The accompanying summary of significant accounting policies and notes are an integral part of these financial statements

Basis of Presentation

EnerNorth Industries Inc. (the "Company") is a corporation amalgamated under the laws of the Province of Ontario. The Company's business is its exploration and development of oil and gas reserves and its construction mechanical contracting and steel fabrication activities.

Going Concern

These consolidated financial statements have been prepared on the basis of a going concern, which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business.

Properties

The Company follows the full cost method of accounting for oil and gas operations whereby all costs of exploring for and developing oil and gas reserves are initially capitalized. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling and overhead charges directly related to acquisition and exploration activities.

Costs capitalized, together with the costs of production equipment, are depleted on the unit-of-production method based on the estimated proved reserves. Petroleum products and reserves are converted to equivalent units of natural gas at approximately 6,000 cubic feet to 1 barrel of oil.

(Continued)

Costs of acquiring and evaluating unproved properties are initially excluded from depletion calculations. These unevaluated properties are assessed periodically to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion calculations.

Proceeds from a sale of oil and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would significantly alter the rate of depletion. Alberta Royalty Tax Credits are included in oil and gas sales.

In applying the full cost method, the Company performs an annual impairment test ("ceiling test") which restricts the capitalized costs less accumulated depletion and amortization from exceeding an amount equal to the estimated fair market value of future net revenues from proved and probable oil and gas reserves, as determined by independent engineers, based on sales prices achievable under forecast prices and posted average reference prices in effect at the end of the year and forecast costs, and after deducting estimated future production related expenses, future site restoration costs and income taxes.

Royalties

As is normal to the industry, the Company's production is subject to crown, freehold and overriding royalties, and mineral or production taxes. These amounts are reported net of related tax credits and other incentives available.

Costs

A provision for environmental and site restoration costs is made when restoration requirements are established and costs can be reasonably estimated. The accrual is based on management's best estimate of the present value of the expected cash flows. Site restoration costs increase the carrying amount of the oil and gas properties and are amortized on the same basis as the properties.

Estimates

The preparation of these consolidated financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. By their nature, these estimates are subject to measurement uncertainty and the effect on the consolidated financial statements of changes in such estimates in future periods could be material.

Recognition

Industrial and Offshore Division

Revenue from construction and fabrication contracts is recognized on the percentage of completion method. The percentage of completion method recognizes revenue and unbilled accounts receivable by assessing the cost of the work performed in relation to the total estimated cost of the contract based on the contract value. Contract costs include all direct material and labour costs and those indirect costs related to contract performance such as supplies, tools and repairs. Administrative and general overheads are charged to expense as incurred. Contract losses are provided for in full in the year in which they become apparent.

Revenue on the sale of products and short term contracts is recognized when risk and title passes to the customer, which is generally upon shipment of product.

Oil and Gas Division

Oil and gas revenue is recognized on actual production, and upon delivery of the product to the customer based on the operators' reports.

Equivalents

Cash and cash equivalents consist of bank balances and investments in money market instruments with original maturities of three months or less.

Securities

Marketable securities are valued at the lower of cost or market on a portfolio basis.

Inventories

Inventories of finished goods are valued at the lower of cost and net realizable value. Raw materials are valued at the lower of cost and replacement cost.

Capital Assets

Capital assets consist primarily of fabrication buildings, office equipment, manufacturing equipment and vehicles. These assets are recorded at cost less accumulated amortization and write down for impairment.

Capital assets are amortized on the declining balance basis over their estimated useful lives at the following rates:

Translation

Foreign currency accounts are translated to Canadian dollars as follows:

At the transaction date, each asset, liability, revenue or expense is translated into Canadian dollars by the use of the exchange rate in effect at that date. At the year end date, monetary assets and liabilities are translated into Canadian dollars by using the exchange rate in effect at that date and the resulting foreign exchange gains and losses are included in income in the current period.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Under this method, future income tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial reporting and tax bases of assets and liabilities and available loss carryforwards. A valuation allowance is established to reduce tax assets if it is more likely than not that all or some portions of such tax assets will not be realized.

Compensation

The Company has established a stock option plan (the "Plan") for directors, officers, employees, consultants and service providers. The Company does not record compensation expense for stock options granted to directors, officers and employees. However, additional disclosure of the effects of accounting for stock based compensation to directors, officers and employees as compensation expense, using the fair value method estimated using the Black-Scholes Option Pricing Model, is disclosed as pro-forma information. Any consideration paid by directors, officers and employees on exercise of stock options or purchase of stock is credited to share capital. Stock options issued to non-employees are recorded at their fair value at date of issuance.

			2004			2003
Trade		$	7,350,726		$	6,082,371
Holdbacks			176,687			360,780
Other			162,716			60,313
		$	7,690,129		$	6,503,464

			2004			2003
Current
Investment in Konaseema EPS Oakwell Power Limited		$	3,365,000		$	-
Long term
Investment in Konaseema EPS Oakwell Power Limited		$	-		$	3,500,000

						Accumulated
						Depletion and			Net Book
			Cost			Amortization			Value
June 30, 2004		$	6,993,753		$	3,242,936		$	3,750,817
June 30, 2003		$	5,282,876		$	838,838		$	4,444,038

						2004						2003
						Accumulated						Accumulated
			Cost			Amortization			Cost			Amortization
Land		$	342,884		$	-		$	342,884		$	-
Building			2,304,335			652,690			2,350,141			671,386
Manufacturing equipment			719,784			662,716			717,634			646,063
Tools and equipment			1,770,912			1,362,362			1,727,943			1,254,302
Office equipment			584,048			376,527			478,425			298,536
Vehicles			527,560			317,824			259,373			205,420
Paving			40,350			19,093			38,851			17,550
Equipment under capital leases			480,337			106,460			516,448			171,656
			6,770,210			3,497,672			6,431,699			3,264,913
Net book value					$	3,272,538					$	3,166,786

During 2003, the Company early adopted the recommendations of the new CICA Handbook Section 3110, Asset Retirement Obligations on a retroactive basis. As a result of applying the new standards, management determined that the asset retirement obligation in the amount of $100,960 was necessary for site restoration costs related to its oil and gas properties for the prior year. The oil and gas properties were adjusted for the same amount and the effect to opening deficit in 2002 was considered to be immaterial.

		Proportionate Share of Joint
		Ventures' Financial Information
			2004			2003
Balance sheet
Current assets		$	4,681,993		$	4,952,377
Non current assets			33,384			63,753
Current liabilities			(4,021,542	)		(4,991,836	)
Operations
Revenue			19,339,402			7,703,574
Operating expenses and amortization			18,919,862			6,918,614
Net income			419,540			11,487
Cash flows
Operating activities			(3,673,530	)		3,216,831
Financing activities			1,904,163			(1,176,403	)
Investing activities			7,145			(83,705	)

		2004			2003
Roynat Inc. mortgage maturing in 2008 with interest at Roynat cost of funds plus 3.25% (2004 - 6.37%; 2003 - 6.99%) repayable in monthly principal payments of $7,000, plus interest. The mortgage is collateralized by a first charge on the land and building of M&M, and a floating charge on all other assets subject to a prior floating charge in favour of the Canadian Imperial Bank of Commerce (see Note 7)		$	353,400		$	437,400
Capital leases on equipment, with interest at 0% to 15% (2003 - 5.41% to 12.45%) compounded semi annually, repayable in blended monthly payments of $14,000 (2003 - $13,000)			415,208			248,929
			768,608			686,329
Less: Current portion			226,499			158,309
		$	542,109		$	528,020

2005		$	84,000
2006			84,000
2007			84,000
2008			84,000
2009 and thereafter			17,400
Total		$	353,400

2005		$	142,499
2006			117,520
2007			82,774
2008			53,655
2009 and thereafter			18,760
Total		$	415,208

		Number of
			Shares			Consideration
Common shares
Balance, as at June 30, 2002			10,578,645		$	42,096,732
Issued pursuant to a private placement (i)			1,600,000			1,242,400
Share consolidation (ii)			(8,119,636	)		-
Balance, as at June 30, 2004 and 2003			4,059,009		$	43,339,132

(i)

On December 20, 2002 the Company entered into a private placement financing with four arms-length investors. The Company issued four allotments of 133,333 (pre-consolidation 400,000) units at a price of US $1.50 (pre-consolidation US $0.50) per unit for net proceeds of US $800,000. Each unit is comprised of one (1) common share and one common share purchase warrant. Each warrant entitles the holder to purchase one (1) common share at a purchase price of US $1.80 (pre-consolidation US $0.60) per common share exercisable for a period of two years after closing.

(ii)

On December 30, 2002, at the Annual Meeting of the Shareholders of the Company, the shareholders approved the consolidation of the Company's issued common shares on the basis that every three (3) pre-consolidated common shares will be converted into one (1) post-consolidation common share. On February 11, 2003 the Company filed Articles of Amendment consolidating the issued common shares on a one for three basis.

	Number of Warrants	Expiry Date	Price
	533,332	December 31, 2004	US $ 1.80

		Number of
			Warrants
Balance, as at June 30, 2002			136,000
Expired			(96,000	)
Issued pursuant to a private placement			1,600,000
Share consolidation (Note 10 (b)(ii))			(1,093,335	)
Expired			(13,333	)
Balance, as at June 30, 2004 and 2003			533,332

(d)

Stock Option Plan

					Weighted
		Number of			Average
		Options			Exercise
					Price
Balance, June 30, 2002			295,000		$	18.42
Share consolidation			(196,667	)		-
Cancelled			(98,333	)		18.42
Balance, June 30, 2004 and 2003			-		$	-

			2004			2003
Future income tax assets:
Non-capital loss carryforwards		$	3,361,334		$	3,335,680
Capital losses			1,847,834			1,540,890
Oil and gas properties			1,105,100			245,400
Capital assets			14,777			80,060
Investments			174,487			131,690
Oakwell claim and other			2,908,202			2,267,363
			9,411,734			7,601,083
Non-capital losses applied			(213,920	)		(448,140	)
Valuation allowance			(9,167,590	)		(7,152,943	)
		$	30,224		$	-
Current portion		$	30,224		$	-
Long term portion		$	-		$	-
Future income tax liabilities
Unbilled revenue		$	(499,403	)	$	(651,250	)
Holdbacks			(16,782	)		(99,790	)
			(516,185	)		(751,040	)
Non capital losses applied			213,920			448,140
		$	(302,265	)	$	(302,900	)
Current portion		$	(276,648	)	$	(302,900	)
Long term portion		$	(25,617	)	$	-

			2004			2003			2002
Net loss from continuing operations		$	(2,114,077	)	$	(7,601,141	)	$	(536,535	)
Combined federal and provincial income tax
rate			36	%		38	%		39	%
Recovery of income tax calculated at
statutory rates		$	(763,605	)	$	(2,888,434	)	$	(209,249	)
Increase (decrease) in taxes resulting from:
Non-deductible expenses			15,953			32,305			21,263
Change in tax rates and other			(1,238,271	)		1,716,521			280,821
Valuation allowance adjustment			2,014,647			1,585,943			502,000
Provision for income taxes		$	28,724		$	446,335		$	594,835

2005		$	335,017
2006			2,886,593
2007			1,938,149
2008			1,400,916
2009			1,318,930
2010			-
2011			1,126,417

		2004			2003			2002
Accounts receivables		$	(1,186,665	)	$	(1,285,263	)	$	(887,115	)
Inventories and unbilled revenue			(13,876	)		258,175			(1,612,963	)
Prepaid expenses			(460,126	)		(181,107	)		7,711
Accounts payable and accrued liabilities			(1,379,002	)		1,725,302			(124,855	)
Deferred revenue			(2,047,304	)		2,399,086			-
Restricted cash			1,218,070			(1,218,070	)		-
		$	(3,868,903	)	$	1,698,123		$	(2,617,222	)

(a)

Supplemental Cash Flow Information

		2004			2003			2002
Cash paid for interest		$	174,309		$	273,658		$	136,009

(b)

Non-Cash Transactions

The Company entered into the following non-cash transactions:

2005		$	115,438
2006			84,989
2007			40,218
		$	240,645

(a)

Stock Options

Under US GAAP (FAS 123), stock options granted to consultants are recognized as an expense based on their fair value at the date of grant. Prior to the adoption of the Canadian Institute Chartered Accountants ("CICA") section 3870, under Canadian GAAP the options were disclosed and no compensation expense was recorded. The calculation for the compensation of $Nil (2003 - $Nil, 2002 - $8,621) is based on the Black Scholes option pricing model with the assumption that no dividends are to be paid on common shares, a weighted average volatility factor for the Company's share price of Nil (2003 - Nil, 2002 - 0.31) for Nil (2003 - Nil, 2002 - 6,667) options issued during fiscal 2003 and a weighted average risk free interest rate of 5% over a four year period and a fair value of options of $Nil (2003 - $Nil, 2002 - $1.29) and a share price of $Nil (2003 - $Nil, 2002 - $8.10).

(b)

Interest Free Loans

Under US GAAP, the benefit of interest free loans is reflected as a discount to the debt and a credit to paid in capital. This discount is computed using the current borrowing rate available to the Company and amortized over the life of the debt.

(c)

Joint Venture

Under US GAAP, the Company would use the equity method of accounting for joint ventures rather than the proportionate consolidation method of accounting. For further information see Note 6.

(d)

Comprehensive Income

Under US GAAP, comprehensive income must be reported which is defined as all changes in equity other than those resulting from investments by owners and distributions to owners.

Other comprehensive income includes the unrealized holding gains and losses on the available-for-sale securities see Note 17(e).

(e)

Marketable Securities

Under accounting principles generally accepted in Canada, gains (losses) in shares of public companies are not recognized until investments are sold unless there is deemed to be an impairment in value which is other than temporary. Under US GAAP, such investments are recorded at market value and the unrealized gains and losses are recognized as a separate item in the shareholder's equity section of the balance sheet unless impairments are considered other than temporary.

(f)

Oil and Gas Properties

Under US GAAP, the Company is required to discount future net revenues at 10% for purposes of calculating any required ceiling test write-down. In comparison, in applying the full cost method under US GAAP, the Company performs a ceiling test based on the same calculations used for Canadian GAAP except the Company is required to discount future net revenues at 10% as opposed to utilizing the fair market value and exclude probable reserves are excluded. A transitional impairment loss was recorded for Canadian GAAP purposes due to a change in accounting policy, whereas for US GAAP purposes a further write-down was recorded.

(g)

Modified Stock Options

(h)

Recently issued Accounting Standards

(h)

Recently Issued United States Accounting Standards (continued)

		2004			2003
Total assets per Canadian GAAP		$	23,262,596		$	28,834,961
Unrealized gain on marketable securities (e)			108,650			50,612
Transitional impairment loss (Note 5)			1,945,786			-
Writedown oil and gas properties (f)			(2,200,588	)		(1,044,000	)
Total assets per US GAAP		$	23,116,444		$	27,841,573
Total liabilities per Canadian GAAP and US GAAP		$	16,097,577		$	17,581,355
Minority interest per Canadian and US GAAP		$	75,141		$	-
Total shareholders' equity per Canadian GAAP		$	7,089,878		$	11,253,606
Other paid in capital adjustment per US GAAP
Compensation expense (a)			413,102			413,102
Debt discount (b)			683,162			683,162
Accumulated other comprehensive income
Unrealized gain on marketable securities (e)			108,650			50,612
Deficit adjustments per US GAAP
Amortization of debt discount			(683,162	)		(683,162	)
Compensation expense			(413,102	)		(413,102	)
Writedown oil and gas properties			(254,802	)		(1,044,000	)
Total shareholders' equity per US GAAP		$	6,943,726		$	10,260,218

		2004			2003			2002
Net loss from continuing operations
according to Canadian GAAP		$	(2,217,942	)	$	(8,047,476	)	$	(1,131,370	)
Compensation expense adjustment (a)			-			-			(111,171	)
Amortization of debt discount (b)			-			-			(155,180	)
Writedown oil and gas properties (f)			(1,156,588	)		-			(1,044,000	)
Net loss according to US GAAP before
cumulative effect of a change in accounting
principle			(3,374,530	)		(8,047,476	)		(2,441,721	)
Cumulative effect of a change in accounting
principle			-			-			(2,056,832	)
Net loss according to US GAAP			(3,374,530	)		(8,047,476	)		(4,498,553	)
Unrealized (loss) gain on
marketable securities (e)			108,650			50,612			(34,077	)
Comprehensive net loss according to
US GAAP		$	(3,265,880	)	$	(7,996,864	)	$	(4,532,630	)
Net loss available for common shareholders
according to US GAAP		$	(3,374,530	)	$	(8,047,476	)	$	(4,498,553	)
Basic and diluted net loss per common
share from continuing operations
according to US GAAP		$	(0.83	)	$	(2.11	)	$	(1.10	)
Loss per common share for the cumulative
effect of a change in accounting
principle for GAAP		$	-		$	-		$	(0.93	)
Basic and diluted net loss per common
share according to US GAAP		$	(0.83	)	$	(2.11	)	$	(2.03	)
Shares used in the computation of basic
and diluted earnings per share			4,059,009			3,806,224			2,212,795

		Industrial &
		Offshore			Oil & Gas						2004
					Division			Corporate			Total
Revenue	$	33,406,327		$	659,456		$	-		$	34,065,783
Interest expense		169,497			-			4,812			174,309
Amortization		345,094			458,230			-			803,324
Net earnings (loss) from
operations		1,627,664			(91,049	)		(3,754,557	)		(2,217,942	)
Capital assets and oil and
gas interests		3,272,538			3,750,817			-			7,023,355

		Industrial &
		Offshore			Oil & Gas						2003
		Division			Division			Corporate			Total
Revenue		$	25,389,716		$	579,749		$	-		$	25,969,465
Interest expense			268,443			-			5,215			273,658
Amortization			316,623			416,937			-			733,560
Net earnings (loss) from
operations			48,568			(116,377	)		(7,979,667	)		(8,047,476	)
Capital assets and oil and
gas interests			3,166,786			4,444,038			-			7,610,824

		Industrial &
		Offshore			Oil & Gas						2002
		Division			Division			Corporate			Total
Revenue		$	21,561,858		$	448,463		$	-		$	22,010,321
Interest expense			131,084			-			4,925			136,009
Amortization			321,991			376,622			-			698,613
Net earnings (loss) from
operations			187,642			(690,758	)		(628,254	)		(1,131,370	)
Capital assets and oil and
gas interests			2,834,859			4,501,038			-			7,335,897

In 1998 a statement of claim has been filed against the Company by a former financial adviser alleging breach of contract. The plaintiff has claimed for special damages in the amount of approximately $240,000 (US $184,197) and entitlement to a success fee of 1% of the gross debt/equity financing of the Andhra Pradesh project less up to 20% of any corporate contributions by the Company or its affiliates. Management believes that the claim is without merit and has filed a counter claim. No correspondence or activity has transpired since 2000 and management believes that the plaintiff has abandoned the litigation. No provision has been made in these financial statements for this claim.