

    -

1,306

6,498

  298

    -

1,309

    -

9,411

      -

      -

(26,926)

    -

    -

    -

    -

    398

 29,859

    -

    -

    -

 10,775

 22,940

    -

108,793

172,765

    -

    -

    -

    -

 36,054

172,765

208,819

    -

    -

    -

    -

    -

 34,692

 21,609

    -

 49,730

106,031

    -

    -

    -

    -

 24,865

106,031

130,896

   -

 1,423

17,242

   -

   -

   -

 6,823

   -

 5,433

30,921

     -

     -

(113,430)

     -

     -

     -

     -

  -

5,221

  -

  -

  -

  -

  -

  -

  -

5,221

  -

  -

  -

  -

  -

5,221

5,221

    398

 82,160

 50,904

  1,930

  6,498

119,050

 60,323

  4,242

198,601

524,106

     -

(140,427)

(140,356)

     -

 336,970

 478,273

 815,243

See Accompanying Notes

NORTH AMERICAN GEM INC.

Consolidated Statements of Acquisition Costs and Deferred Exploration Costs

For the year ended December 31, 2009

 Louise

  Lake,

 British

Columbia

   -$-

  181,765

3,319,410

3,501,175

Mosquito

  Gulch,

Northwest

Territories

-$-

   462,335

    19,294

   481,629

BALANCE OF COSTS,

 Acquisition costs

 Deferred exploration costs

BALANCE DECEMBER 31, 2008

ACQUISITION COSTS:

 Cash

 Shares

Total acquisition costs

EXPLORATION COSTS:

Assays

Consulting

Drilling

Engineering design

Geological works

Ground works

Lease

Licenses, filing fees, and permits

Storage

Maps and Survey

Telecommunication

Travel, lodging and meal

Transportation and misc.

Total exploration Costs

Depletion

Impairment

Option agreement

Total acquisition costs

Total deferred exploration costs

BALANCE DECEMBER 31, 2009

 Whiskey

Gap, Alberta

-$-

      61,500

    559,722

    621,222

Delbonita,

 Alberta

   -$-

         1

       -

         1

Western

Basin,

Alberta

  -$-

    3,125

   91,234

   94,359

Ranger

 Lake,

Ontario

  -$-

  69,000

  79,995

 148,995

Saskatchewan

Coal

-$-

      818,617

       12,770

      831,387

AppalachiaAdamas

  CoalProperty

-$--$-

   1,461,708 142,500

      14,4972,187

   1,476,205 144,687

Kentucky

Property

   -$-

       -

       -

       -

 Total

   -$-

3,200,551

4,099,109

7,299,660

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

   -

16,000

16,000

(3,088)

16,000

12,912

-

-

-

-

-

-

108,866

    -

108,866

105,778

 32,000

137,778

    10

 4,065

    23

   -

 5,082

   -

   -

   -

33,268

   -

   -

   -

   -

42,448

      -

      -

      -

  181,765

3,361,858

3,543,623

  -

2,313

  -

  -

  -

  -

  -

  -

  -

  -

  -

  -

  -

2,313

     -

(623,535)

     -

     -

     -

     -

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

1

-

1

-

-

-

-

-

-

-

-

-

-

-

-

-

-

    -

(94,359)

    -

    -

    -

    -

-

-

-

-

-

-

-

-

-

-

-

-

-

-

     -

(481,629)

     -

     -

     -

     -

  -

  -

  -

  -

  -

  -

  -

  -

  -

6,020

  -

  -

  -

6,020

    -

    -

    -

 85,000

 86,015

171,015

    -

 23,899

    -

    -

    -

  9,190

    -

    -

    -

128,399

    -

  2,958

    -

164,446

    -

    -

(23,000)

808,529

177,216

985,745

 25,819

 27,043

 21,437

    -

 40,455

    -

 10,285

    157

    -

    -

  1,692

    (66)

    -

126,822

      -

      -

      -

1,461,708

  141,319

1,603,027

-

-

-

-

-

-

-

780

-

-

-

-

-

780

    -

    -

    -

142,500

  2,967

145,467

    -

 64,446

 32,850

  6,506

    -

 17,023

  4,286

 75,535

    -

    -

    240

 30,298

  3,822

235,006

 (3,338)

    -

    -

105,528

235,006

340,534

 25,829

121,766

 54,310

  6,506

 45,537

 26,213

 14,571

 76,472

 33,268

134,419

  1,932

 33,190

  3,822

577,835

    (3,338)

(1,199,523)

   (23,000)

 2,785,031

 4,004,381

 6,789,412

See Accompanying Notes

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

1. NATURE OF OPERATIONS AND GOING CONCERN

North American Gem Inc. (the “Company”) was incorporated under the Business

Corporations Act of Alberta, Canada. Effective September 17, 2003 the Company

registered as an extra provincial corporation under the Company Act of British Columbia.

On March 10, 2010 the Company assigned all its interests in Kentucky properties,

except for the Engle Hollow Property to North American Gem US Inc., a wholly owned

subsidiary of North American Gem Holding Inc., which is a wholly owned subsidiary of

the Company. These financial statements present the consolidated operations of the

Company and its subsidiaries. The Company is primarily engaged in the acquisition,

exploration and development of mineral properties. The Company's primary goal is to

explore and mine for coal in North America. Currently the focus is in Kentucky,

Saskatchewan and West Virginia. In addition to coal exploration, the Company also has

interests in Copper, Gold, Molybdenum and other base metals in Canada.

These financial statements have been prepared in accordance with Canadian generally

accepted accounting principles with the assumption that the Company will be able to

realize its assets and discharge its liabilities in the normal course of business rather than

through a process of forced liquidation. The Company started to generate revenue from

its coal production in Kentucky in the United States beginning December 2009. During

the six months ended June 30, 2010, mining operations ceased at the North American

Gem #1 Mine as economically recoverable materials had been mined. The operations

and exploration and acquisition activities of the Company were primarily funded by the

issue of share capital and loans from related parties. The continued operations of the

Company are dependent on its ability to develop a sufficient financing plan, receive

continued financial support from related parties, complete sufficient public equity

financing, and generate profitable operations in the future which raise doubts about the

Company’s ability to continue as a going concern. In this regard, the Company

completed two private placements subsequent to the year and raised $1,830,850. These

financial statements do not include any adjustments to the amounts and classification of

assets and liabilities that might be necessary should the company be unable to continue

in business.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

These financial statements include the accounts and operations of the Company and its

wholly owned subsidiaries, Appalachia Coal Corporation (“ACC”), North American Gem

Holding Inc., North American Gem Leasing Inc. and North American Gem US Inc. ACC

was incorporated in British Columbia on June 19, 2008. The Company acquired a 100%

interest in Appalachia Coal Corp. on September 23, 2008. North American Gem US Inc.

and North American Gem Leasing Inc. were incorporated on March 1, 2010 as wholly

owned subsidiaries of North American Gem Holding Inc. North American Gem Holding

Inc. was incorporated on March 10, 2010 as wholly owned subsidiary of North American

Gem Holding Inc. All inter-company transactions and balances have been eliminated

upon consolidation.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Mineral properties and deferred exploration costs

Mineral properties consist of exploration and mining concessions, options and contracts.

Acquisition and exploration costs are capitalized and deferred until such time as the

property is put into production, or the property is disposed of either through sale or

abandonment. If put into production, the costs of acquisition and exploration will be

written off over the life of the property based on estimated economic reserves. Proceeds

received from the sale of any interest in a property will be credited against the carrying

value of the property, with any excess included in operations for the period. If a property

is abandoned, the acquisition and deferred exploration costs will be written off to

operations.

Although the Company has taken steps to verify title to mineral properties in which it has

an interest, in accordance with industry standards for the current stage of exploration of

such properties, these procedures do not guarantee the Company’s title. Property title

may be subject to unregistered prior agreements or inadvertent non-compliance with

regulatory requirements.

Management reviews capitalized costs on its mineral properties at each reporting period

and will recognize impairment in value based upon current exploration results and upon

management’s assessment of the future probability of profitable revenues from the

property or sale of the property.

Exploration costs renounced due to flow-through share subscription agreements remain

capitalized, however, for corporate income tax purposes, the Company has no right to

claim these costs as tax deductible expenses.

Recorded costs of mineral properties and deferred exploration costs are not intended to

reflect present or future values of resource properties. The recorded costs are subject to

measurement uncertainty and it is reasonably possible, based on existing knowledge,

that change in future conditions could require a material change in the recognized

amount.

Payments on mineral property Option Agreements are made at the discretion of the

Company and, accordingly, are recorded on a cash basis.

The Company’s entitlement to mineral exploration tax credits are accounted for on a

cash basis.

Property examination costs

Property examination costs represent the current costs of evaluating the potential merit

of mineral properties which have been determined by such examination to have no

future value. As no continuing interest is acquired in the evaluated mineral properties, all

related costs are expensed in the year incurred.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Asset retirement obligations

The company recognizes the fair value of a liability for an asset retirement obligation in

the year in which it is incurred when a reasonable estimate of fair value can be made.

The carrying amount of the related long-lived asset is increased by the same amount as

the liability. The asset retirement cost is subsequently allocated in a rational and

systematic method over the underlying assets’ useful life.

Changes in the liability for an asset retirement obligation due to the passage of time will

be measured by applying an interest method of allocation. The amount will be

recognized as an increase in the liability and an accretion expense in the statement of

operations. Changes resulting from revisions to the timing or the amount of the original

estimate of undiscounted cash flows are recognized as an increase or a decrease in the

carrying amount of the liability and the related long-lived asset.

Share capital – flow-through shares

The Company provides certain share subscribers with a flow-through component for tax

benefits available on qualifying Canadian exploration expenditures. Upon renunciation to

the shareholders, the Company reduces share capital and records a temporary future

income tax liability for the amount of the tax deduction renounced to shareholders. In

instances where the Company has sufficient deductible temporary differences available

to offset the future income tax liability created from renouncing qualifying expenditures,

the realization of the deductible temporary differences will be shown as a recovery in

operations in the period of renunciation.

Stock-based compensation

The Company has adopted an incentive stock option plan which is described in Note 7.

The Company accounts for stock options granted to directors, officers, employees and

non-employees using the fair value method of accounting. Accordingly, the fair value of

the options at the date of the grant is determined using the Black-Scholes option pricing

model and stock-based compensation is accrued and charged to operations, with an

offsetting credit to contributed surplus, on a straight-line basis over the vesting periods.

The fair value of stock options granted to non-employees is re-measured at the earlier of

each financial reporting or vesting date, and any adjustment is charged or credited to

operations upon re-measurement. If and when the stock options are exercised, the

applicable amounts of contributed surplus are transferred to share capital. The Company

has not incorporated an estimated forfeiture rate for stock options that will not vest;

rather the Company accounts for actual forfeitures as they occur.

Revenue Recognition

Revenue from the sale of coal is recognized when there is a contractual agreement for

the sale of coal and the coal has been delivered under the terms of that agreement such

that the risk and title of ownership of the coal has passed to the customer. Recognition

of revenue is subject to the provision that ultimate collection be reasonably assured at

the time of recognition.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Loss per share

Basic loss per share is calculated by dividing the loss for the year by the weighted

average number of shares outstanding during the year. Diluted loss per share is

calculated using the treasury stock method. Under the treasury stock method, the

weighted average number of shares outstanding used in the calculation of diluted loss

per share assumes that the deemed proceeds received from the exercise of stock

options, share purchase warrants and their equivalents would be used to repurchase

common shares of the Company at the average market price during the year.

Existing stock options and share purchase warrants have not been included in the

computation of diluted loss per share as to do so would be anti-dilutive. Accordingly,

basic and diluted loss per share is the same.

Income taxes

The Company uses the future income tax method of accounting for income taxes. Under

this method, future income tax assets and liabilities, attributable to temporary timing

differences between the financial statement carrying amounts of existing assets and

liabilities and their respective income tax basis and operating loss carry forwards are

measured using enacted or substantially enacted tax rates expected to apply when the

asset is realized or the liability settled. The effect on future income tax assets and

liabilities of a change in tax rates is recognized in income in the period in which the

change is substantively enacted. A valuation allowance is recorded for the portion of the

future tax assets for which the Company does not consider it more likely than not that

the asset will be realized.

Share issue costs

Costs directly identifiable with the raising of capital will be charged against the related

capital stock. Costs related to shares not yet issued are recorded as deferred financing

costs. These costs will be deferred until the issuance of the shares to which the costs

relate, at which time the costs will be charged against the related capital stock or

charged to operations if the shares are not issued.

Joint ventures

The accounts reflect only the company’s proportionate interest in joint venture activities.

Cash and cash equivalents

Cash and cash equivalents include cashable term deposits expiring within two years.

The term deposits can be liquidated with several days notice without penalty.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Use of estimates

The preparation of financial statements in conformity with Canadian generally accepted

accounting principles requires the Company’s management to make estimates and

assumptions that affect the amounts reported in the financial statements and related

notes to the financial statements. Estimates are used in determining the recorded

amounts for accounts receivable, mineral properties and deferred exploration costs,

asset retirement obligations and stock-based compensation. Actual results may differ

from those estimates.

Financial instruments

i) Financial assets and financial liabilities held for trading

Financial assets and financial liabilities held for trading are acquired or incurred

principally for the purpose of selling or repurchasing them in the near term. They are

recognized at fair value based on market prices, with any resulting gains and losses

reflected in net income for the period in which they arise.

ii) Held-to-maturity financial assets

Held-to-maturity financial assets are non-derivative financial assets with fixed or

determinable payments and fixed maturity that an entity has the intention and ability to

hold to maturity. They are measured at amortized cost using the effective interest rate

method less any impairment loss. A gain or loss is recognized in net income when the

financial asset is derecognized or impaired, and through the amortization process.

iii) Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that are designated

as available for sale, or that are not classified as loans and receivables, held-to-maturity

investments, or held for trading. They are measured at fair value. Fair value is

determined based on market prices. Equity instruments that do not have a quoted

market price in an active market are measured at cost. Gains and losses are recognized

directly in other comprehensive income until the financial asset is derecognized, at which

time the cumulative gain or loss previously recognized in accumulated other

comprehensive income is recognized in net income for the year.

iv) Loans and receivables and other financial liabilities

Loans and receivables and other financial liabilities are measured at amortized cost,

using the effective interest rate method less any impairment loss.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Financial Instruments (continued)

The Company classified its financial instruments as follows:

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Cash and cash equivalents are classified as held for trading.

Amounts Receivables are classified as loans and receivables.

Marketable securities are classified as available for sale.

Accounts payable and accrued liabilities have been classified as other financial

liabilities.

Amounts due from and to related parties and loan receivable from related party

are classified as loans and receivables or other financial liabilities, respectively.

Reclamation bonds are classified as held-to-maturity.

Transaction costs related to financial instruments other than held-for-trading are

capitalized as part of the cost of the financial instrument.

The Company does not use any derivative or hedging instruments.

Foreign Exchange Policy

Accounts of the Corporation’s integrated foreign operations are translated to Canadian

dollars using average exchange rates for the year for revenue and expenses. Monetary

assets and liabilities are translated at the year-end exchange rate and non-monetary

assets and liabilities are translated using historical rates of exchange. Gains or losses

resulting from these translation adjustments are included in net earnings.

Accounts of the Corporation’s self-sustaining operations are translated to Canadian

dollars using average exchange rates for the year for revenue and expenses. Assets

and liabilities are translated at the year-end exchange rate. Gains or losses resulting

from these translation adjustments are included in the cumulative translation adjustment

account in shareholders’ equity.

Transactions in foreign currencies are translated at rates in effect at the time of the

transaction. Monetary assets and liabilities are translated at current rates. Gains and

losses are included in net earnings.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Valuation of Equity Units issued in private placements

The Company has adopted a residual value method with respect to the measurement of

shares and warrants issued as private placement units. The residual value method first

allocates value to the most easily measurable component based on fair value and then

the residual value, if any, to the less easily measurable component.

The fair value of the common shares issued in the private placement was determined to

be the more easily measurable component and were valued at their fair value, as

determined by the closing quoted bid price on the announcement date. The balance, if

any, was allocated to the attached warrants. Any fair value attributed to the warrants is

recorded as warrants. If the warrants are exercised, the related amount is reclassified

as share capital. If the warrants expire unexercised, the related amount is reclassified as

contributed surplus.

Property and equipment

Equipment is recorded at cost less accumulated amortization. As at December 31, 2010,

the Company had one vehicle listed as equipment. Amortization of vehicle is calculated

over its estimated useful life on a diminishing balance basis at 30% per annum. One-half

the normal amortization is taken in the year of acquisition.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

New Accounting Policy

Inventory

During the year ended December 31, 2010, the Company adopted the CICA Handbook

Section 3031 - Inventory. As such, Inventory is valued at the lower of the average cost of

mining and estimated net realizable value. As at December 31, 2010, the Company had

no coal inventory.

New Accounting Standards Not Yet Adopted

Business Combinations, Non-controlling Interest and Consolidated Financial Statements

In January 2009, the CICA issued Handbook Sections 1582 “Business Combinations”,

1601 “Consolidated Financial Statements” and 1602 “Non-controlling Interests” which

replace CICA Handbook Sections 1581 “Business Combinations” and 1600

“Consolidated Financial Statements”. Section 1582 establishes standards for the

accounting for business combinations that is equivalent to the business combination

accounting standard under IFRS. Section 1582 is applicable for the Company’s business

combinations with acquisition dates on or after January 1, 2011. Section 1601 together

with Section 1602 establishes standards for the preparation of consolidated financial

statements. Section 1601 is applicable for the Company’s interim and annual

consolidated financial statements for its fiscal year beginning January 1, 2011. The

Company did not adopt these standards prior to the adoption of IFRS and therefore

there was no impact to the financial statements.

International Financial Reporting Standards

In 2006, Canada’s Accounting Standards Board (AcSB) ratified a strategic plan that will

result in the convergence of Canadian GAAP, as used by public companies, with

International Financial Reporting Standards over a transitional period. The AcSB has

developed and published a detailed implementation plan, with a changeover date for

fiscal years beginning on or after January 1, 2011.

In 2010, the Company’s management assessed the impact of adoption to IFRS and

concluded that the Company choose to adopt IFRS and will commence reporting under

these standards for the period beginning January 1, 2011 with a January 1, 2010 date of

transition (the “Transition Date”). Comparative period amounts for fiscal 2010 will also be

restated under IFRS.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

3. MARKETABLE SECURITIES

     December 31, 2010December 31, 2009

  Fair ValueCostFair ValueCost

$6,750 $12,750 $7,500 $ 12,750

          2,7004,0004,0004,000

          2,7004,0003,0004,000

$12,150 $20,750 $14,500 $ 20,750

Geo Minerals Ltd.

Silver Fields Resources Inc.

WestCan Uranium Corp.

The Company designates marketable securities as available for sale financial

instruments.

Pursuant to an option agreement on the Company’s interest in the Whiskey Gap Project

with Geo Minerals Ltd (Note 4), the Company acquired 150,000 shares of Geo Minerals

Ltd. During the fiscal year 2009, the Company sold 75,000 shares and recognized a loss

of $479 on the transaction.

Pursuant to an option agreement on the Company’s interest in Township 55-07-02 to the

Northeast of Tobin Lake in Saskatchewan (Note 4), the Company received 200,000

common shares of Silver Field Resources Inc. and 200,000 common shares of WestCan

Uranium Corp. All shares were consolidated on the basis of ten old shares for one new

share in the current year.

As of December 31, 2010, the fair market value of the marketable securities was

$12,150 (2009 - $14,500) (Geo minerals Ltd.
.090 per share (2009 –
.10); Silver

Fields Resources Inc.
.135 per share (2009 -
.20); WestCan Uranium Corp.
.135

per share (2009 -
.15) based on the closing bid price of the shares on the TSX

Venture Exchange).

During the year ended December 31, 2010, the Company recorded $2,350 as an

unrealized loss (2009 - $12,771 gain) in the market value. The value was recorded as

accumulated other comprehensive loss.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

4. MINERAL PROPERTY INTERESTS

Whiskey Gap, Alberta

On October 5, 2005 (amended May 21, 2007), the Company entered into an option

agreement to acquire up to an 80% interest in the Whiskey Gap uranium property

consisting of 44,000 acres located in southern Alberta.

To acquire an 80% interest, the Company was to pay $15,000 cash, issue 300,000

common shares, complete work commitments of $1,250,000 and complete a feasibility

study. To date the Company has paid the $15,000, issued 200,000 common shares,

and completed work commitments totalling $650,000.

On December 27, 2007 the Company entered into an Option agreement on the

Company’s interest in the Whiskey Gap Project with Geo Minerals Ltd. Geo Minerals Ltd.

could have earned up to a 40% interest in the Whiskey Gap, should the project reach

feasibility. This arrangement, if completed, would therefore have the Company and Geo

Minerals Ltd. with an equal 40% earn in on the Whiskey Gap project with International

Ranger Corp. holding the remaining 20% of the project’s interest.

In order to earn a 40% interest in the Whiskey Gap Project, Geo Minerals Ltd. was to

pay the Company $25,000, issue to the Company 300,000 common shares of Geo

Minerals Ltd. and incur $800,000 in exploration expenditures before December 31, 2009.

To date, Geo Minerals Ltd. has paid the Company $25,000, issued to the Company

150,000 common shares of Geo Minerals Ltd. and incurred $200,000 in exploration

expenditures.

During the year ended December 31, 2009, the Company wrote off its interest in the

Whiskey Gap Property due to unfavorable results of exploration and provided for an

impairment charge of $623,535.

Western Basin, Alberta

On July 20, 2005 the Company received four Alberta mineral permits issued by Alberta

Energy encompassing approximately 36,608 hectares. Capital acquisition costs include

the cost of staking the claims totalling $3,125.

During the year ended December 31, 2009, the Company wrote off its interest in the

Western Basin property due to unfavorable uranium prices and provided for an

impairment charge of $ 94,359.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

4. MINERAL PROPERTY INTERESTS (Continued)

Mosquito Gulch, Northwest Territories

In January 2007, the Company entered into a purchase agreement to acquire a 100%

interest in the Mosquito Gulch Property located in the Nonacho basin approximately 300

km southeast of Yellowknife. The property consists of one mineral claim encompassing

approximately 2,500 acres. Consideration for this acquisition is a cash payment of

$100,000 (paid) and the issuance of two million common shares of the Company (issued

at a value of
.16). The vendor will retain a 2% NSR of which 1% may be repurchased

for $1 million. In addition the Company also paid finder’s fees of $10,000 cash (paid) and

200,000 common shares of the Company (issued at a value of
.16).

During the year ended December 31, 2009, the Company wrote off its interest in the

Mosquito Gulch property due to permitting and exploration constraints in the region and

provided for an impairment charge of $481,629.

Louise Lake, BC

By an option agreement dated December 14, 2004 and renegotiated on February 20,

2006, with Firestone Ventures Inc. (“Firestone”), the Company is entitled to acquire up to

a 100% interest in eight mineral claims located in the Omineca Mining Division, British

Columbia in which Firestone has an option to acquire a 100% interest under an Option

Agreement dated December 20, 2003 with the original vendors. Consideration for this

transaction is as follows:

For a 100% interest:

a) Cash payments totalling $80,000 to the original vendors on or before December 20,

2007 (paid);

b) Issuance of 300,000 common shares of the Company’s capital stock to the original

vendors as follows:

-

-

150,000 shares on or before December 14, 2005 (issued at a value of
.095 per

share)

150,000 shares on or before December 14, 2006 (issued at a value of
.15 per

share).

c) Issuance of common shares of the Company’s capital stock to Firestone as follows:

-

-

-

-

200,000 shares upon regulatory approval (issued at a value of
.15 per share);

125,000 shares on or before December 14, 2005 (issued at a value of
.095 per

share);

100,000 common shares upon completion of $1 million in exploration

expenditures (issued at a value of
.15 per share); and

250,000 common shares upon completion of a bankable feasibility study.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

4. MINERAL PROPERTY INTERESTS (Continued)

Louise Lake, BC (Continued)

The Option Agreement is subject to a 2% net smelter royalty (“NSR”) payable to the

original vendors upon the commencement of commercial production.

A finder’s fee of 100,000 shares of the Company’s capital stock was previously issued

for this transaction at a value of
.075 per share.

The Company has staked an additional 5 mineral claims and has increased its land

holdings in the area to 12,291 hectares.

In accordance with accounting guidelines which state that where there is a delay in

development which extends beyond three years and no exploration is currently planned

in the foreseeable future there is a presumption of a write-down, management of the

Company resolved to write-down the value of the project to a nominal value.

Delbonita, Alberta

On March 16, 2005, the Company entered into a purchase agreement for four mineral

properties comprising 200,000 acres of prospective uranium mineral claims in southern

Alberta, known as the Delbonita claims, comprising Willow Creek, Milk River, St. Mary

River, and Ravenscrag.

Acquisition costs included a payment of $10,000 (paid) and the issuance of 100,000

common shares of Company stock (issued at a value of
.11 per share). This

acquisition is subject to a 2% NSR with an option to acquire the first 1% NSR from the

vendor by:

a) Paying the vendor $25,000 within two years of the date of the agreement;

b) Paying the vendor $200,000 within two to five years of the date of the agreement;

   and

c) Paying the vendor $1,000,000 after five years from the date of the agreement.

The above option to pay the vendor was not exercised by the Company.

In addition, the Company acquired an additional 9 mineral claims.

This project was written-down to a nominal value due to unfavorable results of

exploration.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

4. MINERAL PROPERTY INTERESTS (continued)

Ranger Lake, Ontario

In May 2007 and further amended on March 12, 2009, the Company entered into an

option purchase agreement to acquire a 100% interest in the Ranger Lake uranium

claims located in the Sault Ste. Marie Mining district of Ontario. The property consists of

approximately 19,000 acres.

Consideration for this acquisition was as follows:

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Pay $60,000 (paid) and issue 50,000 common shares of the Company (issued at

a value of
.18).

The vendor would retain a 2% NSR of which 1% may be repurchased for $1

million.

Issue 200,000 common shares immediately upon approval by the TSX Venture

Exchange of the amended agreement dated March 12, 2009 (issued at a fair

value of
.08 per share).

Issue 200,000 common shares by the anniversary date (May 15, 2009) of the

original agreement.

Make payment of $40,000 and issue 50,000 common shares by May 15, 2010.

Make payment of $60,000 by May 15, 2011 at which point all terms of the

amended option agreement would have been fulfilled.

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During the year ended December 31, 2010, the Company opted to discontinue pursuing

its interest in the Ranger Lake property. As a result, the Company provided for an

impairment charge of $173,113.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

4. MINERAL PROPERTY INTERESTS (continued)

Saskatchewan Coal

The Company has been granted 757 Coal Prospecting Permits covering an area of

1,436,500 acres (581,376 hectares). Three of the permits were acquired by a purchase

agreement on May 1, 2008 for $7,500 in cash (paid) and issuing 100,000 common

shares (issued at
.09 per share) and paying $1,500 cash and issuing 100,000

common shares (issued at
.07 per share) on or before May 1, 2009. The remaining

permits were approved by Saskatchewan Energy and Resources (SER). The capitalized

acquisition costs for Saskatchewan Coal consist of coal permitting of $641,680 and

consulting fees to obtain permits of $173,849.

On February 16, 2009, the Company granted an option to Silver Fields Resources Inc.

(TSX-V symbol: SF) (37.5% interest) and WestCan UraniumCorp. (TSX-V symbol: WCU)

(37.5% interest) to acquire a 75% interest in Township 55-07-02. Township 55-07-02

consists of 12 Coal Prospecting Permits (CPP) totaling 23,040 acres to the northeast of

Tobin Lake in Saskatchewan, Canada.

Terms of the agreement for Township 55-07-02 are as follows:

For Silver Fields Resources Inc. to earn a 37.5% interest and WestCan Uranium Corp.

to earn a 37.5% interest (75% interest in total) in Township 55-07-02 they must:

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Each pay $7,500 ($15,000 in total received) to the Company upon signing of

the agreement (received).

Each issue 200,000 common shares to the Company. (received).

Incur exploration expenditures of $200,000 on the property by September 30,

2010. As of the date of this report this commitment has not been fulfilled.

Incur additional exploration expenditures of $280,000 on the property by

September 30, 2011.

Take the project to completion of a bankable feasibility study within 5 years of

the vesting of this agreement; failure of which the 75% interest in Township

55-07-02 will revert back to the Company.

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During the year ended December 31, 2010, Silver Fields Resources Inc. did not fulfill the

work requirements set out in the agreement. As such, the option agreement is no longer

in good standing and the Company is renegotiating the agreement with Silver Fields

Resources Inc.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

4. MINERAL PROPERTY INTERESTS (continued)

Adamas, SK

On May 11, 2008, the Company entered into an agreement with Adamas Minerals Corp.

of Prince Albert, Saskatchewan to acquire exclusive rights to coal, oil shale’s and or

hydrocarbon discoveries and up to a 60% interest in other mineral discoveries on a land

package on which coal permit applications have been submitted for, west of Hudson

Bay, Saskatchewan. Terms of the agreement are as follows:

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$7,500 payable on signing of the agreement (paid);

Issuance of 500,000 common shares upon regulatory approval of the Letter of

Intent (issued at a value of
.27 per share); and

An additional 500,000 common shares if a decision is made to drill test for coal or

other minerals.

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Appalachia Coal, West Virginia USA

During the year ended December 31, 2008, the Company acquired through the

acquisition of Appalachia Coal Corp. (ACC), a wholly owned subsidiary, interests in

approximately 20,000 acres of coal leases located in Preston County, West Virginia. The

following are the specific terms and conditions for each coal lease:

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On December 21, 2008, ACC signed a lease agreement to acquire a 50%

interest in several parcels located in Portland District, Preston County, West

Virginia, USA for ten years by paying 6% of the sale price of the coal mined,

removed, sold and shipped, payable on 25th day of each calendar month.

On November 13, 2008, ACC signed a lease agreement to acquire an interest in

Little Clarksburg and Elk Lick coal seams for ten years by paying
.25 times the

number of 2,000 pound tons of coal sold, payable on 25th day of each calendar

month, plus $6,500 USD at the beginning of the agreement.

On November 7, 2008, ACC signed a lease agreement to acquire an interest in

Little Clarksburg and Elk Lick coal seams for ten years by paying
.75 times the

number of 2,000 pound tons of coal sold, payable on 25th day of each calendar

month.

On November 7, 2008, ACC signed a lease agreement to acquire an interest in

Little Clarksburg and Elk Lick coal seams (Little Seams), Harlem and other coal

seams (Coal Seams) for ten years by paying $2.50 times the number of 2,000

pound tons of coal sold (Little Seams) and $3.50 times the number of 2,000

pound tons of coal sold (Coal Seams), payable on 25th day of each calendar

month.

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NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

4. MINERAL PROPERTY INTERESTS (continued)

Appalachia Coal, West Virginia USA (continued)

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On September 22, 2008 ACC signed a lease agreement to acquire a 100%

interest in the Cox and Nicholson Properties located in Preston County, West

Virginia, USA including any replacement or successor claims and all

mineral/mining leases and other mining interests derived from any such claims

for ten years by paying 6% of the sale price of the coal mined, removed, sold and

shipped, payable on 25th day of each calendar month.

On September 18, 2008, ACC signed a lease agreement to acquire a 100%

interest in the Birds Creek property, located in Lyon District, Preston County,

West Virginia, USA, including any replacement or successor claims and all

mineral/mining leases and other mining interests derived from any such claims

for ten years by paying 6% of the sale price of the coal mined, removed, sold and

shipped, payable on 25th day of each calendar month.

?

During the current year, management of the Company resolved to write-down capitalized

costs of this project to a nominal value.

Kentucky Property, US

In October 2009, the Company acquired coal leases from Lonesome Pine Leasing LLP

(“LPL”) in Knox County, Kentucky totalling 1,700 acres. As per the terms of the

agreement, the Lessor granted the Lessee an exclusive and undivided leasehold interest

in 5 leases including the coal mining and extraction rights. In consideration for the lease

acquisition, the Company was to make tonnage royalty payments to the Lessor as

specified for each individual lease assigned to the Company and a $1.00/net ton mined

override royalty payment to LPL for all coal mined and extracted from these properties,

pay $25,000 USD (paid $26,184) and transfer 1,600,000 common shares of the

Company. These properties are Demps Hollow Property, Patrick Engle Hollow Property,

North American Gem #1 Mine and North American Gem #3 Mine as described and

discussed in the following sections.

Safeco Lease/North American Gem Processing Facility

On September 14, 2009, the Company entered into an open ended lease with Safeco,

Inc. of Corbin, Kentucky (the “Lessor”), to operate a coal preparation and rail loading

facility in Knox County, Kentucky.

The principal terms to lease the facility from the Lessor include:

?

Lessor will retain ownership and control of the permit and all physical property

pertaining to and located at the facility as well as the bond required to operate the

facility with the exception of bonding required for the refuse disposal area.

The Company posted a bond in the amount of $27,400 USD (paid $30,376 CDN)

to be placed in escrow for the duration of the lease agreement.

?

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

4. MINERAL PROPERTY INTERESTS (continued)

Kentucky Property, US (continued)

Safeco Lease/North American Gem Processing Facility (continued)

?

The Company agrees that if the State of Kentucky requires increased bonding to

be placed during the term of the lease, the Company will post the required

amount.

Lessor agrees that any bond(s) posted by the Company will be replaced upon

termination of the lease provided that no claim is in effect by the State of

Kentucky against said bond(s) for any liability incurred by the Company or its

designated operator during operation of the facility.

Lessor will assign the designee of the Company as operator of the facility,

including operation of the refuse facility upon:

i)

The Company making tonnage production royalty payments to the Lessor in

the amount of $1.50 per net ton for each net ton of coal that is processed

through the crusher and/or screening equipment located at the facility, and

?

?

ii) The Company making royalty payments to the Lessor in the amount of
.50

    per net ton for any coal loaded out of the facility by any means that does not

    require processing through the crusher, screens or washing equipment

    located at the facility, and

iii) The Company making royalty payments to the Lessor in the amount of
.25

     per net ton for any coal that is processed through the washing equipment

     after first being processed through the crushing and screening equipment

     located at the facility. For further clarity, the fee charged for processing

     through the washing equipment shall be in addition to the fee charged for

     processing through the crusher and/or screen, and

iv) The Lessor showing proof of active status of the facility including posting all

    bonds required to operate the facility, and

v) The Company paying to the Lessor the amount of $5,000 minimum payment

   each month during any calendar month that the royalty payments due

   through coal production by the washing process and/or loading do not exceed

   $5,000. In the event that the royalty payment for production or loading

   exceeds $5000, no minimum royalty payment is due, and

vi) The royalty payments described shall be due before the 25th day of the month

    following production or shipment in which the production or loading occurs,

    and

vii) The first minimum royalty payment was due on the last day of the second full

     calendar month after the signing of the definitive agreement,

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

4. MINERAL PROPERTY INTERESTS (continued)

Kentucky Property, US (continued)

Safeco Lease/North American Gem Processing Facility (continued)

viii) The Company agrees to bear the cost to maintain the facility which includes

      repairs necessary due to normal operation, and

ix) Any maintenance, repairs, improvements, additions, or replacements of any

    equipment at the facility will become the property of Lessor unless agreed to

    in writing in a separate agreement by and between the parties.

On October 8, 2010, the Company and the Lessor agreed to amend the agreement.

With the amendment, the expiry date of the lease is October 8, 2011, provided sixty (60)

days written notice has been provided to the other party and which can be extended by

30 days for every $10,000 USD spent on any repairs and maintenance of the coal

processing facility since October 9, 2009.

All costs of maintaining the facility are expensed as incurred.

North American Gem #1 Mine

On September 2, 2009 and further amended on September 9, 2009 the Company

entered into an agreement to acquire two coal leases from Lonesome Pine Leasing LLC.

The leases, also known as the “Bay’s Hollow” leases are located in Whitley County,

Kentucky, which also included a mining permit ready for production. The terms of the

agreement required the Company to purchase the Kentucky State Mining Permit #918-

0396 from Buried Sunshine Transport, Inc (“BST”). The permit was transferred to Engle

Hollow Mining, LLC (“EHM”) which mined the leases under contract for a price of

$40.00/net ton loaded into trucks to be transported to market. The Company had sole

and exclusive rights to market the coal produced at the #1 Mine.

In consideration for the Leases and Permit, the Company:

? Paid EHM $3.50 USD for each net ton of coal processed by the processing

  facility;

? Paid EHM $18,000 USD to begin the process of preparing the processing

  facilities for operation (paid $19,374 CDN);

? Post a bond in the amount of $33,800 USD (paid $36,247 CDN) for the purpose

  of obtaining permit issuance and transfer from BST to EHM;

? Paid $7,200 USD (paid $7,721 CDN) to EHM to transfer the Permit from BST to

  EHM;

? Paid $17,150 for construction and certification (paid $19,142 CDN); and

? Paid to EHM $45,000 USD (paid 48,439 CDN) for funding the purchase of the

  permit.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

4. MINERAL PROPERTY INTERESTS (continued)

Kentucky Property, US (continued)

North American Gem #1 Mine (continued)

In January 2010, the Company replaced EHM and retained the services of C & T

Excavators, LLC to mine the leases under contract for $18/net ton loaded. The

Company also retained the contract services of JC Drilling and Ditching Inc. (“JC”) to

provide coal auger mining services for $15/net ton loaded. EHM still retains ownership

of the permit and the Company negotiated a settlement to pay EHM $5/net ton loaded.

In addition, LPL, Engle Hollow Mining LLC (“EHM”) and Myron McCoy acknowledged

and confirmed that LPL, EHM and Myron McCoy in the aggregate owe the Company

$58,039 USD. Of the $58,039, $7,699 was withheld in total before any payments to

EHM/LPL/Myron McCoy and the remaining $50,340 is to be deducted from any

payments due to EHM at a rate of $2 USD per net ton of coal produced from the #1

Mine. As at December 31, 2010, an amount totaling $53,274 CDN was written off to bad

debts. LPL has override royalty interests in the Company’s North American Gem #3.

The Company expects to deduct amounts owed to it via these royalty payments.

During the six months ended June 30, 2010, the Company completed production at the

North American Gem #1 Mine site in Whitley County, Kentucky and provided a $135,977

depletion charge to write off its interest in the property (See Note 16).

North American Gem #2 Mine

On April 20, 2010 the Company announced the signing of a definitive agreement of a

fully operational surface coal mine located in Knox County, Kentucky. In consideration

for the acquisition of the Jamieson permit, the Company must pay $150,000 USD in

three instalments, with the entire amount due in full when the transfer is complete. The

Company paid $50,000 USD ($53,125 CAD) when the Company entered into the

agreement, the remaining balance of $100,000 USD was paid according to the following

schedule:

?

?

$50,000 USD (paid $54,790 CAD) payment upon the submission of the transfer

application; and

$50,000 USD (paid $55,252 CAD) payment upon the completion of the transfer

application.

In relation to the acquisition of the Jamieson Permit, the Company also acquired the

Begley North Leases. In consideration for the acquisition, the Company paid a

recoupable amount of $25,000 USD (paid $27,090 CAD) upon the effective date of the

lease agreement, and thereafter upon the first day of the second lease year. Upon coal

production, the Company is required to pay production royalties according to the

following terms,

?

For all coal sold at a Gross Sale Price of less than $80 USD per ton of 2,000

pounds, the greater of the sum equal to 8% of the Gross Sale Price of such coal

or the sum of $4 USD for each ton of 2,000 pounds of such coal;

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

4. MINERAL PROPERTY INTERESTS (continued)

Kentucky Property, US (continued)

North American Gem #2 Mine (continued)

?

?

For all coal sold at a Gross Sale Price of $80 USD per ton or more, the royalty

rate shall increase by 1% for each increase in the Gross Sale Price of $10 USD;

Beginning during the first month of the third lease year, and during each calendar

month thereafter for the life of the lease, if the Company fails to mine at least

5,000 tons of coal per month, the Company shall pay to the Lessor a Deficit

Tonnage Royalty of $4 USD per ton of the difference between the tons of coal

actually mined during that month and the minimum tonnage requirement of 5,000

tons.

The $25,000 USD paid for the acquisition of Begley North Leases is recoupable and will

first be recouped against the above coal production royalties due to Lessor. So far, the

Company has recouped $11,108 USD of the $25,000 advanced royalties paid to Lessor.

North American Gem #3 Mine

On June 9, 2009, the Company (the Lessee) entered into an agreement to acquire

certain coal leases located in Knox County, Kentucky from Lonesome Pine Leasing LLC

(“LPL”) (the Lessor). The leases are referred to as the as the “Swan Pond” property

(“Powell Lease”) and the “Possum Hollow” property. The Powell Lease was secured and

is part of the Swan Pond Property.

The principal terms set forth in the agreement include:

?

LPL granting to the Lessee the right to acquire an exclusive and undivided

leasehold interest in the Kentucky Property, including coal mining and extraction

rights, from the Lessor, upon:

The Company making tonnage production royalty payments to the Lessor in the

amount of 8% of the selling price (FOB mine) on all coal mined and extracted

from the Kentucky Properties; and

The Company making tonnage production override royalty payments to the

Lessor in the amount of $1.00/net ton on all coal mined and extracted from the

Kentucky Properties; and

The Company making a one time payment to the Lessor in the amount of

$15,000 USD (paid $16,702 CAD). The amount was paid to secure the Powell

Lease and for all the due diligence related to securing the property.

?

?

?

On September 23, 2009 and further amended on August 12, 2010, the Company

entered into a Definitive Agreement to acquire additional coal leases located in Knox

County, Kentucky. The leases, referred to as the “ABGSC Leases” and part of the Swan

Pond Property will be permitted for mining under permit #861-0502.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

4. MINERAL PROPERTY INTERESTS (continued)

Kentucky Property, US (continued)

North American Gem #3 Mine (continued)

The ABGSC Leases consist of the following Lessors and terms:

Date ofName of

LeaseLessor

 8/9/2009 West

Term

2 years

Payments to Lessors

Greater of $2.60 USD per net ton of 2,000

pounds or 6.5% of gross selling price per

ton, wheelage rate of
.25 per ton for coal

mined and transported by truck across

surface owned by Lessor.

Royalty Overide

$1.50 per net ton

and 1% payments

on gross sales

(FOB Mine) due

to ABGSC

5/14/2009 King

5 years

Greater of $3.00 per net ton of 2,000 pounds $1.50 per net ton

or 8% of gross selling price per ton

Greater of $3.00 per net ton of 2,000 pounds

or 6% of gross selling price per ton,

wheelage rate of
.25 per ton for coal

mined and transported by truck across

surface owned by Lessor.

Wheelage rate of
.35 per net ton of 2,000

pounds coal

$1.50 per net ton

and 1% payments

on gross sales

(FOB Mine) due

to ABGSC

5/14/2009 Foley

5 years

5/27/2009 Gray

5 years

In consideration of and for the sale of the Permit and Leases:

?

ABGSC grants to the Company the right to acquire an exclusive and undivided

leasehold interest in the ABGSC Leases, including coal mining and extraction

rights, from the Lessor, upon the Lessee making one time payments to the

Lessor in the amount of:

o

o

o

 $20,000 USD payment upon signature of the Letter of Intent (paid $22,014

CAD);

 $40,000 USD payment upon execution of the Definitive Agreement (paid

$43,554 CAD); and

 $40,000 USD (paid $42,485 CAD) upon technical acceptance of “the permit”

by the Kentucky DNR.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

4. MINERAL PROPERTY INTERESTS (continued)

Kentucky Property, US (continued)

North American Gem #3 Mine (continued)

?

ABGSC shall be paid a recoupable minimum royalty payment of $10,000 USD

per month beginning no later than ninety days after the technical acceptance of

the permit (November 8, 2010) and not to exceed 36 months for a maximum of

$360,000 after which royalties will only be paid according to actual coal mined.

The Company started to pay the recoupable $10,000 USD royalty payment to

ABGSC on November 8, 2010. Minimum royalty payments will be capped at a

maximum of $10,000 USD per month until the Company recovers $40,000 USD

of purchase money funds described above. This payment can be credited against

royalties when and if royalties from mining activities commence and to such an

extent as such royalties exceed $10,000 USD per month paid to the Vendor.

The Company shall pay necessary expenses for the issuance and transfer of the

permit #861-0502 to be recouped as follows,

o

Fees and costs associated with two natural gas pipeline crossings on the

Lease, 50% of which shall be offset from the royalty payments between 13th

and 18th month of coal production.

Fees and costs associated with obtaining title opinions for the Leases, 25%

of which shall be offset from the royalty payments over the first six months of

production. However, the Company shall only be liable for up to $3,750 USD,

regardless the total fees and costs associated with obtaining title opinion with

the leases.

Fees and costs associated with obtaining a KPDES permit shall be offset

against the cost of the mining permit transfer. The Vendor shall pay the costs

of the mining permit transfer and the Company shall pay the costs of the

KPDES permit and any cost for change in operator, with any difference in

costs being absorbed by the responsible party.

The Company shall place into a third party escrow account the amount of

$25,000 USD to be released to the Company upon the issuance of the

permit to the Company.

?

o

o

o

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

4. MINERAL PROPERTY INTERESTS (continued)

Kentucky Property, US (continued)

Granny Rose Property

On February 2, 2010 and further amended on October 14, 2010, the Company entered

into an agreement to acquire the Granny Rose lease in Knox County, Kentucky.

In consideration for the lease acquisition, the Company must pay $100,000 USD (paid

$111,095 CAD) as an advance royalty and issue 250,000 common shares (pending

Exchange approval). The $100,000 USD is recoupable and will be applied against the

royalty payments upon coal production. In addition, the Company is to make payments

to the Lessor as tonnage royalty per 2,000 ton of coal as follows: $4.00 or 8% of Gross

Sales Price whichever is greater per raw ton for all strip and auger coal.

Demps Hollow Property

During the year ended December 31, 2010, the Company, due to unfavorable testing

and sampling results, terminated the leases previously agreed upon in October 2009

with LPL. As a result, the Company will not make royalty payments and will no longer

transfer 1,600,000 common shares to LPL. The Company provided for impairment

charge of $26,926 USD to write off this property entirely.

Patrick Engle Hollow Property

In March of 2010, the company acquired an additional 2,600 acres of coal leases

previously assigned to LPL via South Coast Holdings of Georgia, Inc. (the Lessor) in

Knox County, Kentucky. Per the terms of the agreement, the Company had access to all

the coal located in and or under the property for which the Company was required to

make annual minimum royalty payments of $5,000 and for each ton of coal mined and

removed from the premises, a tonnage royalty equal to 8% of the gross selling price of

coal or $3.50 per ton of coal mined, sold or removed by the Company.

During the year ended December 31, 2010, the Company terminated all of the leases.

As a result, the Company provided for impairment charge of $113,430 USD to write off

the property entirely.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

4. MINERAL PROPERTY INTERESTS (continued)

Kentucky Property, US (continued)

Gilliam Hill South Property

On April 14, 2010, the Company acquired additional multi-seam coal leases in Knox

County, Kentucky, which will be known as the Gilliam Hill South Property.

Begley South Lease

In consideration for the acquisition of Begley South Lease (Gilliam Hill South Property),

the Company must pay a recoupable amount of $25,000 USD (paid $27,090 CAD) upon

the effective date of the lease agreement, and thereafter upon the first day of the second

and third lease year. Upon the coal production, the Company is required to pay

production royalties according to the following terms,

?

For all coal sold at a Gross Sale Price of less than $80 USD per ton of 2,000

pounds, the greater of the sum equal to 8% of the Gross Sale Price of such coal

or the sum of $4 USD for each ton of 2,000 pounds of such coal;

For all coal sold at a Gross Sale Price of $80 USD per ton or more, the royalty

rate shall increase by 1% for each increase in the Gross Sale Price of $10 USD;

Beginning during the first month of the fourth lease year, and during each

calendar month thereafter for the life of the lease, if the Company fails to mine at

least 5,000 tons of coal per month, the Company shall pay to the lessor a Deficit

Tonnage Royalty of $4 USD per ton of the difference between the tons of coal

actually mined during that month and the minimum tonnage requirement of 5,000

tons.

?

?

The $25,000 USD ($27,090 CAD) paid for the acquisition of Begley South Leases is

recoupable and will be recouped against the coal production royalties.

Jones Lease

On May 13¸ 2010, the Company acquired approximately 800 acres of coal leases in

Knox County, Kentucky which will be known as the Brian Jones lease.

In consideration for the Brian Jones Lease, the Company must pay an advance royalty

of $50,000 USD (paid $54,115 CAD). $25,000 USD of the $50,000USD is recoupable

and can be applied against the royalty payment during the first five years of lease. Upon

the commencement of coal production, the Company is required to pay the minimum of

$4 USD per 2,000 pounds or 8% per ton, whichever is greater of the average Gross Sale

Price for all coal mined. In addition, the Company must pay a wheelage rate at
.25 per

ton coal transport, shipped, conveyed, or hauled across any portion of the leased

premises.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

5. RECLAMATION BONDS

A Reclamation bond of $27,900 CAD is held by the British Columbia government until

the Company completes operations at the Louise Lake property.

A Reclamation bond $27,400 USD ($27,302 CAN) of is held by attorney Bill Henderson

as security deposit for the North American Gem Processing Facility.

A Reclamation bond of $157,000 USD ($156,441 CAN) is held by Cumberland Valley

National Bank and Trust until the Company completes operations at the North American

Gem #2 Mine.

A Reclamation bond of $31,075 USD ($30,965 CAN) is held by State of Kentucky until

the Company completes operations at the North American Gem #3 Mine.

The reclamation bonds bear no interest.

6. RELATED PARTY TRANSACTIONS

The amounts due to/from related parties are amounts due to/from a director and

companies with common directors. The balances are unsecured, non-interest bearing

and have no specific terms for repayment. Accordingly, the fair value cannot readily be

determined.

These transactions are in the normal course of operations and have been valued in

these financial statements at the exchange amount which is the amount of consideration

established and agreed to by the related parties.

Due from related parties

2010

 -$-

Amount due from a director for management fees paid in advance

(recorded in prepaid expense)

Amount due from companies with directors in common

Loan receivable from a company with directors in common

 9,287

 1,680

     -

10,967

2009

 -$-

 14,950

149,294

232,466

396,710

Due to related parties

  2010

   -$-

21,412

21,412

2009

 -$-

   -

-

Amounts due to companies with directors in common

During the year ended December 31, 2010, the Company paid to a director for salaries

in advance. As at December 31, 2010, the amount due from the director is $9,287. As at

December 31, 2010, the amount due to companies with directors in common is $21,412,

and the amount due from a company with directors in common is $1,680.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

6. RELATED PARTY TRANSACTIONS (continued)

During the year ended December 31, 2010, the following rent and office and

administrative fees were paid or accrued among companies with common directors and

directors and officers of the Company.

2010

  -$-

Expenses paid or accrued to a company with common

 directors:

     Rent and general administrative expenses

Expenses paid or accrued to certain Directors and Officers

 of the Company:

     Consulting fees

     Mining Consulting

     Professional fees

Total

2009

  -$-

15,500

31,000

 49,750

120,000

 56,968

242,218

120,000

 80,000

 35,305

266,305

During the year ended December 31, 2010, the Company paid or accrued $15,500 to

the related companies for rent and general administrative expenses. During the year

ended December 31, 2010, the Company paid $49,750 consulting fees to an

officer/director of the Company.

On April 12, 2009, the Company entered into a contract with an officer/director of the

subsidiary of the Company to pay compensation and benefits $10,000 CAN per month

beginning on May 1, 2009. During the year ended December 31, 2010, the Company

paid $120,000 to him for his mining consulting services.

During the year ended December 31, 2010, the Company paid $56,968 accounting fees

to an officer/director of the subsidiary of the Company.

2010

  -$-

Rent and general administrative expenses collected or accrued from related parties

Solitaire Mineral Corp.- company with common directors

Zone Resources Inc. - company with common directors

Soldi Ventures Inc - company with common directors

119,006

 52,500

 63,000

234,506

128,002

 60,000

 30,000

218,002

2009

  -$-

During the year ended December 31, 2008, the Company signed services contracts with

companies with common directors to share expenses of rent and general administrative

services. During the year ended December 31, 2010, the Company collected or accrued

$234,506 from the related companies.

During the year ended December 31, 2008, the Company made a $400,000 loan

bearing an interest rate of 7.5% per year to a company with directors in common. The

principal amount of the loan was $400,000 at the rate of 7.5% per annum. $200,000 of

the principal was paid on November 27, 2009. On January 20, 2010, the balance of loan

principal and accrued interest in the amount of $233,287 was repaid.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

7. SHARE CAPITAL & CONTRIBUTED SURPLUS

Share capital

Authorized:

The authorized share capital of the Company consists of unlimited common shares

without par value and unlimited preferred shares issuable in series. The Company has

issued common shares of its capital stock during the year ended December 31, 2010:

2010

2009

Balance, beginning of year

Issued during the year for:

Options for cash

Warrants for cash

Private Placement

Mineral Property Acquisition

Tax benefits renounced

Finders' Fees paid

Share issue costs

Warrants exercised

Options exercised

Balance, end of year

 # of shares

137,312,759

        -$-

14,338,398

 # of shares

107,678,259

        -$-

12,636,826

 3,420,000

16,026,500

13,524,903

   250,000

        -

        -

        -

        -

        -

170,534,162

   346,500

 1,436,630

 1,081,993

    36,250

  (126,780)

   (75,290)

   (65,230)

    77,546

   208,151

17,258,168

 1,175,000

 2,859,500

25,200,000

   400,000

        -

        -

        -

        -

        -

137,312,759

   126,500

   238,100

 1,412,000

    32,000

       -

       -

  (173,256)

     2,779

    63,449

14,338,398

Issuance of Share Capital

During the year ended December 31, 2010:

a) A total of 3,420,000 stock options were exercised at prices of
.10 -
.15 per

   option for total proceeds of $346,500.

b) A total of 16,026,500 warrants were exercised at prices of
.08 -
.12 per

   warrant for total proceeds of $1,436,630.

c) On September, 21, 2010, the Company completed a non-brokered private

   placement of 9,901,078 units at a price of
.08 per unit for total proceeds of

   $792,087. The units were issued as non flow-through units consisting of one

   common share and one full warrant. One full warrant will entitle the holder to

   purchase one additional common share of the Company at a price of
.10 per

   share during the first year and at a price of
.12 during the second and at a

   price of
.15 per share until expiration in the third and final year. The Company

   paid share issuance costs of $45,300 in cash and 566,250 warrants with a fair

   value of $37,962. Each warrant is exercisable to acquire one additional common

   share of the Company at a price of
.10 per share during the first year and at a

   price of
.12 during the second and at a price of
.15 per share until expiration

   in the third and final year.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

7. SHARE CAPITAL & CONTRIBUTED SURPLUS (continued)

Issuance of Share Capital (continued)

d) On October 18, 2010, the Company closed the non-brokered private placement

   and raised $289,906. A total of 3,623,825 non-flow-through units at a price of

  
.08 per unit were issued. Each unit consists of one common share and one

   non-transferable share purchase warrant. Each warrant will entitle the holder to

   purchase one additional common share of the Company at a price of
.10 per

   share for the first year,
.12 per share on the second year and
.15 per share

   until expiration on the third year. The Company paid share issuance costs of

   $29,120 in cash and 364,000 warrants with a fair value of $27,268. Each warrant

   will entitle the holder to purchase one additional common share of the Company

   at a price of
.10 per share for the first year,
.12 per share on the second

   year and
.15 per share until expiration on the third year.

e) During the year ended December 31, 2010, the Company issued 250,000

   common shares for the acquisition of mineral interests for a total market value of

   $36,250.

During the year ended December 31, 2009:

a) The Company completed a series of non-brokered private placements as follows:

?

On April 28, 2009, the Company raised $612,000 by issuing 10,200,000 common

shares at a price of
.06. A total of 3,030,000 units were issued as flow-through

units consisting of one common share and one-half of one non-transferable share

purchase warrant. A total of 7,170,000 units were issued as non-flow-through

units consisting of one common share and one non-transferable share purchase

warrant. A total of 8,685,000 warrants were issued. One warrant will entitle the

holder to purchase one additional common share of the company at a price of

.10 per share for the first year, and
.15 until expiration the following year.

The company paid share issue costs consisting of $33,270 and 564,500 warrants

with a fair value of $23,418. Each warrant is exercisable to acquire one additional

share at a price of
.10 per share for the first year, and
.15 until expiration the

following year.

On August 31, 2009, the Company raised $500,000 by issuing 10,000,000

common shares at a price of
.05. A total of 5,430,000 units were issued as

flow-through units consisting of one common share and one-half of one non-

transferable share purchase warrant. A total of 4,570,000 units were issued as

non-flow-through units consisting of one common share and one non-transferable

share purchase warrant. A total of 7,285,000 warrants were issued. One warrant

will entitle the holder to purchase one additional common share of the company

at a price of
.08 per share for the first year, and
.10 for the second year, and

.12 until expiration the third year.. The Company paid share issue costs

consisting of $35,900 and 653,000 warrants with a fair value of $31,378. Each

warrant is exercisable to acquire one additional share at a price of
.08 per

share for the first year, and
.10 for the second year, and
.12 until expiration

the third year.

?

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

7. SHARE CAPITAL & CONTRIBUTED SURPLUS (continued)

Issuance of Share Capital (continued)

?

On October 7, 2009, the Company completed a non-brokered private placement

of 5,000,000 units at a price of
.06 per unit for total proceeds of $300,000. The

units were issued as non flow-through units consisting of one common share and

one warrant. A total of 5,000,000 warrants were issued. One warrant will entitle

the holder to purchase one additional common share of the Company at a price

of
.09 per share for the first year,
.12 per share in the second year, and

.15 per share until expiration in the third year. The company paid share issue

costs consisting of $23,760 and 396,000 warrants with a fair value of $25,530.

Each warrant will entitle the holder to purchase one additional common share of

the Company at a price of
.09 per share for the first year,
.12 per share in

the second year, and
.15 per share until expiration in the third year.

b) During the year ended December 31, 2009, the Company issued 400,000

   common shares for the acquisition of mineral interests for a total fair market

   value of $32,000.

c) During the year ended December 31, 2009, a total of 1,175,000 stock options

   were exercised at prices of
.10 -
.12 per option for total proceeds of

   $126,500.

d) During the year ended December 31, 2009, a total of 2,859,500 warrants were

   exercised at prices of
.08 -
.10 per warrant for total proceeds of $238,100.

e) At December 31, 2009 amount totalling of $76,000 related to the above

   transactions are included in share subscriptions receivable (subsequently

   received).

Contributed Surplus

     2010

       -$-

2,694,960

  999,161

 (208,151)

   65,230

  (77,546)

3,473,654

     2009

       -$-

2,140,258

  540,604

  (63,449)

   80,326

   (2,779)

2,694,960

Balance, beginning of year

Stock based compensation expense

Stock options excercised

Warrants granted as share issuance costs

Warrants excercised

Balance, end of year

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

7. SHARE CAPITAL & CONTRIBUTED SURPLUS (continued)

Stock Options

The Company has adopted an incentive stock option plan (the “Plan”). The essential

elements of the Plan provide that the aggregate number of common shares of the

Company’s capital stock issuable pursuant to options granted under the Plan may not

exceed 10% of the number of issued shares of the Company at the time of the granting

of the options. Options granted under the Plan will have a maximum term of ten years.

The exercise price of options granted under the Plan will not be less than the discounted

market price of the common shares (defined as the last closing market price per share of

the Company’s common shares on the trading day immediately preceding the day on

which the Company announces the grant of the options, less the maximum discount

permitted under TSX Venture Exchange policies), or such other price as may be agreed

to by the Company and accepted by the TSX Venture Exchange. Options granted under

the plan vest fully upon the expiry of any hold periods (if applicable), except for

consultants conducting investor relations activities which will become vested with the

right to exercise one-fourth of the option upon the conclusion of each three month period

subsequent to the date of the grant of the option.

A summary of the status of the Company’s stock option plan as at December 31, 2010

and changes during the year ended December 31, 2010 and 2009 is as follows:

Balance - December 31, 2008

Granted

Granted

Granted

Granted

Granted

Exercised

Cancelled

Expired

Balance - December 31, 2009

Granted February 9, 2010

Granted April 9, 2010

Granted May 21, 2010

Granted October 22, 2010

Granted November 19, 2010

Exercised

Cancelled

Expired

Balance - December 31, 2010

Option

 9,103,500

 1,500,000

 1,900,000

 1,500,000

   600,000

 1,800,000

(1,175,000)

  (297,500)

(1,283,500)

13,647,500

   700,000

 2,600,000

 1,750,000

 3,000,000

 1,250,000

(3,420,000)

  (437,500)

(2,990,000)

16,100,000

Expiry Date

  August 18, 2014

    March 2, 2014

     May 29, 2014

   October 8, 2014

December 18, 2014

  February 9, 2015

      April 9, 2015

     May 21, 2015

  October 22, 2015

November 19, 2015

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

7. SHARE CAPITAL & CONTRIBUTED SURPLUS (continued)

Stock option (continued)

The following table summarises information about the stock options outstanding at

December 31, 2010:

Outstanding and Exerciseable

                      2,500,000

                        450,000

                        325,000

                      1,150,000

                        450,000

                        200,000

                        300,000

                      1,650,000

                        700,000

                      2,525,000

                      1,700,000

                      2,900,000

                      1,250,000

                     16,100,000

Exercise Price

.35

.18

.10

.10

.10

.10

.10

.12

.13

.19

.13

.10

.12

  Expiry Date

July 4, 2013

   August 18, 2013

    March 2, 2014

     May 29, 2014

September 4, 2014

   October 8, 2014

   October 8, 2011

December 18, 2014

  February 9, 2015

      April 9, 2015

     May 21, 2015

  October 22, 2015

November 19, 2015

On February 9, 2010 pursuant to its stock option plan, the Company granted incentive

stock options to its directors, officers, consultants and employees to purchase 700,000

common shares in the capital stock of the Company, exercisable for a period of five

years, at a price of
.13 per share.

The fair value of stock options granted on February 9, 2010 was estimated at the vesting

date using the Black – Scholes option pricing model with estimated volatility of 112%,

risk free rate of 2.83%, annual rate of dividends zero and expected life of 5 years. With

these assumptions, the fair value of options was determined to be $66,848 which has

been expensed with a corresponding credit to contributed surplus.

On April 9, 2010 pursuant to its stock option plan, the Company granted incentive stock

options to its directors, officers, consultants and employees to purchase 2,600,000

common shares in the capital stock of the Company, exercisable for a period of five

years, at a price of
.185 per share. The fair value of stock options granted on April 9,

2010 was estimated at the vesting date using the Black – Scholes option pricing model

with estimated volatility of 117%, risk free rate of 3.12%, annual rate of dividends zero

and expected life of 5 years. With these assumptions, the fair value of options was

determined to be $384,260 which has been expensed with a corresponding credit to

contributed surplus.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

7. SHARE CAPITAL & CONTRIBUTED SURPLUS (continued)

Stock option (continued)

On May 21, 2010 pursuant to its stock option plan, the Company granted incentive stock

options to its directors, officers, consultants and employees to purchase 1,750,000

common shares in the capital stock of the Company, exercisable for a period of five

years, at a price of
.13 per share. The fair value of stock options granted on May 21,

2010 was estimated at the vesting date using the Black – Scholes option pricing model

with estimated volatility of 116%, risk free rate of 2.55%, annual rate of dividends zero

and expected life of 5 years. With these assumptions, the fair value of options was

determined to be $185,964 which has been expensed with a corresponding credit to

contributed surplus.

On October 22, 2010 pursuant to its stock option plan, the Company granted incentive

stock options to its directors, officers, consultants and employees to purchase 3,000,000

common shares in the capital stock of the Company, exercisable for a period of five

years, at a price of
.10 per share. The fair value of stock options granted on October

22, 2010 was estimated at the vesting date using the Black – Scholes option pricing

model with estimated volatility of 113%, risk free rate of 2.06%, annual rate of dividends

zero and expected life of 5 years. With these assumptions, the fair value of options was

determined to be $241,186 which has been expensed with a corresponding credit to

contributed surplus.

On November 19, 2010 pursuant to its stock option plan, the Company granted incentive

stock options to its directors, officers, consultants and employees to purchase 1,250,000

common shares in the capital stock of the Company, exercisable for a period of five

years, at a price of
.12 per share. The fair value of stock options granted on November

19, 2010 was estimated at the vesting date using the Black – Scholes option pricing

model with estimated volatility of 113%, risk free rate of 2.48%, annual rate of dividends

zero and expected life of 5 years. With these assumptions, the fair value of options was

determined to be $120,903 which has been expensed with a corresponding credit to

contributed surplus.

An amount of $208,151 of contributed surplus was allocated to share capital as a result

of options exercised in the year ended December 31, 2010.

Option pricing models require the input of highly subjective assumptions including the

expected price volatility. Changes in the subjective input assumptions can materially

affect the fair value estimate, and therefore the existing model does not necessarily

provide a reliable single measure of the fair value of the Company’ stock options granted.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

7. SHARE CAPITAL & CONTRIBUTED SURPLUS (continued)

Warrants

A summary of the status of the Company’s warrants as at December 3, 2010 and

changes during the year ended December 31, 2010 and 2009:

Warrants outstanding

              12,622,615

              8,735,000

                564,500

              7,285,000

                653,000

  5,000,000

                396,000

             (2,859,500)

                 (50,000)

               (645,340)

              31,701,275

            (16,026,500)

                 (10,000)

             (8,000,000)

                930,250

             13,524,903

              22,119,928

              22,119,928

Balance, December 31, 2008

 Granted - private placement

 Granted - finder's fees

 Granted - private placement

 Granted - finder's fees

 Granted - private placement

 Granted - finder's fees

 Exercised

 Cancelled

 Expired

Balance, December 31, 2009

 Exercised

 Cancelled

 Expired

 Granted - finder's fees

 Granted - private placement

Balance, December 31, 2010

Exercisable, December 31, 2010

As at December 31, 2010, the Company had warrants outstanding as follows:

Outstanding and Excercisable

                       825,000

                       759,775

                     2,855,000

                     1,445,000

                     1,780,000

                     9,901,078

                       566,250

                     3,623,825

                       364,000

                    22,119,928

Exercise Price

.15

.15

.15

.10/
.12

.12/
.15

.10/
.12/
.15

.10/
.12/
.15

.10/
.12/
.15

.10/
.12/
.15

Expiry Date

 3-Oct-12

27-Dec-12

28-Apr-11

31-Aug-12

 7-Oct-12

20-Sep-13

20-Sep-13

15-Oct-13

15-Oct-13

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

8. CAPITAL DISCLOSURE

The Company considers its capital structure to include shareholders’ equity and debt.

The Company’s objectives when managing capital are to (i) maintain financial flexibility

in order to preserve its ability to meet financial obligations and continue as a going

concern; (ii) maintain a capital structure that allows the Company to finance its growth

using internally-generated cash flow and debt capacity; and (iii) optimize the use of its

capital to provide an appropriate investment return to its shareholders commensurate

with risk.

The Company’s financial strategy is formulated and adapted according to market

conditions in order to maintain a flexible capital structure that is consistent with its

objectives and the risk characteristics of its underlying assets. The Company manages

its capital structure and makes adjustments to it in light of changes in economic

conditions and the risk characteristics of its underlying assets. To maintain or adjust the

capital structure, the Company may attempt to issue new shares, acquire or dispose of

assets, or adjust the amount of cash and cash equivalents and receivables.

There were no changes in the Company’s approach to capital management during the

year ended December 31, 2010. The Company is not subject to externally imposed

capital requirements.

9. SUPPLEMENTAL CASH FLOW INFORMATION

2010

   -$-

 -

 -

2009

   -$-

 -

 -

Interest paid

Income taxes remitted

The company incurred non-cash investing and financing activities during the year ended

December 31, 2010 and 2009 as follows:

2010

  -$-

Non-cash investing activities

 Acquisition cost of mineral properties

 Acquisition of marketable securities

(36,250)

    -

(36,250)

2009

  -$-

(24,000)

 (8,000)

(32,000)

Non-cash financing activities

 Fair value of warrants exercised

 Fair value of options exercised

 Contributed surplus

 Share issuance costs

 Shares issued for mineral properties

  77,546

 197,050

(223,931)

 (50,665)

  36,250

  36,250

  2,779

 63,449

 14,098

(80,326)

 32,000

 32,000

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

10. INCOME TAXES

Income tax recovery varies from the amount that would be computed from applying the

combined federal and provincial tax rate to loss before taxes as follows:

Net loss for the year before taxes

Statutory Canadian corporate tax rate

Anticipated tax recovery

Change in taxes resulting from:

Effect of tax rate change

Unrecognized items for tax purposes

Loss carry forward expired

Difference in tax rates in other jurisdictions

Tax benefits not realized (realized)

Change in valuation allowance

Future income tax recovery

      2010

        -$-

(9,486,351)

    28.50%

(2,703,610)

  232,092

  291,201

   43,242

  (53,528)

  (18,823)

2,082,940

 (126,486)

      2009

        -$-

(2,692,004)

    30.00%

  (807,601)

 101,678

 167,376

   5,836

     -

 (23,233)

 401,500

(154,444)

The significant components of the company's consolidated future tax assets

(liabilities) are as follows:

 2010

-$-

Exploration and development deductions641,191

Non-capital loss carry-forwards1,793,829

Share issue costs47,634

Miscellaneous1,786

             2,484,440

Valuation allowance(2,484,440)

Net future tax assets (liabilities)-

     2009

        -$-

 (667,925)

1,001,797

   66,662

      966

  401,500

 (401,500)

      -

The Company has available non-capital losses for Canadian income tax purposes which

may be carried forward to reduce taxable income in the future years. If not utilized, the

non-capital losses in the amount of $5,750,450 expire as follows:

 2014 $

 2015

 2026

 2027

 2028

 2029

 2030

Total $

  157,851

  323,942

  512,066

  601,643

1,172,044

1,087,918

1,894,986

5,750,450

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

10. INCOME TAXES (continued)

At December 31, 2010, the Company has unclaimed resource and other deductions in

the amount of $3,385,371 (2009 - $3,575,830) which may be deducted against future

taxable income on a discretionary basis.

In addition the Company has share issue costs totalling $190,535 (2009 - $266,649)

which have not been claimed for income purposes.

11. COMMITMENTS

Flow-through Shares Subscription

The Company entered into Flow-through Share Subscription Agreements in the year

ended December 31, 2009 whereby it was committed to incur on or before December

31, 2010 a total of $444,840 of qualifying Canadian Exploration Expenses (“CEE”) as

described in the Income Tax Act of Canada. As at December 31, 2010, the Company

has unfulfilled Canadian Exploration Expenditure commitments of $431,278. The

Company has agreed to indemnify shareholders for taxes and penalties related to the

unspent portion of the commitment. An amount totaling $194,750 has been accrued

related to the indemnification. In addition, Part XII.6 tax penalties of $53,757 have been

accrued on the unfulfilled commitments.

Lease commitments

Effective September 1, 2007, the Company entered into a seven year lease agreement

with Pacific Centre Leaseholders Limited for office premises from September 1, 2007 to

August 31, 2014. During the year ended December 31, 2008, the Company entered into

a sublease with Solex Resources Corp. for additional office premises from October 1,

2008 to April 29, 2013. The Company is a joint tenant on the lease so is only expected

to pay for half of the lease costs. A company with directors in common is to pay the

other half.

Under the agreements above, payments anticipated over next four years are as follows:

Lease Payment

Year

2011

2012

2013

2014

Total

-$-

123,394

127,754

 82,773

 41,936

375,857

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

12.

SEGMENTED INFORMATION

The Company’s business is considered to be in one segment, being mineral property

exploration. The total assets and operating loss by geographical locations are as

follows:

Year ended December 31, 2010

Tangible assets

Revenue

Amortization/depletion

Future income tax recovery

Year ended December 31, 2009

Tangible assets

Revenue

Amortization/depletion

Future income tax recovery

  CanadaUnited States

1,142,415 $828,485

        - $612,330

    2,114 $142,165

        - $-

  CanadaUnited States

4,845,852 $1,943,560

        - $55,177

        - $3,338

  154,444 $-

     Total

1,970,900

  612,330

  144,279

         -

     Total

6,789,412

   55,177

    3,338

  154,444

$

$

$

$

$

$

$

$

$

$

$

$

$

$

$

$

13. COMPARATIVE FIGURES

The financial statements have been reclassified, where applicable, to conform to the

presentation used in the current year. The changes do not affect prior year earnings.

14. FINANCIAL INSTRUMENTS

Fair values

Per CICA Handbook Section 3862, a three-level hierarchy that reflects the significance

of inputs used in making fair value adjustments is required. The three levels of fair value

hierarchy are as follows:

a) Level 1 – Unadjusted quoted prices in active markets for identical assets or

   liabilities;

b) Level 2 – Inputs other than quoted prices that are observable for assets or

   liabilities, either directly or indirectly; and

c) Level 3 – Input for assets or liabilities that are not based on observable market

   data.

The following table outlines the Company’s financial assets and liabilities measured at

fair value by level with the fair value hierarchy described above. Assets and liabilities are

classified in entirety based on the lowest level of input that is significant to the fair

measurement.

As at December 31, 2010 and December 31, 2009 the Company’s financial instruments

measured at fair value are as follows:

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

14. FINANCIAL INSTRUMENTS (continued)

                 20102009

Level 1Level 2 Level 3 TotalLevel 1Level 2 Level 3 Total

 $ 47,546 $- $- $ 47,546 $ 169,771 $- $- $ 169,771

   12,150--12,15014,500--14,500

Assets

Cash and cash equivalents

Marketable securities

The Company’s marketable securities are valued using quoted market prices in active

markets, and therefore are classified as Level 1.

Financial Instrument Risks

The Company's financial instruments are exposed to certain financial risks, including

credit risk, interest rate risk, market risk, liquidity risk and currency risk.

a)

Credit risk

The Company is exposed to credit risk by holding cash and cash equivalents. This risk is

minimized by holding the investments in large Canadian financial institutions or with

Canadian governments. The Company is also exposed to credit risk through its amounts

receivable and reclamation bonds. The credit risks of reclamation bonds are minimized

by holding the bonds under various trust accounts. The Company’s various refundable

credits, are due from Canadian governments.

In January 2009, the CICA approved EIC-173, Credit Risk and the Fair Value of

Financial Assets and Financial Liabilities. The guidance clarified that an entity’s own

credit risk and the credit risk of the counterparty should be taken into account in

determining the fair value of financial assets and financial liabilities including derivative

instruments. The guidance was effective as of the date of the abstract. The adoption of

this abstract did not have an impact on the financial statements.

b)

Interest rate risk

The Company is exposed to interest rate risk because of fluctuating interest rates.

Fluctuations in market rates do not have a significant impact on the Company's

operations due to the short term to maturity and a no penalty cashable feature of its cash

equivalents.

c)

Market risk

The Company is exposed to market risk because of the fluctuating values of its publicly

traded marketable securities and other company investments. The Company has no

control over these fluctuations and does not hedge its investments.

Based on the December 31, 2010 portfolio values, every 10% increase or decrease in

the share prices of these companies, would have impacted other comprehensive loss,

up or down, by approximately $1,215 before taxes.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

14. FINANCIAL INSTRUMENTS (continued)

Financial Instruments (continued)

d)

Liquidity risk

Liquidity risk is the risk that the Company is unable to meet its financial obligations as

they come due. The Company manages this risk by careful management of its working

capital to ensure its expenditures will not exceed available resources.

e)

Currency risk

Currency risk is the risk to the Company's earnings that arises from fluctuations of

foreign exchange rates and the degree of volatility of these rates. The Company does

not use derivative instruments to reduce its exposure to foreign currency risk.

All sales revenues for the Company are denominated in US dollars. The Company may

also become exposed to currency fluctuations on mineral acquisition and deferred

exploration costs and expenses, as well as purchases of certain equipment or facilities

for its new and existing mines which are denominated in US dollars. These potential

currency risks could have a significant impact on the cost of developing its mines and on

the profitability of the Company.

As at December 31, 2010, the Company was exposed to currency risk through the

following monetary assets and liabilities in US dollars:

Cash

Prepaid expenses

Amounts receivable

Accounts payable and accrued liabilities

$

$

Foreign exchange rate at December 31, 2010

   2,880

   1,784

  17,856

(85,127)

(62,607)

0.9946

Based on the net exposures at December 31, 2010, and assuming that all other

variables remain constant, a 10% depreciation or appreciation of the Canadian dollar

against the US dollar would not have a significant impact on the Company’s net

earnings.

15. CONTINGENCY

On March 23, 2010, JSE Enterprises, LLC (“JSE”) a Kentucky company claimed that the

Company owed JSE $96,000 US dollars for the receipt of JSE goods, services,

equipment and benefits in improvement of mine located in Rockholds, Whitely County,

Kentucky. The Company maintains the position that attempts to collect the indebtedness

will be defended as there was no contract between the Company and JSE. The outcome

of this action is not determinable at this time. Any amount paid as a result of this action

will be recorded in the period of resolution.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

16. DISCONTINUED OPERATIONS

North American Gem #1 Mine

During the six months ended June 30, 2010 the Company completed production at the

North American Gem #1 mine site in Whitley County, Kentucky.

The assets and liabilities of the discontinued operations are as follows:

2010

  $

Amounts receivable

Mineral interests

Reclamation bond

Net assets

Coal revenue

Cost of coal sold

Depletion

Net income (loss) from discontinued operations

-

-

-

 525,738

(604,206)

(135,977)

(214,445)

2009

  $

   98,361

 110,231

   36,247

 244,839

 55,177

(40,592)

 (3,338)

 11,247

There was no income tax recorded in association with the discontinued operations as a

full valuation allowance was provided.

17. SUBSEQUENT EVENTS

On January 4, 2011, the Company granted incentive stock options to its directors,

officers, consultants, and employees to purchase in the total of 890,000 common shares

in the capital stock of the company, exercisable for a period of five years, at a price of

.125 per share.

On January 28, 2011, the Company closed the non-brokered private placement

announced January 11th 2011.The Company raised $647,500 at a price of
.10 per

share. A total of 6,475,000 units were issued as non-flow-through units consisting of one

common share and one non-transferable share purchase warrant. One warrant will

entitle the holder to purchase one additional common share of the company at a price of

.12 per share for the first year and at a price of
.15 per share during the second and

final year. A total of 6,475,000 warrants were issued. One warrant will entitle the holder

to purchase one additional common share of the company at a price of
.12 per share

for the first year and at a price of
.15 per share during the second and final year.

Shares, warrants and any shares issued upon exercise of the warrants are subject to a

hold period of four months expiring May 27, 2010. The Company paid share issuance

costs of $44,500 in cash and 445,000 warrants related to this placement. The proceeds

of the private placement will be used for exploration of the company's mineral properties

and general working capital.

NORTH AMERICAN GEM INC.

Notes to the Consolidated Financial Statements

December 31, 2010 and 2009

17. SUBSEQUENT EVENTS (continued)

On January 28, 2011, the Company granted incentive stock options to its directors,

officers, consultants, and employees to purchase in the total of 2,000,000 common

shares in the capital stock of the company, exercisable for a period of five years, at a

price of
.11 per share.

On February 4, 2011, the Company granted incentive stock options to its directors,

officers, consultants, and employees to purchase in the total of 250,000 common shares

in the capital stock of the company, exercisable for a period of five years, at a price of

.11 per share.

On April 18, 2011, the Company closed the non-brokered private placement announced

March 29th 2011. The Company raised $1,183,350 at a price of
.075 per share. A

total of 5,940,000 units were issued as non-flow-through units consisting of one common

share and one share purchase warrant. One warrant will entitle the holder to purchase

one additional common share of the company at a price of
.10 per share in the first

year,
.12 per share in the second year, and
.15 per share in the third year. A total of

9,838,000 units were issued as flow-through units consisting of one common share and

one-half of one share purchase warrant. One warrant will entitle the holder to purchase

one additional common share of the company at a price of
.10 per share in the first

year,
.12 per share in the second year, and
.15 per share in the third year. Shares,

warrants and any shares issued upon exercise of the warrants are subject to a hold

period of four months expiring August 15th 2011. The proceeds of the private placement

will be used for exploration of the Company's mineral properties and general working

capital.

On April 18, 2011, the Company through its subsidiary, North American Gem US, Inc.

(NAG US) responded to a lawsuit by Kentucky Mining Partners, LLC (KMP) issued on

March 17th 2011 in the Eastern District of Kentucky, United States District Court

(Federal Court). KMP was hired by NAG US as a contingent laborer to mine the

Jamieson property in Kentucky. The Company maintains that KMP's claims of a joint

venture agreement with NAG US will be defeated by KMP's actions and KMP's request

for a new independent contractor agreement. The outcome of this action is not

determinable.

Any adjustment required as the result of this action will be accounted for in the period of

settlement.