_____________________________________________________________

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-KSB


(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 2006

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transitional period from __________________ to __________________

Commission File No. 000-28543

NOVASTAR RESOURCES LTD.
----------------------------------------------------
(Name of Small Business Issuer in Its Charter)

NEVADA
 
91-1975651
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

8300 Greensboro Drive, Suite 800
McLean, Virginia 22102
 
 
703.918.4904
(Address of Principal Executive Office)
 
(Issuer Telephone No. Including Area Code)


Securities registered under Section 12(b) of the Exchange Act: NONE
 
Securities registered under Section 12(g) of the Exchange Act: Common stock, $.001 par value
 
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes X No __
 
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes__ No X
 

The issuer’s revenues for its most recent fiscal year are $0.
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.): $70,018,308
 
The number of shares outstanding of the issuer's common stock as of September 20, 2006 is 160,476,474.
 

 
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TABLE OF CONTENTS
 

 
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FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements and information relating to Novastar Resources Ltd., that are based on the beliefs of our management as well as assumptions made by and information currently available to us. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. These statements reflect our current view concerning future events and are subject to risks, uncertainties and assumptions, including among many others: significant operating losses; limited operating history; uncertainty of capital resources; the speculative nature of our business; government regulations; operating hazards; competition; the loss of key personnel; and other factors referenced in this and previous filings. Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected.

When used in this report, the terms “Novastar,” “Company,” “we,” “our,” and “us” refer to Novastar Resources Ltd. and its subsidiary TP Acquisition Corp (“TP Acquisition”).

PART I

Item 1. DESCRIPTION OF BUSINESS.

General Overview
 
We are currently a mineral exploration company. We hold mineral leases and claims for properties located in Alabama, USA and North Queensland, Australia. These are exploration stage mineral properties prospective for thorium, platinum group metals (“Platinum Group Metals”) and other rare earth minerals (REM).
 
Our objective is to become a global supplier of thorium to the nuclear energy industry.
 
The phosphate mineral monazite, which exists as a sand, contains concentrations of thorium oxide as well as other REM. All commercially viable thorium metal is extracted from monazite.
 
Utilizing thorium based nuclear fuels has several important societal benefits, such as safety benefits, environmental benefits, and non-proliferation benefits. Thorium is more abundant, more efficient and safer to use as a reactor fuel than uranium. Also important, thorium fueled reactors leave behind very little weapons grade plutonium.
 
To this end, we acquired, and may acquire, both physical properties and rights to properties that contain monazite deposits. Properties of interest to us contain both monazite stockpiles and in ground concentrations of monazite. As of the date of this filing, we have not conducted any mining activities on any of the properties that we hold mineral leases and claims.
 
On February 14, 2006, our newly-formed, wholly-owned subsidiary, TP Acquisition Corp., and Thorium Power Inc., (“Thorium Power”) entered into a merger agreement, which was amended on June 12, 2006 and again on August 8, 2006. Under the terms of the merger agreement TP Acquisition will merge with and into Thorium Power, with Thorium Power, the surviving corporation, becoming a wholly owned subsidiary of Novastar. We expect the merger to close in October 2006.
 
After the merger with Thorium Power is consummated, we will have two different lines of business, or business segments. Our primary business segment after the merger will be research and development of proprietary nuclear fuel technology for use in nuclear power plants. This primary business line is Thorium Power’s current business. Our second business segment will be mineral exploration as described above and in more detail below.
 
 
3

 
Corporate History
 
We were incorporated under the laws of the state of Nevada on February 2, 1999, under the name of Aquistar Ventures (USA) Inc. We were organized for the purpose of exploring for and, if possible, developing mineral properties primarily in the province of Ontario, Canada, through our wholly owned subsidiary, Aquistar Ventures Inc. ("Aquistar Canada"). Aquistar Canada was incorporated under the laws of the province of British Columbia, Canada, on April 13, 1995 and is now inactive.
 
On February 2, 2001, we acquired 100% of the issued and outstanding capital stock of Custom Branded Networks, Inc. or CBN, a Delaware corporation, in exchange for 25,000,000 shares of our common stock. We then changed our name to Custom Branded Networks, Inc. on or about May 29, 2001. The business of CBN, the Delaware corporation which was our wholly-owned subsidiary, was the provision of turnkey private label Internet solutions to businesses and private organizations.
 
In May of 2003 we began actively looking for other business opportunities that would provide superior economic opportunity, and in January 2005 we retained consultants to assist in the identification of opportunities in the nuclear sector, particularly with respect to thorium fuel and technology. Effective May 10, 2005, we changed our name to Novastar Resources Ltd. During the period from September through December 2005, we entered into three agreements to acquire mining interests for two properties in Alabama and one property in Queensland, Australia. Thereafter, on February 14, 2006, we entered into the merger agreement with Thorium Power.
 
Employees
 
As of June 30, 2006, we had 2 employees, both of whom were full-time employees. We believe that our relationship with our employees is satisfactory.  
 
We use consultants with specific skills to assist with various business functions including evaluation, due diligence, acquisition initiatives, corporate governance, business development, research and development and government relations.
 
Government Regulation 
 
Mining operations and exploration activities are subject to various national, state, provincial and local laws and regulations in the United States, Canada and Australia, as well as other jurisdictions, which govern prospecting, development, mining, production, exports, taxes, labor standards, occupational health, waste disposal, protection of the environment, mine safety, hazardous substances and other matters. Based on future assay results, we will, either directly or through a service contractor, make applications for those licenses, permits and other authorizations required to conduct our exploration activities on our leases and claims located in Alabama, USA and North Queensland, Australia, respectively. To date, we have spent approximately $395,000 to conduct our mineral exploration activities.
 
Such approval may involve many levels of government (i.e. Federal, State, Provincial, County and/or City approval), and we cannot predict whether all such approvals will be successfully obtained.
 
Our exploration projects are subject to various regulations governing protection of the environment, both in North America and in Australia. These laws are continually changing and, as a general matter, are becoming more restrictive. Management intends to conduct business in a way that safeguards public health and the environment.
 
We believe that we are and will continue to be in compliance in all material respects with applicable statutes and regulations.
 
Changes to laws and regulations in the jurisdictions where we own property or may operate in the future could require additional capital expenditures and increased operating costs. We are unable to predict what additional legislation or regulatory requirements, if any, might be proposed or enacted, and how such laws could impact the economics of its projects.
 
Management expects that it will not incur material capital expenditures for environmental control facilities until it determines that the market for its minerals will support these and all costs of mining.
 

 
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Competition
 
We compete with other mining companies in connection with the acquisition of prospective properties and mineral rights. There is competition for the limited number of opportunities, some of which is with other companies having substantially greater financial resources than us. As a result, we may have difficulty acquiring attractive projects at reasonable prices.
 
We believe no single company has sufficient market power to affect the price or supply of thorium, rare earth minerals, platinum group metals or other minerals in the world market.
 
Key Developments in 2006
 
 
·
On February 14, 2006 we entered into a merger agreement with Thorium Power Inc. and we anticipate the merger to occur in October 2006.
 
 
·
We have hired a new management team and formed a technical advisory board and international advisory board, all with the capability to pursue other growth opportunities in the nuclear power industry.
 
 
·
We have been able to raise in three separate private placements approximately $17.4 million to support our business segments.
 
 
Risk Factors

WE CONTINUE TO EXPERIENCE SIGNIFICANT OPERATING LOSSES.
 
We adopted a new business model in mid-2005 to pursue the exploration of thorium and other rare earth minerals and development opportunities, and have a limited operating history in our current form. Since we reorganized our business, our operating costs have exceeded our revenue in each quarter. We incurred cumulative net losses of approximately $17,483,000 from the period June 28, 1999 (inception) to June 30, 2006. We may not be able to obtain or maintain any level of revenues in the future. If we are unsuccessful in these efforts, we may never achieve profitability.
 
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT FOR YOU TO JUDGE OUR PROSPECTS.
 
We are an exploration stage company that has a limited operating history upon which an evaluation of us, our current business and our prospects can be based. You should consider any purchase of our shares in light of the risks, expenses and problems frequently encountered by all companies in the early stages of corporate development.
 
OUR LIQUIDITY AND CAPITAL RESOURCES ARE UNCERTAIN.
 
For the twelve month period ending June 30, 2006, we had an operating loss of $13,344,535. At June 30, 2006, we had a working capital surplus of $9,966,244 During the period from July 1, 2005 through June 30, 2006, we raised approximately $17,500,000 in private placement transactions. While management expects these proceeds will meet our foreseeable needs for at least the next 12 months, we may need to raise additional capital by way of an offering of equity securities, an offering of debt securities, or by obtaining financing through a bank or other entity. If we need to obtain additional financing, that financing may not be available or we may not be able to obtain that financing on terms acceptable to us. If additional funds are raised through the issuance of equity securities, there may be a significant dilution in the value of our outstanding common stock.
 
WE FAILED TO CAUSE THE RESALE REGISTRATION STATEMENT RELATING TO OUR MAY 2006 PRIVATE PLACEMENT TO GO EFFECTIVE BEFORE THE REQUIRED EFFECTIVENESS DATE AND WE ARE CURRENTLY SUBJECT TO LIQUIDATED DAMAGES AT A RATE OF APPROXIMATELY $312,000 PER MONTH (WHICH IS PAYABLE IN CASH OR EQUITY AT THE OPTION OF THE INVESTOR) SUBJECT TO A TOTAL CAP OF $1,870,000.  WE WILL CONTINUE TO INCUR THESE LIQUIDATED DAMAGES UNTIL THE REGISTRATION STATEMENT THAT WE FILED RELATING TO THE INVESTORS' SHARES GOES EFFECTIVE.   
 
       Under the terms of a registration rights agreement entered into in connection with our May 4, 2006 private placement, we became obligated to file a resale registration statement relating to the shares sold in the placement within 15 days of the filing of our registration statement on Form S-4 relating to the securities being issued in our contemplated merger with Thorium Power. We satisfied this obligation when we filed a registration statement on Form SB-2 on June 29, 2006. The registration rights agreement requires us to, among other things, use reasonable best efforts to cause the SB-2 to be declared effective as soon as possible, but in any event not later than the earlier of (a) the 120th day following the closing date of the private placement and (b) the fifth trading day following the date on which we are notified by the SEC that the SB-2 will not be reviewed or is no longer subject to further review and comments. If the SB-2 is not declared effective within the time frame described above, then we must issue to the investors in the May 2006 private placement cash or additional units (at the investor’s option), as liquidated damages, equal to 2% of the number of units for which the investor subscribed on each monthly anniversary of the failure to be declared effective (if the failure has not been cured by such date).  If the SB-2 ceases to be effective after the date first declared effective by the SEC and prior to the expiration of the effectiveness period described in the registration rights agreement, then we must issue to each investor cash or additional units (at the investor’s option), as liquidated damages, equal to 2% of the number of units for which the investor subscribed on each monthly anniversary of the SB-2 ceasing to be effective (if the failure has not been cured by such date).  In no event, however, will the aggregate amount of cash or number of units issued as liquidated damages in the case of (a) a failure to be declared effective (as described above) or (b) the SB-2 ceasing to be effective (as described above), exceed 12% of the amount of cash paid or the number of units paid for by the investor.
 
Since the 120 day deadline for the effectiveness of the SB-2 has passed and since we do not expect the SB-2 to go effective before October 4, 2006, we expect that we will be obligated to pay the liquidated damages described above for the first two months of delay. If, for any reason, the SB-2 does not go effective in October, then liquidated damages will continue to accrue.

 
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MINERAL EXPLORATION AND DEVELOPMENT ACTIVITIES ARE SPECULATIVE IN NATURE.
 
Resource exploration and development is a speculative business, characterized by a number of significant risks including, among other things, unprofitable efforts resulting not only from the failure to discover mineral deposits but from finding mineral deposits which, though present, are insufficient in quantity and quality to return a profit from extraction. The marketability of minerals acquired or discovered by us may be affected by numerous factors which are beyond our control and which cannot be accurately predicted, such as market fluctuations, the proximity and capacity of milling facilities, mineral markets and processing equipment and such other factors as government regulations, including regulations relating to royalties, allowable production, importing and exporting of minerals and environmental protection, the combination of which factors may result in us not receiving an adequate return on investment capital.
 
Substantial expenditures are required to establish mineral reserves through drilling, to develop metallurgical processes to extract the metal from the ore and, in the case of new properties, to develop the mining and processing facilities and infrastructure at any site chosen for mining. Although substantial benefits may be derived from the discovery of a major mineralized deposit, no assurance can be given that minerals will be discovered in sufficient quantities and grades to justify commercial operations or that funds required for development can be obtained on a timely basis. Estimates of reserves, mineral deposits and production costs can also be affected by such factors as environmental permitting regulations and requirements, weather, environmental factors, unforeseen technical difficulties, unusual or unexpected geological formations and work interruptions. In addition, the grade of ore ultimately mined may differ from that indicated by drilling results. Short term factors relating to reserves, such as the need for orderly development of ore bodies or the processing of new or different grades, may also have an adverse effect on mining operations and on the results of operations. Material changes in ore reserves, grades, stripping ratios or recovery rates may affect the economic viability of any project.
 
WE ARE AN EXPLORATION STAGE COMPANY, AND THERE IS NO ASSURANCE THAT A COMMERCIALLY VIABLE DEPOSIT OR "RESERVE" EXISTS ON ANY PROPERTIES FOR WHICH WE HAVE, OR MIGHT OBTAIN, AN INTEREST.
 
We are an exploration stage company and cannot be certain that a commercially viable deposit, or “reserve,” exists on any properties for which we currently have or may have an interest. Therefore, determination of the existence of a reserve depends on appropriate and sufficient exploration work and the evaluation of legal, economic, and environmental factors. If we fail to find a commercially viable deposit on any of our properties, our financial condition and results of operations will be materially adversely affected.
 
Any potential development and production of our exploration properties depends upon the results of exploration programs and/or feasibility studies and the recommendations of duly qualified engineers and geologists. Such programs require substantial additional funds. Any decision to further expand our operations on these exploration properties is anticipated to involve consideration and evaluation of several significant factors including, but not limited to:
 
 
o
costs of bringing each property into production, including exploration work, preparation of production feasibility studies and construction of production facilities;
 
 
o
availability and costs of financing;
 
 
o
ongoing costs of production;
 
 
o
market prices for the minerals to be produced;
 

 
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o
environmental compliance regulations and restraints; and
 
 
o
political climate and/or governmental regulation and control.
 
OUR BUSINESS AND FINANCIAL CONDITION ARE SUBJECT TO THE RISKS APPLICABLE TO MINING COMPANIES GENERALLY
 
Factors beyond our control may affect the marketability of any substances discovered from any resource properties we may acquire. Metal prices have fluctuated widely in recent years. Government regulations relating to price, royalties, allowable production and importing and exporting of minerals can adversely affect us. There can be no certainty that we will be able to obtain all necessary licenses and permits that may be required to carry out exploration, development and operations on any projects we may acquire and environmental concerns about mining in general continue to be a significant challenge for all mining companies.
 
WE WILL BE SUBJECT TO OPERATING HAZARDS, COMPETITION AND DOWNWARD PRICE FLUCTUATION WHICH MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION. 
 
Mineral exploration involves many risks, which even a combination of experience, knowledge and careful evaluation may not be able to overcome. Our operations will be subject to all the hazards and risks normally incidental to exploration, development and production of metallic minerals, such as unusual or unexpected formations, cave-ins or pollution, all of which could result in work stoppages, damage to property and possible environmental damage. We do not have general liability insurance covering our operations. Payment of any liabilities as a result could have a material adverse effect upon our financial condition.
 
Significant and increasing competition exists for the limited number of mineral acquisition opportunities available. As a result of this competition, some of which is with large established mining companies with substantial capabilities and greater financial and technical resources than us, we may be unable to acquire attractive mineral properties on terms it considers acceptable.
 
We have no control over the fluctuations in the prices of the thorium and other rare earth minerals that we are exploring for. A significant decline in such prices would severely reduce our value.
 
OUR ACTIVITIES WILL BE SUBJECT TO ENVIRONMENTAL AND OTHER INDUSTRY REGULATIONS WHICH COULD HAVE AN ADVERSE EFFECT ON OUR FINANCIAL CONDITION.
 
Our activities are subject to environmental regulations promulgated by government agencies from time to time. Environmental legislation generally provides for restrictions and prohibitions on spills, releases or emissions of various substances produced in association with certain mining industry operations, which would result in environmental pollution. A breach of such legislation may result in imposition of fines and penalties. In addition, certain types of operations require the submission and approval of environmental impact assessments. Environmental legislation is evolving in a manner which means stricter standards and enforcement, fines and penalties for non-compliance are more stringent. In addition to existing laws, there can be new federal, state, or local laws banning, restricting, or taxing mining activities planned by us.
 
Environmental assessments of proposed projects carry a heightened degree of responsibility for companies and directors, officers and employees. The cost of compliance with changes in governmental regulations could have an adverse effect on our financial condition.
 
Our operations, including exploration and development activities and commencement of production on its properties require permits from various federal, state, provincial and local governmental authorities and such operations are and will be governed by laws and regulations governing prospecting, development, mining, production, exports, taxes, labor standards, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety and other matters. Companies engaged in the development and operation of mines and related facilities generally experience increased costs and delays in production and other schedules as a result of the need to comply with applicable laws, regulations and permits.
 

 
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Failure to comply with applicable laws, regulations, and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. Parties engaged in mining operations may be required to compensate those suffering loss or damage by reason of the mining activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations and, in particular, environmental laws.
 
WE RELY ON SETH GRAE AND CERTAIN OTHER KEY INDIVIDUALS AND THE LOSS OF MR. GRAE OR ANY OF THESE OTHER KEY INDIVIDUALS WOULD HAVE AN ADVERSE EFFECT ON US.
 
Our success will depend upon Seth Grae and certain other key members of the management team. Mr. Grae’s knowledge of the nuclear power industry, his network of key contacts within that industry and in government and, in particular, his expertise in the potential use of thorium as a fuel in nuclear reactors, is critical to the implementation of the prospective business model of the combined company. Mr. Grae and these other individuals are a significant factor in our future growth and success. The loss of the service of Mr. Grae or these other key members of the management team would have a material adverse effect on us. We do not have key man insurance policies relating to Seth Grae or any other key individuals and does not anticipate obtaining any such insurance.
 

Item 2. DESCRIPTION OF PROPERTY.

Mineral Property Descriptions and Mining Contracts
 
On September 14, 2005, we entered into an Assignment of Specific Mineral Rights agreement (the “AGH Assignment Agreement”) with Charles Merchant, our former Chief Executive Officer, who was conducting business under the name American Graphite Holdings (“AGH”), an Alabama sole proprietorship, under which we were assigned all of his mineral rights located on certain properties in Clay County, Alabama and commonly referred to as the Ashland Graphite Properties. In consideration of the assigned rights, we paid to AGH $100,000 in cash and issued 1,000,000 shares of restricted stock to AGH, at a deemed issued price of $0.001 per share. In addition, AGH is to receive a $15.00 per ton net royalty if thorium/monazite removed from the leased properties. In March of 2006, as contemplated by the merger agreement with Thorium Power, the parties entered into Amendment No. 1 to the AGH Assignment Agreement, whereby the parties agreed that the sole remedy available to AGH for breach of the AGH Assignment Agreement by us is the termination of the AGH Assignment Agreement, and that no further relief or recourse, whether in law, in equity or otherwise, will be available to AGH.
 
On September 30, 2005 we entered into a Mining Acquisition Agreement (the “Acquisition Agreement”) with Walter Doyle whereby we agreed to acquire an undivided 100% interest in and to any deposits of thorium, monazite and other rare earth minerals on certain mining properties in Queensland, Australia. The consideration paid by us to Mr. Doyle consisted of 5,000,000 shares of restricted stock. In February, 2006, we purchased all such shares from Mr. Doyle for $400,000 and such shares were cancelled. Under the Acquisition Agreement, we operate the property subject to the agreement, and are granted the right to prospect, explore, develop and engage in other mining work on and under the property as we deem necessary and desirable, including bringing and erecting buildings, plants, machinery and equipment. We are further permitted to remove all metals and minerals derived from our operations as necessary for testing. Pursuant to the terms of the Acquisition Agreement, Mr. Doyle is to retain 2.5% of the gross proceeds received by us in any year from the sale of thorium, monazite or rare earth minerals of commercial economic value mined from the property, and any concentrates or other materials or products derived there from, less (i) the cost of transportation to a smelter or other place of treatment and (ii) any smelter or other treatment charges. In addition, we are to incur our proportionate share of the following amounts spent on or with respect to exploration activities, to total not more than $695,000 as follows: (i) expenditures of $125,000 by December 31, 2006; (ii) expenditures of an additional $150,000 by December 31, 2007; (iii) expenditures of an additional $140,000 by December 31, 2008; (iv) expenditures of an additional $140,000 by December 31, 2009 and (v) expenditures of an additional $140,000 by December 31, 2010. In March of 2006, as contemplated by the merger agreement with Thorium Power, the parties entered into Amendment No. 1 to the Acquisition Agreement, whereby the parties agreed that the sole remedy available to Mr. Doyle for breach of the Acquisition Agreement by us is the termination of the Acquisition Agreement, and that no further relief or recourse, whether in law, in equity or otherwise, will be available to Mr. Doyle.
 

 
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    On December 31, 2005 the Company entered into an agreement with CM Properties whereby certain mineral leases in the Cleburne County District of Alabama can be assigned to the Company. The Company will assume 51% of a lease held by the lessee, who subsequently became an officer of the Company but no longer serves as an officer as of June 30, 2006, for consideration of 2,000,000 restricted common shares of the Company.  In addition, the Company must incur $1,500,000 on property expenditures and for each $100,000 in additional expenditures; the Company will receive an additional 4% interest in the lease up to a maximum of an extra 40% interest. Upon reaching a 91% interest, the lessee shall retain a 9% interest and shall receive $17.50 per ounce of pure Platinum Group Metal (PGM) produced. For each 2,500 ounces of PGM produced, the lessee shall receive an additional 1,000,000 restricted common shares of the Company, up to a maximum of 8,000,000 shares, for a period of two years from the acquisition of the Company’s 91% interest being obtainedAspects of the contract remain executory, and the company has not issued the 2,000,000 shares, while entities controlled by CM Properties continue to oversee the properties and are reimbursed by the Company for their services. In February 2006, the Company and CM Properties amended this lease agreement to make the sole remedy to CM Properties for a breach of the agreement by the Company termination of the mineral lease agreements, with no further relief or recourse against the Company. Accordingly, the balance sheet does not reflect the value of the property (this value determined by the stock value of the 2 million shares at the date of the agreement - $380,000) as an asset nor does it reflect the Company's obligation to issue the shares (valued at the stock value of $380,000) as common stock reserved for future issuance (an equity account on the balance sheet).
 
 
Other Property Descriptions
 
We are obligated to pay approximately $7,000 per month for office rent and approximately another $2,000 per month for other fees for the rented office space located at 8300 Greensboro Drive, Suite 800, McLean, Virginia 22102.  The space is used by our executives for administrative purposes.  The term of the lease expires for one office on April 30, 2007 and for the other offices in the summer of 2007.

Item 3. LEGAL PROCEEDINGS.

On March 31, 2006, the Novastar, Thorium Power and their respective officers were served, through their counsel, with a verified complaint by Raj Pamnani. Mr. Pamnani alleges that Novastar and Thorium Power and their respective officers breached an oral consulting agreement he alleges was entered into between Mr. Pamnani and Novastar and demands a combination of shares of unrestricted common stock of Novastar and payment of monetary damages in the amount of $10 million plus an additional $5 million in punitive damages. The action was filed in the Supreme Court of the State of New York, County of New York, and Novastar filed a Motion to Dismiss the complaint on May 23, 2006.  On August 8, 2006, the parties entered into a Settlement Agreement whereby Mr. Pamnani irrevocably and forever waived and released any and all claims against Novastar, Thorium Power and the other defendants named in the complaint, through the date of execution of the Settlement Agreement, in return for the issuance of 215,000 shares of common stock of Novastar, as well as warrants to purchase 107,500 shares of Novastar common stock at a price of $0.48 per share.

 
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted during the fourth quarter of our fiscal year to a vote of security holders, through the solicitation of proxies or otherwise.

 
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PART II

Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS.

Market Information
 
Our common stock is listed and traded on the OTC Bulletin Board. The following table sets forth the high and low closing per share sales prices of our common stock as reported on the OTC Bulletin Board for the quarterly fiscal periods presented below. The quotations were obtained from the OTC Bulletin Board website and reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 


FISCAL YEAR
QUARTER ENDING
HIGH
LOW
 
 
 
 
2006
June 30, 2006
$0.74
 $0.43
March 31, 2006
$0.88
$0.19
December 31, 2005
$0.28
$0.14
 
September 30, 2005
$0.29
$0.13
 
 
 
 
2005
June 30, 2005
$0.22
  $0.077
 
March 31, 2005
$0.22
 $0.09
 
December 31, 2004
$0.29
 $0.07
 
September 30, 2004
$0.04
   $0.017


Holders

As of September 20, 2006, our common stock was held by 161 stockholders of record.
 
Dividends

We have never paid dividends. While any future dividends will be determined by our directors after consideration of the earnings, financial condition and other relevant factors, it is currently expected that available cash resources will be utilized in connection with our ongoing acquisition, exploration and development programs. In certain situations where executives receive stock compensation, we may redeem a portion of the executive’s stock in order to provide the executive with the cash necessary to pay taxes relating to that executive’s stock compensation. Any such redemption would require board approval.

Section 15(g) of the Securities Exchange Act of 1934 - The Penny Stock Rules

Our shares are covered by Section 15(g) of the Securities Exchange Act of 1934, as amended that imposes additional sales practice requirements on broker/dealers who sell such securities to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouses). For transactions covered by this Section 15(g), the broker/dealer must make a special suitability determination for the purchase and have received the purchaser's written agreement to the transaction prior to the sale. Consequently, Section 15(g) may affect the ability of broker/dealers to sell our securities and also may affect your ability to sell your shares in the secondary market.

 
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Section 15(g) also imposes additional sales practice requirements on broker/dealers who sell penny securities. These rules require a one page summary of certain essential items. The items include the risk of investing in penny stocks in both public offerings and secondary marketing; terms important to in understanding of the function of the penny stock market, such as "bid" and "offer" quotes, a dealers "spread" and broker/dealer compensation; the broker/dealer compensation, the broker/dealers duties to its customers, including the disclosures required by any other penny stock disclosure rules; the customers rights and remedies in causes of fraud in penny stock transactions; and, the NASD's toll free telephone number and the central number of the North American Administrators Association, for information on the disciplinary history of broker/dealers and their associated persons.

Transfer Agent

Our transfer agent and registrar for our common stock is Computershare Investor Services, Shareholder Communications Department, 2 LaSalle Street, 3rd Floor, Chicago, IL 60602. Its telephone number is 888-243-5445 and facsimile is 212-701-7664.

Recent Sales of Unregistered Securities

Except for sales previously disclosed in quarterly reports on form 10-QSB or in a current report on Form 8-K filed by us with the Securities and Exchange Commission, we have not sold any securities without registration under the Securities Act of 1933. See Item 7 of Part II “Financial Statements - Note 9 - Share Capital” for unregistered stock issuances for the year ended June 30, 2006.

Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

The following discussion should be read in conjunction with our financial statements, together with the notes to those statements, included elsewhere in this report. The following discussion contains forward-looking statements that involve risks, uncertainties, and assumptions such as statements of our plans, objectives, expectations, and intentions. Our actual results may differ materially from those discussed in these forward-looking statements because of the risks and uncertainties inherent in future events.

Overview
 
We engage in the acquisition, exploration and evaluation of mineral rights in properties containing thorium, as well as potentially other minerals.   All commercially viable thorium metal is extracted from monazite.  The phosphate mineral monazite exists as a sand and may contain concentrations of 3.0% -12.0% thorium oxide as well as other rare earth minerals such as cerium, lanthanum, yttrium and neodymium, and platinum group metals.
 
In the future, we may acquire rights to properties that contain monazite deposits. Properties of interest to us would be both monazite stockpiles and in-ground concentrations of mineral monazite.
 
The current market for thorium is very limited. Our objective has been to become a supplier of thorium to be used in the future as fuel in nuclear energy industry. Thorium can be used to power existing nuclear reactors using fuel designs developed by Thorium Power. Thorium based nuclear fuels are believed to have several important advantages over conventional nuclear fuels, such as non-proliferation benefits, environmental benefits and possible cost and safety benefits.
 
We expect to generate revenues in the future through the sale of thorium, platinum group metals and other rare earth minerals, but we have not done so to date. We have not conducted any mining activities on any of the properties that we hold mineral leases and claims for.
 
On February 14, 2006, we and our newly-formed wholly-owned subsidiary, TP Acquisition Corp., and Thorium Power, Inc. entered into a merger agreement, which was amended on June 12, 2006 and again on August 8, 2006. Under the terms of the merger agreement TP Acquisition will merge with and into Thorium Power, with Thorium Power, the surviving corporation, becoming a wholly owned subsidiary of Novastar. We expect the merger to close in October 2006.
 

 
11



 
After the merger with Thorium Power is consummated, we will have two different lines of business or business segments. Our primary business segment after the merger will be research and development of proprietary nuclear fuel technology for use in nuclear power plants. This primary business segment is Thorium Power’s current business. Our second business segment is mineral exploration as described above and in more detail below.
 
Outlook
 
As of the date of this report, there is not significant global demand for thorium as a source of nuclear fuel. We believe that there will be significant increases in demand for thorium at some future point; however, we are unable to predict when or if this will occur.
 
The International Atomic Energy Agency (IAEA), a United Nations organization, submitted an official report on the thorium nuclear fuel cycle in May of 2005. On July 6, 2005 we issued a press release commenting on this report. The IAEA report publicly promotes the significant benefits of thorium as a nuclear fuel. In addition, on page # 91 of its report, the IAEA recommended that companies augment the exploration and mining of thorium to insure the availability of sufficient supplies of reactor grade thorium.
 
To date, we have invested $1,350,000 in Thorium Power and upon consummation of the merger, we will acquire Thorium Power and it will become our wholly-owned subsidiary.
 
We have worked with the government relations firm Capitol Project Partners, LLC, to inform government officials on the value of thorium and a thorium nuclear fuel cycle.
 
In addition to the acquisition of thorium properties and mineral rights, we believe that we may have potential revenue opportunities to supplement our business since other metals of commercial significance can be extracted from our properties. These would include platinum group metals and rare earth minerals of the yttrium group. Rare earth minerals can be divided into two groups: the yttrium group, containing yttrium, lanthanum, cerium, neodymium, and the dysprosium group, containing europium, gadolinium, terbium, dysprosium, holmium, and erbium. Mineral monazite only contains concentrations of rare earth minerals classified in the yttrium group.
 
Management believes that our properties may also contain zirconium oxide. Zirconium metal is used as an alloy to coat metal parts to provide heat and corrosion resistance. It is widely used in nuclear reactors and management believes that there may be a growing use in the automotive industry to replace chrome. Management believes that platinum may also be present on our properties. Platinum may be used to coat machinery parts to impart wear resistance and to electronic components to enhance electrical conductivity. Platinum is also widely used in the automotive industry for catalytic converters and in the jewelry industry.
 
We may process and stockpile rare earth minerals as a by-product of mining and refining mineral monazite into thorium oxide. We intend to identify potential buyers of rare earth minerals both in the United States and abroad. With approximately 80% of world rare earth metals production sourced from the Peoples' Republic of China and no rare earth mineral mines operating in North America, rare earth minerals may become an important strategic commodity. We believe that there may be short and intermediate term revenue generating opportunities from sales of rare earth minerals. Some of the commercial applications for rare earth minerals include, but are not limited to:
 
 
o
industrial super alloys used in the aerospace and nuclear industries
 
 
o
crystals manufactured for the production of lasers
 
 
o
the refining of petroleum products
 
 
o
in magnetic refrigeration technology
 

 
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o
as catalysts used in the manufacture of fuel-cells
 
 
o
in cellular phones and other wireless equipment
 
 
o
magnetic plastic technology used in computer data memory devices
 
 
o
fiber-optic lines and to color, polarize and polish glass
 
 
o
the creation of high temperature superconductors
 
 
o
catalytic converters for the automotive industry
 
We have not taken any core samples from the properties located in Australia. No further mineral property descriptions are available for public dissemination at this time.
 
Plan of Operation

If the merger with Thorium Power is not consummated, then it will be very difficult for us to effect our business plan. Major cash commitments in the next fiscal year are related to the funding of Thorium Power’s business, corporate administration and operations, and proposed exploration activities.
 
At June 30, 2006, our total assets were $16,589,832. Liabilities as of June 30, 2006 totaled $5,273,588. We had working capital surplus of $9,966,244 at June 30, 2006.

On May 4, 2006, we closed a $15,000,000 private placement (raised $15,580,431) for the purpose of acquiring, exploring and developing thorium and rare earth minerals properties as well as to assist us in connection with the planned acquisition of Thorium Power and the development of Thorium Power’s business.
 
While management expects these proceeds and our present working capital will meet our foreseeable needs for at least the next 12 months, we may need to raise additional capital by way of an offering of equity securities, an offering of debt securities, or by obtaining financing through a bank or other entity. If we need to obtain additional financing, that financing may not be available or we may not be able to obtain that financing on terms acceptable to us. If additional funds are raised through the issuance of equity securities, there may be a significant dilution in the value of our outstanding common stock.
 
In the next 12-24 months we expect to incur Research and Development expenses related to Thorium Power Inc,’s development of its patents for its proprietary nuclear fuel design.

 
13

 
Results of Operations - Fiscal Year Ended June 30, 2006 and 2005
 
Summary
 
The following table summarizes the results of our operations during the fiscal year ended June 30, 2006 and 2005 and provides information regarding the dollar and percentage increase or (decrease) from the 2006 fiscal year to the 2005 fiscal year.
 

Line Item
 
6/30/06
 
6/30/05
 
Increase (Decrease)
 
Percentage Increase (Decrease)
 
                   
Revenues
   $
0
   $
0
   $
0
   %
0
 
Operating expenses
   
13,147,485
   
2,691,516
   
10,455,969
   
388
 
Other income (expense) - net
   
(197,050
)
 
0
   
197,050
   
-
 
Net loss
   
13,344,535
   
2,691,516
   
10,653,019
   
396
 
 Loss per common share    $
.12
   $ .05    $
.07
   %
140
 
 
 
Revenues

We did not generate any revenue during the fiscal year ended June 30, 2006 and we do not anticipate generating any revenue in the next 12 months from our present business segment or from the new business segment that we will aquire when we close the merger with Thorium Power.

Operating Expenses
 
Cash used for operating expenses totaled approximately $1,246,000, with the remaining amount attributable to expenses paid for by equity issuances.
Operating expenses increased $10,455,969 due primarily to:

 
·
Payroll expenses and related fringe benefits increased $116,436 due to the hiring of additional key management. We increased our payroll and related fringe benefits costs in our first fiscal quarter ended September 30, 2006, as we have hired an additional 6 employees.

 
·
Professional fees expense increased approximately $672,000 due primarily to legal fees incurred in connection with the upcoming merger with Thorium Power, Inc and financing activities. We anticipate that our legal fees will decrease once we are able to complete the merger with Thorium Power Inc., unless we engage in other financing or acquisition activities.
 
 
·
Travel, business development, and public relations expense increased $93,385. We anticipate that our travel, business development and public relations expense will increase as we continue to promote our business and seek other opportunities in the nuclear industry.
  
 
·
Consulting expense increased $3,466,600, which included costs associated with finance, geological work, government advocacy work, technical advisory board, and international advisory board.
 
 
·
Stock Based Compensation was $4,949,729, which included stock and stock option grants to our executive officers and advisory board members. Our implementation of SFAS No. 123R (a modification to the existing standard - SFAS No. 123) in 2006 (see notes to the financial statements), changed the way we account for Stock-Based Compensation in 2006, and required us to record expenses for equity instruments for which we would not have been required to report under SFAS No. 123.
 
 
·
We incurred a net impairment loss of $670,544 on the mineral property acquisition costs, as we wrote off the entire amounts expended to acquire the rights to mine properties in Alabama and Australia. This impairment was based on management's assessment of future projected undiscounted and discounted cash flows from the properties.
 
 
·
Mineral exploration costs increased $394,516 due to our exploration activities in our mining operations.
 
 
·
Director and officer liability insurance expense increased $91,506 due to liability insurance related to the merger agreement
 
Other income (expense)

Changes in Fair Value of Warrants:

 
·
We recorded a warrant liability in the amount of $3,678,278 for the fair value of warrants accruing under a Registration Rights Agreement entered into on May 4, 2006 (see Item 7 of Part II, “Financial Statements—Note 9(ii) —Share Capital”). The change in the fair value of the warrants, from May 4, 2006 to June 30, 2006 was a loss recorded of $139,220.

 
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Interest and Dividend income increased $80,571 for the year ended June 30, 2006. This increase is due to the increase in our cash balances, due to the 3 private placements that we completed during our fiscal year.

Legal Settlement expense increased $146,445 due the settlement of one lawsuit.

Research and Development Activities

In the next 12-24 months we expect in incur Research and Development expenses related to Thorium Power Inc,’s development of its patents for its proprietary nuclear fuel design.

Cash Flows - Fiscal Year Ended June 30, 2006 and 2005

Cash Flows
 
We used $1,246,314 in cash from our operating activities during the year ended June 30, 2006 as compared to $7,079 used in the prior year. The difference of $1,239,235 which is attributable to the following factors:

 
·
Increased overhead expenses attributable to the addition of key management and staff.

 
·
Payroll expenses and related fringe benefits increased $116,436 due to the hiring of additional key management and staff. We increased our payroll and related fringe benefits costs in our first fiscal quarter ended September 30, 2006, as we have hired an additional 6 employees.

 
·
Professional fees expense increased $672,000 due primarily to legal fees incurred in connection with the upcoming merger with Thorium Power, Inc and financing activities. We anticipate that our legal fees will decrease once we are able to complete the merger with Thorium Power Inc., unless we engage in other financing or acquisition activities.
 
 
·
Travel, business development, and public relations expense increased $93,385. We anticipate that our travel, business development and public relations expense will increase as we continue to promote our business and seek other opportunities in the Nuclear Industry.

 
·
Other general and administrative expenses increased $358,000 which consisted primarily of insurance expense, other office expenses which were offset by a payable due to Thorium Power Inc.


We used $1,350,000 in cash from our investing activities during the year ended June 30, 2006 as compared to $0 used in the prior year. This increase is due to our investment in Thorium Power Inc. (see Item 7 of Part II, “Financial Statements—Note 5 —Investment/Due to Thorium Power Inc.”)
 
We received $17,026,919 from financing activities during the year ended June 30, 2006 as compared to $7,881 during the prior year. This increase is due primarily to an increase in sales of our securities through private placements. (see Item 7 of Part II, “Financial Statements—Note 9(i) (g), Note 9(i) (t) and Note 9 (ii)—Share Capital”)
 
For further information on the cumulative cash flows from June 28, 1999 (Inception) to June 30, 2006 see Item 7 of Part II, “Financial Statements”, Consolidated Statements of Cash Flows”.

Liquidity and Capital Resources
 
At June 30, 2006, our total assets were $16,589,832. Liabilities as of June 30, 2006 totaled $5,273,588. We had working capital surplus of $9,966,244 at June 30, 2006.
 
On May 4, 2006, we closed a $15,000,000 private placement (raised $15,580,431) for the purpose of acquiring, exploring and developing Thorium and rare earth minerals properties as well as to assist us in connection with the planned acquisition of Thorium Power and the development of Thorium Power’s business. 
 

 
15


 
While management expects these proceeds will meet our foreseeable needs for at least the next 12 months, we may need to raise additional capital by way of an offering of equity securities, an offering of debt securities, or by obtaining financing through a bank or other entity. If we need to obtain additional financing, that financing may not be available or we may not be able to obtain that financing on terms acceptable to us. If additional funds are raised through the issuance of equity securities, there may be a significant dilution in the value of our outstanding common stock.
 
Major cash commitments in the next fiscal year are related to the funding of Thorium Power’s business, corporate administration and operations, and proposed exploration activities.
 
Off Balance Sheet Arrangements
 
We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.
 
Seasonality
 
Our business has not been subject to any material seasonal variations in operations, although this may change in the future.
 
Inflation
 
As a development stage company, our business, revenues and operating results have not been affected in any material way by inflation. If and when it begins marketing thorium and other minerals, management expects its business will be affected by inflation and commodity price volatility.
 
Critical Accounting Policies
 
The Securities and Exchange Commission issued Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" suggesting that companies provide additional disclosure and commentary on their most critical accounting policies. In Financial Reporting Release No. 60, the Securities and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the following significant policies as critical to the understanding of its financial statements.
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make a variety of estimates and assumptions that affect (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and (ii) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements.
 
Our management expects to make judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increase, these judgments become even more subjective and complex. Although we believe that our estimates and assumptions are reasonable, actual results may differ significantly from these estimates. Changes in estimates and assumptions based upon actual results may have a material impact on our results of operation and/or financial condition. We have identified certain accounting policies that we believe are most important to the portrayal of our current financial condition and results of operations. Our significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in its Annual Report on Form 10-KSB.
 
 
16

 
Mineral Property Exploration and Acquisition Costs
      Costs of acquiring property concessions and exploration costs will be capitalized by project area when a production decision is made in respect to the project and we are reasonably assured that it will receive regulatory approval to permit mining operations. Costs to maintain the property concessions and leases are expensed as incurred. When a property concession reaches the production stage, the related capitalized costs will be amortized, using the units of production method on the basis of periodic estimates of ore reserves. To date no property concessions have reached production stage.
 
Property concessions will be periodically assessed for impairment of value and any diminution in value is charged to operations at the time of impairment. Should a property concession be abandoned, its capitalized costs will be charged to operations. Our charges to operations the allocable portion of capitalized costs attributable to property concessions sold. Capitalized costs will be allocated to property concessions abandoned or sold based on the proportion of claims abandoned or sold to the claims remaining within the project area.
 
Deferred tax assets and liabilities
 
We will recognize the expected future tax benefit from deferred tax assets when the tax benefit is considered to be more likely than not of being realized. Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, our ability to realize deferred tax assets could be impacted. Additionally, future changes in tax laws in the jurisdictions in which we operate could limit our ability to obtain the future tax benefits.
 
Property and equipment
 
Property and equipment are stated at cost. Depreciation is provided using the straight-line or accelerated methods over the estimated useful lives of the assets. The useful lives of property, plant and equipment for purposes of computing depreciation are five to seven years for equipment, and 39 years for buildings.
 
We evaluate the recoverability of property and equipment when events and circumstances indicate that such assets might be impaired. We determine impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying amounts. Maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized. The cost and related reserves of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in results of operations.
 
Accounting for Stock Based Compensation, Stock Options and Warrants Granted to Employees and Nonemployees
 
We currently report stock issued to employees under the rules of SFAS No. 123R.
 
The options were valued using the Black-Scholes option pricing model. The assumptions used were as follows: volatility of 279% to 284%, a risk-free interest rate of 4.30% to 4.35% and an exercise term of five years.
 
Environmental Matters
 
When it is probable that costs associated with environmental remediation obligations will be incurred and they are reasonably estimable, we will accrue such costs at the most likely estimate. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study for such facility and are charged to provisions for closed operations and environmental matters. We periodically review our accrued liabilities for such remediation costs as evidence becomes available indicating that its remediation liability has potentially changed. Costs of future expenditures for environmental remediation are not discounted to their present value unless subject to a contractually obligated fixed payment schedule. Such costs are based on our current estimate of amounts that are expected to be incurred when the remediation work is performed within current laws and regulations. Recoveries of environmental remediation costs from other parties will be recorded as assets when their receipt is deemed probable.
 

 
17



 
Future remediation costs for inactive mines will be accrued based on management’s best estimate at the end of each period of the undiscounted costs expected to be incurred. Such costs estimates include, where applicable, ongoing care, maintenance and monitoring costs. Changes in estimates are reflected in earnings in the period an estimate is revised.
 
Accounting for reclamation and remediation obligations requires management to make estimates unique to each mining operation of the future costs we will incur to complete the reclamation and remediation work required to comply with existing laws and regulations. Actual costs incurred in future periods could differ from amounts estimated. Additionally, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work required. Any such increases in future costs could materially impact the amounts charged to earnings. At March 31, 2005 and the years ended June 30,2006 and 2005, we had no accrual for reclamation and remediation obligations because management cannot make a reasonable estimate. Any reclamation or remediation costs related to abandoned concessions has been previously expensed.
 

Item 7. FINANCIAL STATEMENTS.

See the index to our financial statements and our financial statements following the Signature Page and Certifications at the end of this Annual Report on Form 10-KSB.

Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

There have been no disagreements regarding accounting and financial disclosure matters with our independent certified public accountants.

Item 8A. CONTROLS AND PROCEDURES.

As required by Rule 13a-15 under the Exchange Act, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as of the end of the period covered by this report on Form 10-KSB. This evaluation was carried out under the supervision and with the participation of our management, including Seth Grae, our President and Chief Executive Officer, and Larry Goldman, our acting Chief Financial Officer. Based upon that evaluation, management concluded that the our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is accumulated and communicated to management (including the chief executive officer and chief financial officer) to allow timely decisions regarding required disclosure and that our disclosure controls and procedures are effective to give reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.

There were no changes in our internal control over financial reporting identified in connection with the evaluation performed that occurred during the fiscal year covered by this report that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive and acting Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.
 
 
 
18


PART III

Item 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
             COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

Directors and Executive Officers
 
Set forth below are the names of our current directors, officers and significant employees, their ages, all positions and offices that they hold with us, the period during which they have served as such, and their business experience during at least the last five years.

SETH GRAE. Mr. Grae, age 43, was named the Chief Executive Officer and President of Novastar on March 17, 2006, and effective April 2, 2006, became a director of Novastar.
 
Mr. Grae is the President, the Chief Executive Officer and a director of Thorium Power. Mr. Grae has played an active role in all business activities of Thorium Power since its inception in 1992. Mr. Grae led the efforts that resulted in Thorium Power’s project at the Kurchatov Institute becoming one of the first grant recipients from the United States Department of Energy (“DOE”) for nuclear non-proliferation-related work in Russia. He is a member of the board of directors of the Bulletin of the Atomic Scientists and has served as co-chair of the American Bar Association’s Committee on Arms Control and Disarmament. As a former member of the board of directors of the Lawyers Alliance for World Security, Mr. Grae helped advise on the drafting of nuclear export control regulations in China and Belarus, and he participated in consultations with the government of India on nuclear power and weapons. On a pro bono basis, he represented refuseniks, who were nuclear scientists, in securing exit visas from the Soviet Union. Mr. Grae obtained his B.A. from Brandeis University cum laude, J.D. from American University, LL.M. in International Law with honors from Georgetown University and M.B.A. from Georgetown University. He has been admitted to the bars of New York, Connecticut, and Florida (all now inactive).
 
THOMAS GRAHAM, JR. Ambassador Graham, age 72, became a director of Novastar on April 2, 2006, and chairman of the board of directors on April 4, 2006.
 
Ambassador Graham is one of the world’s leading experts in nuclear non-proliferation. He is Chairman of the Board of the Cypress Fund for Peace and Security. Ambassador Graham has served as a senior U.S. diplomat involved in the negotiation of every major international arms control and non-proliferation agreement for the past 35 years, including the Strategic Arms Limitations Talks (SALT), Strategic Arms Reduction Talks (START Treaties), Anti-Ballistic Missile (ABM) Treaty, Intermediate Nuclear Forces (INF) Treaty, Nuclear Non-Proliferation Treaty (NPT), Conventional Armed Forces in Europe (CFE) Treaty and Comprehensive Test Ban Treaty (CTBT). In 1993, Ambassador Graham served as the Acting Director of the U.S. Arms Control and Disarmament Agency (ACDA), and for seven months in 1994 served as the Acting Deputy Director. From 1994 through 1997, he served as the Special Representative of the President of the United States for Arms Control, Non-Proliferation and Disarmament, and in this capacity successfully led U.S. government efforts to achieve the permanent extension of the NPT. He also served for 15 years as the general counsel of ACDA. Ambassador Graham worked on the negotiation of the Chemical Weapon Convention and the Biological Weapons Convention. He drafted the implementing legislation for the Biological Weapons Convention and managed the Senate approval of the ratification of the Geneva Protocol banning the use in war of chemical and biological weapons. He is also Chairman of the Board of Mexco Energy Corporation, an oil and gas exploration company listed on the American Stock Exchange (stock ticker symbol MXC). Ambassador Graham received an A.B. in 1955 from Princeton and a J.D. in 1961 from Harvard University. He is a member of the Kentucky, the District of Columbia and the New York Bars and is a member of the Council on Foreign Relations. He chaired the Committee on Arms Control and Disarmament of the American Bar Association from 1986-1994. Ambassador Graham received the Trainor Award for Distinction in Diplomacy from Georgetown University in 1995.
 
CORNELIUS J. MILMOE. Mr. Milmoe, age 59, became a director of Novastar on April 2, 2006 and he was appointed the Chief Operating Officer of Novastar on April 4, 2006.
 
Mr. Milmoe served as General Counsel for General Electric’s nuclear fuel business that provided nuclear fuel fabrication, software and design services to 50 nuclear reactors in the U.S., Europe, Japan, Mexico and Taiwan. At GE Nuclear Fuel, Mr. Milmoe led legal negotiations for all reactor reload contracts (valued at $30 to $300 million each), created a joint venture with Hitachi and Toshiba to build a $70 million modern fuel processing plant that reduced costs by 30% and environmental effluents by 90%, and created a marketing joint venture with ENUSA that led to GE Nuclear Fuel’s first fuel sales at plants in Germany and Finland. Since leaving GE in 2000, Mr. Milmoe has run his own consulting firm that has included GE as a major client, focusing on international energy transactions. Mr. Milmoe formed a project team to recover low enriched uranium for fuel fabrication from uranium concentrates at the Ulba Metallurgical plant in Kazakhstan. The DOE-supported project team included GE, Brookhaven National Laboratory, Massachusetts Institute of Technology, Kazatomprom and RWE Nukem. Mr. Milmoe’s other projects include construction of a copper-beryllium alloy processing plant in Kazakhstan, sourcing zirconium components in Russia for Western nuclear power plants and R&D agreements for advanced nuclear technologies. Mr. Milmoe’s firm has also received contracts to improve DOE reporting and management of all projects relating to the implementation of President Bush’s National Energy Policy and DOE’s international energy agreements, particularly science and technology agreements and nuclear non-proliferation agreements. Mr. Milmoe earned his B.A. from Colgate University in 1969 and earned his J.D. from Columbia University Law School and was admitted to the bar in 1974. From 1974 to 1980, Mr. Milmoe served as Staff Attorney and Special Assistant to the New York Public Service Commission. From 1980 to 1994, Mr. Milmoe served as a counsel in the following divisions of General Electric: GE Naval & Small Steam Turbines, GE Aircraft Engines, GE Government Services, GE Automated Systems, GE Aircraft Instruments, GE Armament Systems and GE Silicones.
 

 
19

 
 
VICTOR E. ALESSI. Dr. Alessi, age 66, became a director of Novastar on August 23, 2006.
 
Dr. Victor E. Alessi is President Emeritus of the United States Industry Coalition (“USIC”), an organization dedicated to facilitating the commercialization of technologies of the New Independent States (“NIS”) of the former Soviet Union through cooperation with its members. He has held such position since August 1, 2006; prior to becoming President Emeritus, Dr. Alessi held the positions of CEO and President of USIC since 1999. Previously, he was President of DynMeridian, a subsidiary of DynCorp, specializing in arms control, nonproliferation, and international security affairs. Before joining DynMeridian in early 1996, Dr. Alessi was the Executive Assistant to the Director, U.S. Arms Control and Disarmament Agency (“ACDA”). At ACDA he resolved inter-bureau disputes, and advised the Director on all arms control and nonproliferation issues. Dr. Alessi served as Director of the Office of Arms Control and Nonproliferation in the Department of Energy (“DOE”) prior to his work at ACDA, overseeing all DOE arms control and nonproliferation activities. As a senior DOE representative, Dr. Alessi participated in U.S. efforts that led to successful conclusion of the Intermediate Nuclear Forces (INF), Conventional Forces in Europe, Threshold Test Ban, Peaceful Nuclear Explosions, Open Skies, Strategic Arms Reductions Talks Treaties and the Chemical Weapons Convention. In this role, he was instrumental in implementing the U.S. unilateral nuclear initiative in 1991 and was a member of the U.S. delegation discussing nuclear disarmament with Russia and other states of the former Soviet Union. He was in charge of DOE’s support to the U.N. Special Commission on Iraq, to the Nunn-Lugar Initiative, and represented DOE in discussions on the Comprehensive Test Ban (“CTB”) with the other nuclear weapons states before the CTB negotiations began in Geneva in 1994. Dr. Alessi has been the U.S. board member to the International Science and Technology Center in Moscow since its founding. He is also the U.S. board member to the Science and Technology Center in Ukraine. Dr. Alessi is a 1963 graduate of Fordham University, where he also earned a licentiate in Philosophy (Ph.L.) in 1964. He studied nuclear physics at Georgetown University, receiving his M.S. in 1968 and Ph.D. in 1969.

LARRY GOLDMAN. Mr. Goldman, age 50, became the Treasurer and Acting Chief Financial Officer of Novastar on June 13, 2006.
 
Mr. Goldman is a certified public accountant with over 20 years of auditing, consulting and technical experience as a partner in a mid-size New York City based accounting firm, working with a wide variety of companies, assisting them in streamlining their operations and increasing profitability. Prior to joining Novastar, Mr. Goldman worked as the Chief Financial Officer, Treasurer and Vice President of Finance of WinWin Gaming, Inc. (OTCBB: WNWN), a multi-media developer and publisher of sports, lottery and other games. Prior to joining WinWin, in October 2004, Mr. Goldman was a partner at Livingston Wachtell & Co., LLP and had been with that firm for the past 19 years. Mr. Goldman is also an independent director and audit committee chairman of Winner Medical Group Inc. (OTCBB: WMDG.OB), a China based manufacturer of medical disposable products and surgical dressings. Mr. Goldman has extensive experience in both auditing and consulting with public companies, and has experience providing accounting and consulting services to the Asian marketplace, having audited several Chinese public companies.
 
 
20

 
ANDREY MUSHAKOV. Mr. Mushakov, age 29, became the Executive Vice President - International Nuclear Operations of Novastar on July 27, 2006.
 
Mr. Mushakov is Treasurer and Secretary of Thorium Power and has held these positions since April 2002 and July 2003 respectively. He is the primary liaison between Thorium Power and the Kurchatov Institute in Moscow. Mr. Mushakov has expertise in financial analysis, financial planning and budgeting, financial reporting and accounting, structuring business transactions, and government contract negotiations. In 2004, Mr. Mushakov led successful negotiations with officials from the National Nuclear Security Administration and Oak Ridge National Laboratory (ORNL) that resulted in signing of a $3.5 million government contract between ORNL and Kurchatov Institute for work relating to the Thorium Power's nuclear fuel development effort in Russia. His prior experience includes finance-related work in the banking and construction sectors. Mr. Mushakov has the following degrees: PhD in Economics from St. Petersburg State University of Economics and Finance (Russia), MS in Management with excellence (MBA equivalent) from Hult International Business School (formerly the Arthur D. Little School of Management), where he was enrolled as a recipient of the Russian President's Scholarship, and BS in Banking and Finance with honors from the Finance Academy of Russia.
 
There are no agreements or understandings for any of our executive officers or directors to resign at the request of another person and no officer or director is acting on behalf of nor will any of them act at the direction of any other person.

Directors are elected until their successors are duly elected and qualified.

To the best of our knowledge, except as set forth herein, none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC. None of the directors, director designees or executive officers to our knowledge has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement.

Committees and Board Meetings

We do not have a standing audit, nominating or compensation committee or any committee performing a similar function although we intend to form such committees in the near future.

Audit Committee and Audit Committee Financial Expert

We do not currently have an audit committee financial expert, nor do we have an audit committee. Our entire board of directors, which currently consists of Mr. Grae, Amb. Graham, Mr. Milmoe and Mr. Alessi, handles the functions that would otherwise be handled by an audit committee. We are currently looking to add an additional director to the board of directors to serve in the capacity of an audit committee financial expert, though no agreement has been reached with any possible candidate. Additionally, prior to retaining any such expert, our board would make a determination as to whether such person is independent.

Director Compensation
 
We currently have only one independent director, Vic Alessi. Mr. Alessi became a director of the Company on August 21, 2006. Pursuant to the Independent Director Contract between Mr. Alessi and the Company, Mr. Alessi receives $40,000 in cash per year for acting as a director of Novastar. In addition, Mr. Alessi was granted non-qualified options to purchase up to 500,000 shares of the common stock of the Company which shall vest with respect to 1/36 of the total number of shares on September 21, 2006; the remaining shares will subsequently vest 1/36 on the first day of each month thereafter until all options have vested

Except for Mr. Alessi, all of our current directors are also our officers and are compensated for the services that they provide to us in their capacity as officers. Other than Mr. Alessi, our current directors do not receive any additional compensation for the services they provide to us as directors. Directors are reimbursed for out of pocket expenses incurred as a result of their participation on our board.

 
21



We intend to compensate independent directors that are elected or appointed to our board in the future in a manner that is consistent with Mr. Alessi’s compensation as described above.

Family Relationships
 
There are no family relationships among our directors or officers.

Code of Ethics
 
Effective October 13, 2004, our Company's Board of Directors adopted a Code of Business Conduct and Ethics that applies to, among other persons, our company's President and Secretary (being our principal executive officer, principal financial officer and principal accounting officer), as well as persons performing similar functions. As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote:

1. honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

2. full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us;

3. compliance with applicable governmental laws, rules and regulations;
 
4. the prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics; and
 
5. accountability for adherence to the Code of Business Conduct and Ethics.
 
Our Code of Business Conduct and Ethics requires, among other things, that all of our company's Senior Officers commit to timely, accurate and consistent disclosure of information; that they maintain confidential information; and that they act with honesty and integrity.
 
In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly Senior Officers, have a responsibility for maintaining financial integrity within our company, consistent with generally accepted accounting principles, and federal and state securities laws. Any Senior Officer who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to our company. Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter. It is against our company policy to retaliate against any individual who reports in good faith the violation or potential violation of our company's Code of Business Conduct and Ethics by another.

Our Code of Business Conduct and Ethics as filed with the Securities and Exchange Commission is incorporated by reference as Exhibit 14.1 to our annual report on Form 10-KSB file with the Commission on November 25, 2005. We will provide a copy of the Code of Business Conduct and Ethics to any person without charge, upon request. Requests can be sent to: Novastar Resources Ltd., 8300 Greensboro Drive, Suite 800 McLean, Virginia 22102.

Compliance with Section 16(a) of the Securities Exchange Act

Section 16(a) of the Exchange Act, as amended, requires our executive officers, directors and persons who beneficially own more than 10% of our shares of common stock to file reports of their beneficial ownership and changes in ownership (Forms 3, 4 and 5, and any amendment thereto) with the SEC. Executive officers, directors, and greater-than-ten percent holders are required to furnish us with copies of all Section 16(a) forms they file.
 

 
22



Based solely upon a review of the Forms 3, 4, and 5 furnished to us for the fiscal year ended June 30, 2006, we have determined that our directors, officers, and greater than 10% beneficial owners, except as provided below, complied with all applicable Section 16 filing requirements.

Thomas Graham, Jr. was late in filing a Form 3 and a transaction on Form 4. Sean Mulhearn was late in filing a Form 3. Chris Davis was late in filing a Form 3. Cornelius J. Milmoe was late in filing a Form 3. Charles Merchant was late in filing a Form 3 and a transaction on Form 4.


Item 10. EXECUTIVE COMPENSATION.

The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to our Chief Executive Officers, for services during the last three fiscal years in all capacities to us, our subsidiaries and predecessors. No executive officer received compensation of $100,000 or more in any of the last three fiscal years.
 
SUMMARY COMPENSATION TABLE
 
 
         
LONG TERM COMPENSATION
   
ANNUAL COMPENSATION
AWARDS
PAYOUTS
Name And
Principal Position
Year
Salary(1)
($)
Bonus
($)
Other
Annual
Compensation
($) (4)
Restricted
Stock
Award(s)
($)
Securities
Under-Lying Options/SARs (#)
LTIP Payouts ($)
 
All Other Compensation
($)
Paul Carter (1)
Chief Executive Officer, President, Chairman and Director
2006
$0
$0
$0
$0
$0
$0
$0
2005
$0
$0
$40,000
$0
$0
$0
$0
2004
$0
$0
$0
$0
$0
$0
$0
Charles H. Merchant (2)
Interim Chief Executive Officer and Chief Operating Officer
2006
$0
$0
$0
$127,500
$0
$0
$0
2005
$0
$0
$0
$0
$0
$0
$0
2004
$0
$0
$0
$0
$0
$0
$0
Seth Grae (3)
Chief Executive Officer, President and Director
2006
$29,762
$0
$0
$4,150,000
$647,133
$0
$0
2005
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2004
N/A
N/A
N/A
N/A
N/A
N/A
N/A


 
 

 
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(1)
Mr. Carter served as Novastar’s Chief Executive Officer from 2002 until December 1, 2005.
 
(2)
Mr. Merchant served as Novastar’s interim Chief Executive Officer from December 1, 2005 until March 17, 2006.
 
(3)
Mr. Grae was named the Chief Executive Officer and President of Novastar on March 17, 2006, and effective April 2, 2006, became a director of Novastar.
 
(4)
The value of perquisites and other personal benefits, securities and property for the named executive officers that do not exceed the lesser of $1,000 or 10% of the total of the annual salary and bonus is not reported herein.
 
Bonuses and Deferred Compensation
 
Novastar has no retirement, pension or profit sharing program for the benefit of its directors, officers or other employees, but the board of directors may recommend one or more such programs for adoption in the future.
 

Options and Stock Appreciation Rights
 
OPTION GRANTS IN LAST FISCAL YEAR
 
 
 

 
 
Name
Number of
Securities Underlying Options Granted (1)
% of Total Options Granted To Employees in the Fiscal Year
 
Exercise Price
 
 
Expiration Date
Paul Carter
0
N/A
N/A
N/A
 
 
 
 
 
Charles H. Merchant
0
N/A
N/A
N/A
 
 
 
 
 
Seth Grae
7,200,000
69%
$0.80
February 14, 2016

 
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AGGREGATED NOVASTAR OPTION EXERCISES IN LAST FISCAL YEAR-END
AND FISCAL YEAR-END OPTION VALUES TABLE
The following table contains information concerning the number of shares acquired and value realized from the exercise of options by the named executive officers during fiscal 2006 and the number of unexercised options held by the named executive officers at June 30, 2006.
 
 
 
 
Number of Shares of Common Stock Underlying Unexercised Options at Year End June 30, 2006
Value of Unexpected In-The-Money Options at
Year End June 30, 2006 (1)
Name
Shares Acquired on Exercise
Value Realized ($)
Exercisable
Unexercisable
Exercisable
Unexercisable
Paul Carter
0
N/A
N/A
N/A
N/A
N/A
 
 
 
 
 
 
 
Charles H. Merchant
0
N/A
N/A
N/A
N/A
N/A
 
 
 
 
 
 
 
Seth Grae
0
N/A
1,650,000
5,550,000
$0
$0
____________________
(1) Options are "in-the-money" if the market price of a share of common stock exceeds the exercise price of the option.

OPTION/SAR GRANTS 
 
Effective February 14, 2006, Novastar adopted its 2006 Stock Plan. The 2006 Stock Plan provides for grants of restricted shares of common stock and grants of stock options. Under the terms of the 2006 Stock Plan, as amended on July 17, 2006, Novastar Resources may grant a maximum of 75 million shares of common stock, to consist of no more than 75 million shares issuable under incentive stock options and no more than 37.5 million restricted shares of common stock. The maximum number of restricted shares that may be granted to one individual in any fiscal year is five million shares, and the maximum number of options that may be granted to one individual in any fiscal year is eight million shares. Since adopting the 2006 Stock Plan, Novastar has granted to date a total of 19,225,000 options to its officers, directors and advisory board members.
 
Prior to the 2006 Stock Plan, the Novastar board of directors chose to make option or warrant awards to select officers, directors, consultants, or stockholder/investors in order to induce them to assist it in implementing its business model and to provide long term additional incentive. These options or warrants, as awarded, were not awarded pursuant to a plan but were specific individual awards with varying terms and conditions. In some instances, the board of directors reserved the right to cancel these awards for non-performance or other reasons, or established a vesting schedule pursuant to which the award is earned.
 
 
Employment Contracts and Termination of Employment and Change-in-Control Arrangements
On February 14, 2006, Novastar and Seth Grae entered into an employment agreement whereby Mr. Grae became Chief Executive Officer and President of the Company. Pursuant to the employment agreement, Novastar has agreed to pay Mr. Grae an annual salary of $275,000 for performing the duties described in the employment agreement. In addition, Novastar issued to Mr. Grae pursuant to the agreement 5,000,000 shares of restricted stock and granted to Mr. Grae 7,200,000 non-qualified stock options, with a term of ten years at an exercise price of $0.795 per share. The options vest with respect to 6/48 of the total number of shares granted on August 14, 2006 and vest 1/48 on the first day of each month thereafter until all options have vested. The 5,000,000 shares of restricted stock vest immediately on issuance but 2,500,000 may not be directly or indirectly sold, transferred or otherwise disposed of for a period of one year and the remaining 2,500,000 for a period of two years, except for sales, transfers or other dispositions made to family members, for estate planning purposes, or pursuant to a qualified domestic relations order. The shares will also be subject to the provisions of Rule 144 promulgated under the Securities Act. Mr. Grae was named CEO of Novastar on March 17, 2006, though the agreement did not take effect until April 2, 2006, the date that Novastar obtained D&O liability insurance coverage, and the agreement terminates on April 2, 2011 the fifth anniversary of the date of the agreement.

       On June 5, 2006, the Company entered into a definitive employment agreement with Cornelius J. Milmoe, the Chief Operating Officer and a Director of the Company. Under the terms of the agreement, the Company agreed to pay Mr. Milmoe an annual salary of $200,000, as consideration for performance of his duties as Chief Operating Officer. Mr. Milmoe was paid an amount equal to a 75% pro rata share of his annual salary, as consideration for services already performed by him on behalf of the Company from April 3, 2006 through May 1, 2006. In addition, the Company has agreed (i) to issue to Mr. Milmoe, 75,000 (37,500 restricted) shares of the common stock the Company and (ii) to grant to Mr. Milmoe an incentive ten-year option for the purchase of 525,000 shares of the common stock the Company, at an exercise price of $0.465 per share. The initial term of the Mr. Milmoe’s employment agreement will be one year and but will automatically be extended for additional one-year periods unless terminated by either party in accordance with its terms and conditions.

Pursuant to a consulting agreement dated June 13, 2006, Larry Goldman became Novastar's Treasurer and Acting Chief Financial Officer. Mr. Goldman owns a total of 75,000 restricted shares of Novastar Common Stock, which were issued upon entry into the consulting agreement with Mr. Goldman. Mr. Goldman receives hourly compensation of $170.00 for services provided to Novastar, subject to a maximum of ten hours per day. The contract includes payment for a minimum of 40 hours per month. The contract can be terminated by Novastar at any time, but Novastar must provide at least 180 days advance written notice. Pursuant to the consulting agreement, Mr. Goldman was granted nonqualified options for the purchase of an additional 350,000 shares of Novastar common stock pursuant to Novastar's 2006 stock plan. Upon consummation of the merger, Mr. Goldman will own a total of 75,000 shares of Novastar common stock and options to purchase a total of 350,000 shares of Novastar common stock.
 
 
25


 
On July 27, 2006, Ambassador Graham entered into an employment and stock option agreement with Novastar. Under the employment agreement, Ambassador Graham acts as the Chairman and Secretary of Novastar. Pursuant to the employment agreement, Novastar has agreed to pay Ambassador Graham an annual salary of $130,000 for part-time employment of an average of three out of five business days per week or 24 hours of his business time per week. In addition, Novastar granted to Ambassador Graham non-qualified stock options for the purchase of 1,500,000 shares, with a term of ten years at an exercise price of $0.49 per share. The options vest in equal monthly installments over a three year period. Ambassador Graham owns a total of 40,025 shares of Thorium Power common stock and options to purchase 100,000 shares of Thorium Power common stock at an exercise price of $10 per share. Ambassador Graham owns 190,000 shares of Novastar common stock. Upon consummation of the merger, Ambassador Graham will own a total of 1,215,761 shares of Novastar common stock and he will own options to purchase 4,062,800 shares of Novastar common stock.

On July 27, 2006, Mr. Mushakov entered into an employment and stock option agreement with Novastar. Under the employment agreement, Mr. Mushakov was appointed as the Executive Vice President - International Nuclear Operations. Pursuant to the employment agreement, Novastar has agreed to pay Mr. Mushakov an annual salary of $160,000 for performing the duties described in the agreement. In addition, Novastar issued to Mr. Mushakov, pursuant to the agreement, 1,500,000 shares of restricted stock and granted Mr. Mushakov 2,250,000 non-qualified stock options with a term of ten years at an exercise price of $0.49 per share. On July 27, 2006, 234,375 options vested and the remaining 2,015,625 options will vest in equal monthly installments. The 1,500,000 shares of restricted stock vest immediately on issuance, but 750,000 may not be directly or indirectly sold, transferred or otherwise disposed of for a period of one year and the remaining 750,000 for a period of two years, except for sales, transfers or other dispositions made to family members for estate planning purposes or pursuant to a qualified domestic relations order. Mr. Mushakov owns options to purchase a total of 37,500 shares of Thorium Power common stock. Upon consummation of the merger, Mr. Mushakov will own 1,500,000 shares of Novastar common stock and 3,211,050 options to purchase shares of Novastar common stock.
 
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth certain information with respect to the beneficial ownership of our common stock as of August 1, 2006 by:
 
 
o
each security holder known by us to be the beneficial owner of more than 5% of our outstanding common stock;
 
 
o
each current director;
 
 
o
each of our named executive officers listed in the table under the caption “Executive Compensation” and
 
 
o
all current directors and executive officers as a group.
 
Unless otherwise specified, the address of each of the persons set forth below is in care of Novastar Resources Ltd., 8300 Greensboro Drive, Suite 800, McLean, VA 22102.

Name and Address of Beneficial Owner(1)
Amount and Nature of
Beneficial Ownership(1
Percent of
Common Stock(2)
Seth Grae
7,050,000
4.5%
Andrey Mushakov
1,828,125
1.2%
Thomas Graham, Jr.
273,333
*
Cornelius J. Milmoe
75,000
*
Larry Goldman
75,000
*
OTC Investments Ltd.
1710-1177 West Hastings Street
Vancouver, BC V6E 2L3 Canada
15,000,000
9.6%
Directors and Officers as a Group (five people)
9,301,458
5.9%
 
____________________
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares of Novastar common stock.
(2) A total of 156,411,474 shares of Novastar common stock are considered to be outstanding pursuant to Rule 13d-3(d)(1) under the Securities Exchange Act of 1934. For each beneficial owner above, any options exercisable within 60 days have been included in the denominator.

Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

On December 1, 2005, the Company granted Chris Davis, the President of OTC Investments Ltd, which holds 9.6% of the outstanding shares of common stock of the Company, 2,000,000 shares of its common stock as compensation for certain consulting services. The fair market value of the shares on the date on which they were granted to Mr. Davis was $0.17 per share, for a total value of $340,000.
 
      See Item 7 of Part II, “Financial Statements—Notes 7(i)(b) and 7(i)(c) for information relating to transactions entered into with our prior Chief Executive Officer, Mr. Merchant.

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Item 13. EXHIBITS.

The following exhibits are filed with this report, except those indicated as having previously been filed with the Securities and Exchange Commission and are incorporated by reference to another report, registration statement or form. As to any shareholder of record requesting a copy of this report, we will furnish any exhibit indicated in the list below as filed with this report upon payment to us of our expenses in furnishing the information.

Exhibit Number
 
 
Description
3.1
Articles of Incorporation (incorporated by reference from Novastar’s Registration Statement on Form 10-SB filed on December 17, 1999).
3.2
By-laws (incorporated by reference from Novastar’s Current Report on Form 8-K filed on September 18, 2006).
4.1
2005 Compensation Plan for Outside Consultants of Custom Brand Networks, Inc. dated March 1, 2005 (incorporated by reference from Novastar’s Registration Statement on Form S-8 filed on March 10, 2005).
4.2
2005 Augmented Compensation Plan for Outside Consultants of Novastar Resources Ltd. dated August 15, 2005 (incorporated by reference from Novastar’s Registration Statement on Form S-8 filed on August 19, 2005).
4.3
2006 Stock Plan (incorporated by reference to Exhibit 10.1 of the current report of Novastar on Form 8-K filed February 21, 2006)
10.1
Consulting Agreement dated October 15, 2004 between Custom Branded Networks, Inc. and Walter Doyle (incorporated by reference from Novastar’s Registration Statement on Form S-8 filed on October 19, 2004).
10.2
Consulting Agreement dated October 15, 2004 between Custom Branded Networks, Inc. and Adam Harrison (incorporated by reference from Novastar’s Registration Statement on Form S-8 filed on October 19, 2004).
10.3
Consulting Agreement dated October 15, 2004 between Custom Branded Networks, Inc. and Tim Lelek (incorporated by reference from Novastar’s Registration Statement on Form S-8 filed on October 19, 2004).

 
27



10.4
Consulting Agreement dated October 15, 2004 between Custom Branded Networks, Inc. and Bruce Fearn (incorporated by reference from Novastar’s Registration Statement on Form S-8 filed on October 19, 2004).
10.5
 
Compensation Agreement dated October 15, 2004 between Custom Branded Networks, Inc. and Paul G. Carter (incorporated by reference from Novastar’s Registration Statement on Form S-8 filed on October 19, 2004).
10.6
Consulting Agreement dated January 24, 2005 between Custom Branded Networks, Inc. and Walter Doyle (incorporated by reference from Novastar’s Registration Statement on Form S-8 filed on January 27, 2005).
10.7
 
Consulting Agreement dated January 24, 2005 between Custom Branded Networks, Inc. and Sanjeev Pamnani (incorporated by reference from Novastar’s Registration Statement on Form S-8 filed on January 27, 2005).
10.8
Consulting Agreement dated January 24, 2005 between Custom Branded Networks, Inc. and Seth Shaw (incorporated by reference from Novastar’s Registration Statement on Form S-8 filed on January 27, 2005).
10.9
Assignment of Specific Mineral Rights dated September 14, 2005 between American Graphite Holdings and Novastar Resources Ltd. (incorporated by reference from Novastar’s Current Report on Form 8-K filed on October 11, 2005).
10.10
 
Amendment No. 1, dated March 5, 2006, to Assignment of Specific Mineral Rights between American Graphite Holdings and Novastar Resources Ltd. (incorporated by reference from Exhibit 10.10 of the initial filing of this Registration Statement on Form S-4 filed June 14, 2006).
10.11
Mining Acquisition Agreement dated September 30, 2005 between Walter Doyle and Novastar Resources Ltd. (incorporated by reference from Novastar’s Current Report on Form 8-K filed on October 11, 2005).
10.12
 
Amendment No. 1, dated March 5, 2006, to Mining Acquisition Agreement between Walter Doyle and Novastar Resources Ltd. (incorporated by reference from Exhibit 10.12 of the initial filing of this Registration Statement on Form S-4 filed June 14, 2006).
10.13
 
Agreement and Plan of Merger dated as of February 14, 2006, between Novastar Resources Ltd., TP Acquisition Corp. and Thorium Power Inc. (incorporated by reference from Novastar’s Current Report on Form 8-K filed on June 13, 2006).
10.14
Amendment No. 1, dated June 9, 2006, to Agreement and Plan of Merger between Novastar Resources Ltd., TP Acquisition Corp. and Thorium Power Inc. (incorporated by reference to Exhibit 10.1 of the current report of Novastar on Form 8-K filed June 13, 2006).
10.15
Employment Agreement, dated as of February 14, 2006, between Novastar and Seth Grae (incorporated by reference to Exhibit 10.2 of the current report of Novastar on Form 8-K filed February 21, 2006)
10.16
Stock Option Agreement, dated as of February 14, 2006, between Novastar and Seth Grae (incorporated by reference to Exhibit 10.3 of the current report of Novastar on Form 8-K filed February 21, 2006)
10.17
Subscription Agreement, dated as of February 14, 2006, between Novastar and Thorium Power (incorporated by reference to Exhibit 10.4 of the current report of Novastar on Form 8-K filed February 21, 2006)
10.18
 
Amended and Restated Consulting Agreement, dated February 6, 2006, between Novastar and Alan Gelband (incorporated by reference to Exhibit 10.5 of the current report of Novastar on Form 8-K filed February 21, 2006)

 
28



10.19
 
Form of Subscription Agreement between Novastar and the investors in the private placement closed on February 14, 2006 (incorporated by reference to Exhibit 10.6 of the current report of Novastar on Form 8-K filed February 21, 2006)
10.20
 
Assignment of Minerals Lease, dated December 31, 2005, between CM Properties and Novastar Resources Ltd. (incorporated by reference to Exhibit 10.1 of the current report of Novastar on Form 8-K filed January 10, 2006)
10.21
 
Amendment No. 1 to Assignment of Minerals Lease, dated March 5, 2006 between CM Properties and Novastar Resources Ltd. (incorporated by reference from Exhibit 10.21 of the initial filing of this Registration Statement on Form S-4 filed June 14, 2006).
10.22
 
Office Service Renewal Agreement, dated September 21, 2005, between Tysons Business Center, LLC and Thorium Power (incorporated by reference from Exhibit 10.22 of the initial filing of this Registration Statement on Form S-4 filed June 14, 2006).
10.23
Sublease Agreement, dated May 28, 2004, between Thorium Power and Carmen & Muss, P.L.L.C. (incorporated by reference from Exhibit 10.23 of the initial filing of this Registration Statement on Form S-4 filed June 14, 2006).
10.24
 
Office Building Lease, dated August 14, 2001, between Washington Real Estate Investment Trust and Thorium Power (incorporated by reference from Exhibit 10.24 of the initial filing of this Registration Statement on Form S-4 filed June 14, 2006).
10.25
 
Teaming Agreement dated February 22, 2006 between The University of Texas System, The University of Texas of the Permian Basin, The University of Texas at Austin, The University of Texas at Arlington, The University of Texas at Dallas, The University of Texas at El Paso, The City of Andrews, Texas, Andrews County, Texas, the Midland Development Corporation, the Odessa Development Corporation, Thorium Power and General Atomics (incorporated by reference from Exhibit 10.25 of the initial filing of this Registration Statement on Form S-4 filed June 14, 2006).
10.26
Amendment No. 1 to Amended and Restated Consulting Agreement, dated June 12, 2006, among Novastar Resources, Ltd., Alan Gelband and Alan Gelband Company, Inc. (incorporated by reference to Exhibit 10.1 of the current report of Novastar on Form 8-K filed June 13, 2006).
10.27
Employment Agreement, dated June 6, 2006, between Novastar Resources, Ltd. and Cornelius J. Milmoe (incorporated by reference to Exhibit 10.1 of the current report of Novastar on Form 8-K filed June 13, 2006).
10.28
Stock Option Agreement, dated June 6, 2006, between Novastar Resources, Ltd. and Cornelius J. Milmoe (incorporated by reference to Exhibit 10.1 of the current report of Novastar on Form 8-K filed June 13, 2006).
10.29
Consulting Agreement, dated June 12, 2006, between Novastar Resources, Ltd. and Larry Goldman (incorporated by reference to Exhibit 10.1 of the current report of Novastar on Form 8-K filed June 13, 2006).
10.30
Stock Option Agreement, dated June 12, 2006, between Novastar Resources, Ltd. and Larry Goldman (incorporated by reference to Exhibit 10.1 of the current report of Novastar on Form 8-K filed June 13, 2006).
10.31
 
Office Service Agreement, dated April 19, 2006, between Tysons Business Center LLC and Novastar Resources Ltd. (incorporated by reference from Exhibit 10.31 of the initial filing of this Registration Statement on Form S-4 filed June 14, 2006).

 
29



10.32
Employment Agreement, dated July 27, 2006, between Novastar Resources, Ltd. and Andrey Mushakov (incorporated by reference to Exhibit 10.1 of the current report of Novastar on Form 8-K filed August 4, 2006).
10.33
Stock Option Agreement, dated July 27, 2006, between Novastar Resources, Ltd. and Andrey Mushakov (incorporated by reference to Exhibit 10.2 of the current report of Novastar on Form 8-K filed August 4, 2006).
10.34
Employment Agreement, dated July 27, 2006, between Novastar Resources, Ltd. and Thomas Graham, Jr. (incorporated by reference to Exhibit 10.3 of the current report of Novastar on Form 8-K filed August 4, 2006).
10.35
Stock Option Agreement, dated July 27, 2006, between Novastar Resources, Ltd. and Thomas Graham, Jr. (incorporated by reference to Exhibit 10.4 of the current report of Novastar on Form 8-K filed August 4, 2006).
10.36
 
Amendment No. 2, dated August 8, 2006, to Agreement and Plan of Merger between Novastar Resources Ltd., TP Acquisition Corp. and Thorium Power Inc. (incorporated by reference to Exhibit 10.1 of the current report of Novastar on Form 8-K filed August 9, 2006).
10.37
 
Independent Director Contract, dated August 21, 2006, between Novastar Resources, Ltd. and Victor Alessi (incorporated by reference to Exhibit 10.1 of the current report of Novastar on Form 8-K filed August 25, 2006).
10.38
Stock Option Agreement, dated August 21, 2006, between Novastar Resources, Ltd. and Victor Alessi (incorporated by reference to Exhibit 10.2 of the current report of Novastar on Form 8-K filed August 25, 2006).
14.1
Code of Ethics (incorporated by reference from Novastar’s Annual Report on Form 10-KSB filed on November 25, 2005).
16.1
Letter from Morgan and Company dated September 14, 2005 regarding change in independent accountant (incorporated by reference from Novastar’s Current Report on Form 8-K filed on October 11, 2005).
23.1*
Consent of Telford Sadovnick, P.L.L.C.
31.1*
Rule 13a-14(a)/15d-14(a) Certification - Principal Executive Officer
31.2*
Rule 13a-14(a)/15d-14(a) Certification - Principal Accounting Officer
32*
Section 1350 Certifications

* Filed herewith
 
 
30


 
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees
 
The aggregate fees billed for the last two fiscal years for professional services rendered by the principal accountant for the audit of the Company's annual financial statements and review of financial statements included in the Company's Form 10-QSBs or services that are normally provided by the accountant in connection with statutory and regulatory engagements for those fiscal years were:

2006 - $28,500



2005 - $10,000
 
Audit - Related Fees
 
The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountants that are reasonably related to the performance of the audit or review of the Company's financial statements and are not reported in the preceding paragraph:
 
2006 - $0
2005 - $0
 
Tax Fees
 
The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning was:
 
2006 - $0
2005 - $0
 
All Other Fees
 
The aggregate fees billed in each of the last two fiscal years for the products and services provided by the principal accountant, other than the services reported in paragraphs (1), (2), and (3) was:
 
2006 - $0
2005 - $0


Pre-Approval Policies and Procedures

In September 2006, our Board of Directors adopted a resolution in accordance with the Sarbanes-Oxley Act of 2002 requiring pre-approval of all auditing services and all audit related, tax or other services not prohibited under Section 10A(g) of the Securities Exchange Act of 1934, as amended, to be performed for the Corporation by its auditor, Telford Sadovnick P.L.L.C., subject to the de minimus exception described in Section 10A(i)(1)(B) of the Exchange Act.


 
31


SIGNATURES

In accordance with section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report on Form 10-KSB to be signed on its behalf by the undersigned, thereto duly authorized individual.

Date: September 27, 2006

NOVASTAR RESOURCES LTD.


/s/ Seth Grae
By: 
Seth Grae
Chief Executive Officer,
President and Director

In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


SIGNATURE
TITLE
/s/ Seth Grae   
Seth Grae
Chief Executive Officer, President and Director
(Principal Executive Officer)
/s/ Larry Goldman  
Larry Goldman
Acting Chief Financial Officer and Treasurer
(Principal Financial Officer)
/s/ Thomas Graham, Jr. 
Thomas Graham, Jr.
Director
/s/ Cornelius J. Milmoe 
Cornelius J. Milmoe
Director
/s/ Victor Alessi   
Victor Alessi
Director

 





32


AUDITED FINANCIAL STATEMENTS

NOVASTAR RESOURCES LTD
(A Development Stage Company)

JUNE 30, 2006




TABLE OF CONTENTS

   Page
F-2
  
 
F-3
   
F-4
 
 
F-5
   
F-6
 
F-10
   
Unaudited Pro Forma Balance Sheet - June 30, 2006
 F-42
   
Unaudited Pro Forma Statement of Operations - June 30, 2006
 F-43


 




F-1



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Novastar Resources Ltd.
(An Exploration Stage Company)

We have audited the accompanying consolidated balance sheets of Novastar Resources Ltd. (the “Company”) (an Exploration Stage Company) as at June 30, 2006 and 2005, the related consolidated statements of operations and cash flows for the years then ended and for the cumulative period from June 28, 1999 (inception) to June 30, 2006 and the related consolidated stockholders’ deficiency for the cumulative period from June 28, 1999 (inception) to June 30, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the Company’s cumulative data from June 28, 1999 (inception) to June 30, 2004 in the consolidated statements of operations, stockholders’ deficiency and cash flows, which were audited by other auditors whose report, dated September 27, 2004, which expressed an unqualified opinion, has been furnished to us. Our opinion, insofar as it relates to the amounts included for cumulative data from June 28, 1999 (inception) to June 30, 2004, is based solely on the report of the other auditors
.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Novastar Resources Ltd. (an Exploration Stage Company) as at June 30, 2006 and 2005 and the results of its operations and its cash flows for the years then ended, and for the period from June 28, 1999 (inception) to June 30, 2006 in conformity with accounting principles generally accepted in the United States of America.


/s/ TELFORD SADOVNICK, P.L.L.C.
CERTIFIED PUBLIC ACCOUNTANTS

Bellingham, Washington
September 20, 2006

 
 
F-2


 

NOVASTAR RESOURCES LTD.
(An Exploration Stage Company)

CONSOLIDATED BALANCE SHEETS
 

   
June 30
 
   
2006
 
2005
 
ASSETS
         
           
Current assets:
         
Cash and cash equivalents
 
$
14,431,407
 
$
802
 
Prepaid expenses and other current assets
   
808,425
   
-
 
Total current assets
   
15,239,832
   
802
 
               
Investment - Thorium Power Inc.
   
1,350,000
   
-
 
               
Total assets
 
$
16,589,832
 
$
802
 
               
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
             
               
Current liabilities:
             
Accounts payable
 
$
463,354
 
$
121,438
 
Accrued liabilities
   
103,541
   
103,542
 
Due to related parties
   
128,675
   
-
 
Due to Thorium Power Inc.
   
264,740
   
-
 
Warrant Liability - Note 9(ii)
   
3,678,278
   
-
 
Accrued payroll tax liability
   
635,000
   
-
 
Total Current Liabilities
   
5,273,588
   
224,980
 
               
Total Liabilities
   
5,273,588
   
224,980
 
               
Commitments - Note 13
             
               
Common Stock With Registration Rights - Note 9(ii):
             
Common Stock subject to continuing registration, $0.001 par value, 36,659,837 shares issued and outstanding at June 30, 2006
(2005 - 0 shares)
   
12,041,373
   
-
 
               
STOCKHOLDERS’ DEFICIENCY
             
               
Preferred stock, $0.001 par value; 50,000,000 authorized shares; no shares issued and outstanding 
   
-
    -  
Voting Common stock, $0.001 par value; 250,000,000 authorized shares; 118,101,637 shares issued and outstanding
( 2005 - 86,072,532)
   
118,101
   
86,073
 
Additional paid-in capital
   
14,913,153
   
4,328,081
 
Deferred Stock Compensation
   
(83,328
)
 
(499,967
)
Common Stock and Warrants Reserved for Future Issuance
   
1,807,445
   
-
 
Accumulated Deficit
   
(17,482,900
)
 
(4,138,365
)
Accumulated Other Comprehensive Income
   
2,400
   
-
 
               
Total Stockholders’ Deficiency
   
(725,129
)
 
(224,178
)
               
Total Liabilities and Stockholders’ Deficiency
 
$
16,589,832
 
$
802
 

 


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


F-3

NOVASTAR RESOURCES LTD.
(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS


   
Years Ended
 
Cumulative Period from
 June 28, 1999
(Inception) to
 
   
June 30
 
June 30
 
   
2006
 
2005
 
2006
 
Revenue
 
$
-
 
$
-
 
$
184,162
 
                     
Operating Expenses
                   
Consulting
   
5,770,133
   
2,303,533
   
8,268,046
 
Forgiveness of debt
   
-
   
(169,818
)
 
(169,818
)
General and administrative
   
1,362,563
   
114,988
   
2,714,493
 
Impairment loss - equipment
   
-
   
-
   
12,445
 
Impairment loss - Mineral property acquisition costs
   
670,544
   
-
   
720,544
 
Interest attributable to beneficial conversion feature for notes payable
   
-
   
442,813
   
580,057
 
Mineral property exploration expenses
   
394,516
   
-
   
394,516
 
Stock-based compensation
   
4,949,729
   
-
   
4,949,729
 
     
13,147,485
   
2,691,516
   
17,470,012
 
                     
Operating Loss
   
(13,147,485
)
 
(2,691,516
)
 
(17,285,850
)
                     
Other Income and Expenses
                   
Dividend income
   
8,136
   
-
   
8,136
 
Interest income
   
72,435
   
-
   
72,435
 
Legal Settlement
   
(146,445
)
 
-
   
(146,445
)
Loss on fair value of warrant derivatives
   
(139,220
)
 
-
   
(139,220
)
Other income
   
8,044
   
-
   
8,044
 
                     
Net Loss
 
$
(13,344,535
)
$
(2,691,516
)
$
(17,482,900
)
                     
                     
Net Loss Per Common Share, Basic and diluted
 
$
(0.12
)
$
(0.05
)
        
                     
                     
Weighted Average Number Of Common Shares
                   
Outstanding
   
111,913,155
   
57,188,970
           


 

The accompanying notes are an integral part of these consolidated financial statements.
 
F-4

NOVASTAR RESOURCES LTD.
(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
 
   
Years Ended
 
Cumulative Period from 
June 28, 1999 (Inception) to
 
   
June 30
 
June 30
 
   
2006
 
2005
 
2006
 
Operating Activities
             
Loss for the year
 
$
(13,344,535
)
$
(2,691,516
)
$
(17,482,900
)
Adjustments to reconcile net loss from operations to net cash used in operating activities:
                   
Shares issued for other than cash for payment of expences
   
10,686,652
   
2,339,533
   
13,071,185
 
Loss on fair value of warrant liability
   
139,220
   
-
   
139,220
 
Interest attributable to beneficial conversion feature
                   
for notes payable
   
-
   
442,813
   
580,057
 
Amortization of equipment
   
-
   
774
   
3,813
 
Impairment loss - mineral property acquisition costs
   
670,544
   
-
   
670,544
 
Forgiveness of debt
   
-
   
(169,818
)
 
(169,818
)
Impairment loss - equipment
   
-
   
-
   
12,445
 
Unrealized gain on investment
   
2,400
   
-
   
2,400
 
Changes in non-cash operating working capital items:
                   
Prepaid expenses and other current liabilities
   
(808,425
)
 
-
   
(808,425
)
Accounts payable and accrued liabilities
   
379,415
   
71,135
   
859,454
 
Due to related party
   
128,675
   
-
   
42,756
 
Due to Thorium Power Inc.
   
264,740
   
-
   
264,740
 
Accrued payroll tax liability
   
635,000
   
-
   
635,000
 
Net Cash (Used In) Operating Activities
   
(1,246,314
)
 
(7,079
)
 
(2,179,529
)
                     
Investing Activities
                   
Purchase of equipment
   
-
   
-
   
(1,808
)
Acquisition of long-term investment
   
(1,350,000
)
 
-
   
(1,350,000
)
Net Cash (Used In) Investing Activities
   
(1,350,000
)
 
-
   
(1,351,808
)
                     
Financing Activities
                   
Proceeds from loan payable to shareholder
   
-
   
-
   
16,097
 
Issue of common shares
   
1,846,488
   
-
   
1,865,438
 
Net proceeds from issuance of common stock with registration rights
   
15,580,431
   
-
   
15,580,431
 
Cash paid for redemption of shares
   
(400,000
)
 
-
   
(400,000
)
Advances on notes payable
   
-
   
7,881
   
900,000
 
Cash acquired on acquisition of subsidiary
   
-
   
-
   
778
 
Net Cash Provided By Financing Activities
   
17,026,919
   
7,881
   
17,962,744
 
                     
Net Increase In Cash and Cash Equivalents
   
14,430,605
   
802
   
14,431,407
 
                     
Cash and Cash Equivalents, Beginning Of Period
   
802
   
-
   
-
 
                     
Cash and Cash Equivalents, End Of Period
 
$
14,431,407
 
$
802
 
$
14,431,407
 
                     
Supplemental Disclosure of Cash Flow Information
                   
Cash paid during the year:
                   
Interest paid
 
$
-
 
$
-
 
$
-
 
Income taxes paid
 
$
-
 
$
-
 
$
-
 
        Other (Note 12)
                            

 

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


F-5

NOVASTAR RESOURCES LTD.
(An Exploration Stage Company)

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
PERIOD FROM JUNE 28, 1999 (INCEPTION) TO JUNE 30, 2006

 
   
Common Stock
 
Additional Paid-in
 
Deferred
 
Common Stock and Warrants Reserved for Future
 
Accumulated
 
Accumulated Other Comprehensive
     
   
Shares
 
Amount
 
Capital
 
Compensation
 
Issuance
 
Deficit
 
Income
 
Total
 
                                   
Issuance of shares to founders
   
3,465
 
$
3
 
$
18,947
 
$
-
 
$
-
 
$
-
 
$
-
 
$
18,950
 
Net loss for the period
   
-
   
-
   
-
   
-
   
-
   
(159,909
)
 
-
   
(159,909
)
                                                   
Balance, June 30, 2000
   
3,465
   
3
   
18,947
   
-
   
-
   
(159,909
)
 
-
   
(140,959
)
                                                   
Repurchase of common stock by consideration of forgiveness of loan payable to shareholder
   
(1,445
)
 
(1
)
 
16,098
   
-
   
-
   
-
   
-
   
16,097
 
     
2,020
   
2
   
35,045
   
-
   
-
   
(159,909
)
 
-
   
(124,862
)
Adjustment to number of shares issued and outstanding as a result of the reverse take-over transaction -
                                                 
Custom Branded Networks, Inc.
   
(2,020
)
 
(2
)
 
2
   
-
   
-
   
-
   
-
   
-
 
Aquistar Ventures (USA) Inc.
   
15,463,008
   
15,463
   
(15,463
)
 
-
   
-
   
-
   
-
   
-
 
     
15,463,008
   
15,463
   
19,584
   
-
   
-
   
(159,909
)
 
-
   
(124,862
)
Shares allotted in connection with the acquisition of Custom Branded Networks, Inc.
   
25,000,000
   
25,000
   
(9,772
)
 
-
   
-
   
-
   
-
   
15,228
 
Less: Allotted and not yet issued
   
(8,090,476
)
 
(8,090
)
 
8,090
   
-
   
-
   
-
   
-
   
-
 
Common stock conversion rights
   
-
   
-
   
421,214
   
-
   
-
   
-
   
-
   
421,214
 
Net loss for the year
   
-
   
-
   
-
   
-
   
-
   
(723,239
)
 
-
   
(723,239
)
                                                   
Balance, June 30, 2001
   
32,372,532
   
32,373
   
439,116
   
-
   
-
   
(883,148
)
 
-
   
(411,659
)


 




F-6

NOVASTAR RESOURCES LTD.
(An Exploration Stage Company)

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY (Continued)
PERIOD FROM JUNE 28, 1999 (INCEPTION) TO JUNE 30, 2006


   
Common Stock
 
Additional Paid-in
 
Deferred
 
Common Stock and Warrants Reserved for Future
 
Accumulated
 
Accumulated Other Comprehensive
     
 
 
Shares
 
Amount
 
Capital
 
Compensation
 
Issuance
 
Deficit
 
Income
 
Total
 
                                   
Balance, June 30, 2001
   
32,372,532
 
$
32,373
 
$
439,116
 
$
-
 
$
-
 
$
(883,148
)
$
-
 
$
(411,659
)
                                                   
Additional shares issued in connection with the acquisition of Custom Branded Networks, Inc.
   
1,500,000
   
1,500
   
(1,500
)
 
-
   
-
   
-
   
-
   
-
 
Common stock conversion rights
   
-
   
-
   
109,748
   
-
   
-
   
-
   
-
   
109,748
 
Net loss for the year
   
-
   
-
   
-
   
-
   
-
   
(326,038
)
 
-
   
(326,038
)
                                                   
Balance, June 30, 2002
   
33,872,532
   
33,873
   
547,364
   
-
   
-
   
(1,209,186
)
 
-
   
(627,949
)
                                                   
Issue of common stock for deferred compensation expense
   
4,500,000
   
4,500
   
40,500
   
(45,000
)
 
-
   
-
   
-
   
-
 
Amortization of deferred compensation
   
-
   
-
   
-
   
22,500
   
-
   
-
   
-
   
22,500
 
Common stock conversion rights
   
-
   
-
   
45,116
   
-
   
-
   
-
   
-
   
45,116
 
Net loss for the year
   
-
   
-
   
-
   
-
   
-
   
(142,233
)
 
-
   
(142,233
)
                                                   
Balance, June 30, 2003
   
38,372,532
   
38,373
   
632,980
   
(22,500
)
 
-
   
(1,351,419
)
 
-
   
(702,566
)
                                                   
Amortization of deferred compensation
   
-
   
-
   
-
   
22,500
   
-
   
-
   
-
   
22,500
 
Common stock conversion rights
   
-
   
-
   
3,301
   
-
   
-
   
-
   
-
   
3,301
 
Net loss for the year
   
-
   
-
   
-
   
-
   
-
   
(95,430
)
 
-
   
(95,430
)
                                                   
Balance, June 30, 2004
   
38,372,532
   
38,373
   
636,281
   
-
   
-
   
(1,446,849
)
 
-
   
(772,195
)
                                                   
Issue of common stock for services
   
14,800,000
   
14,800
   
901,200
   
-
   
-
   
-
   
-
   
916,000
 
Issue of common stock for convertible notes
    20,000,000      20,000      484,166     
-
   
-
   
-
   
-
    504,166   
Issue of warrants for convertible notes
   
-
   
-
   
495,834
   
-
   
-
   
-
   
-
   
495,834
 
Issue of common stock for services
   
11,600,000
   
11,600
   
1,583,900
   
(598,000
)
 
-
   
-
   
-
   
997,500
 
Issue of common stock for services
   
1,300,000
   
1,300
   
226,700
   
-
   
-
   
-
   
-
   
228,000
 
Amortization of deferred compensation
   
-
   
-
   
-
   
98,033
   
-
   
-
   
-
   
98,033
 
Net loss for the year
   
-
   
-
   
-
   
-
   
-
   
(2,691,516
)
 
-
   
(2,691,516
)
                                                   
Balance, June 30, 2005
   
86,072,532
   
86,073
   
4,328,081
   
(499,967
)
 
-
   
(4,138,365
)
 
-
   
(224,178
)
 
 

 
F-7

NOVASTAR RESOURCES LTD.
(An Exploration Stage Company)

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY (Continued)
PERIOD FROM JUNE 28, 1999 (INCEPTION) TO JUNE 30, 2006


   
Common Stock
 
Additional Paid-in
 
Deferred
 
Common Stock and Warrants Reserved for Future
 
Accumulated
 
Accumulated Other Comprehensive
     
   
Shares
 
Amount
 
Capital
 
Compensation
 
Issuance
 
Deficit
 
Income
 
Total
 
                                   
Balance, June 30, 2005
   
86,072,532
 
$
86,073
 
$
4,328,081
 
$
(499,967
)
$
-
 
$
(4,138,365
)
$
-
 
$
(224,178
)
                                                   
Issuance of common stock for services
   
17,610,776
   
17,611
   
3,679,269
   
-
   
-
   
-
   
-
   
3,696,880
 
Issuance of common stock for settlement of debt
   
249,999
   
250
   
29,681
   
-
   
-
   
-
   
-
   
29,931
 
Issuance of warrants for settlement of debt
   
-
   
-
   
7,569
   
-
   
-
   
-
   
-
   
7,569
 
Issuance of common stock for property acquisition
   
6,000,000
   
6,000
   
1,604,000
   
-
   
-
   
-
   
-
   
1,610,000
 
Stock based compensation - employment agreement