UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549

# FORM 20-F

(Mark One)

| |  | REGISTRATION STATEMENT
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
| |  | ----------------------------------------------------------------------------------------------

# OR

| |  | ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year
ended 12/31/2005
| |  | -------------------------------------------------------------------------------------------------------------------------

# OR

| |  | TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| |  | ----------------------------------------------------------------------------------------

# OR

| |  | SHELL COMPANY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------

# For the transition
period from ____________________ to _______________________

Commission file number

KODIAK OIL & GAS
CORP.
(Exact name of
Registrant as specified in its charter)

Yukon Territory
(Jurisdiction of
incorporation or organization)

1625 Broadway, Suite
330, Denver, Colorado 80202
(Address of principal executive offices)

Securities registered or to be
registered pursuant to Section 12(b) of the Act.

|                        |                                              
|----------------------- | ---------------------------------------------
|Title of each classNone | Name of each exchange on which registeredNone

Securities registered or to be registered
pursuant to Section 12(g) of the Act.

Common Shares, no par
value 
(Title of Class)

Securities for which there is a
reporting obligation pursuant to Section 15(d) of the Act.

None
(Title of Class)

Indicate the number of outstanding
shares of each of the issuers classes of capital or common stock as of the close of
the period covered by the annual report: 54,547,158

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes  No

Indicate by check mark which
financial statement item the registrant has elected to follow.

Item 17  Item 18

If this is an annual report,
indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).

Yes  No

(APPLICABLE ONLY TO
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the
registrant has filed all documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.

Yes  No

---

# TABLE OF CONTENTS

|                                          |                                                                              |   
|----------------------------------------- | ---------------------------------------------------------------------------- | --
|                                          |                                                                              |   
|NOTE REGARDING FORWARD-LOOKING STATEMENTS | iii                                                                         
|                                         
|PART I                                    |                                                                              | 4 
|                                         
|Item 1.                                   | Identity of Directors, Senior Management and Advisers                        | 4 
|                                         
|Item 2.                                   | Offer Statistics and Expected Timetable                                      | 4 
|                                         
|Item 3.                                   | Key Information                                                              | 4 
|                                         
|Item 4.                                   | Information on the Company                                                   | 12
|                                         
|Item 5.                                   | Operating and Financial Review and Prospects                                 | 22
|                                         
|Item 6.                                   | Directors, Senior Management and Employees                                   | 29
|                                         
|Item 7.                                   | Major Shareholders and Related Party Transactions                            | 33
|                                         
|Item 8.                                   | Financial Information                                                        | 34
|                                         
|Item 9.                                   | The Offer and Listing                                                        | 34
|                                         
|Item 10.                                  | Additional Information                                                       | 36
|                                         
|Item 11.                                  | Quantitative and Qualitative Disclosures About Market Risk                   | 48
|                                         
|Item 12.                                  | Description of Securities Other than Equity Securities                       | 49
|                                         
|PART II                                   |                                                                              | 49
|                                         
|Item 13.                                  | Defaults, Dividend Arrearages and Delinquencies                              | 49
|                                         
|Item 14.                                  | Material Modifications to the Rights of Security Holders and Use of Proceeds | 49
|                                         
|Item 15.                                  | Controls and Procedures                                                      | 49
|                                         
|Item 16.                                  | [Reserved]                                                                   | 49
|                                         
|Item 16A.                                 | Audit Committee Financial Expert                                             | 49
|                                         
|Item 16B.                                 | Code of Ethics                                                               | 49
|                                         
|Item 16C.                                 | Principal Accountant Fees and Services                                       | 50
|                                         
|Item 16D.                                 | Exemptions from the Listing Standards for Audit Committees                   | 50
|                                         
|Item 16E.                                 | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       | 50
|                                         
|PART III                                  |                                                                              | 51
|                                         
|Item 17.                                  | Financial Statements                                                         | 51
|                                         
|Item 18.                                  | Financial Statements                                                         | 51
|                                         
|Item 19.                                  | Exhibits                                                                     | 51
|                                         
|Signature                                 | 53                                                                          
|                                         
|Financial Statements                      | F-1                                                                         

i

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# GLOSSARY OF TERMS

The following technical terms defined
in this section are used throughout this Form 20-F:

(a)    
          2-D seismic or 2-D data means seismic data that is acquired.and
          processed to yield a two-dimensional cross-section of the subsurface.

(b)    
          3-D seismic or 3-D data means seismic data that is acquired and
          processed to yield a three-dimensional picture of the subsurface.

(c)    
          Adsorption means the action of a body, as charcoal, in condensing
          and holding a gas or soluble substance upon its surface.

(d)    
          Bbl means one stock tank barrel, or 42 U.S. gallons liquid volume,
          used in reference to oil or other liquid hydrocarbons.

(e)    
          BOE means barrels of oil equivalent. Oil equivalents are determined
          using the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.

(f)    
          Coalbed methane is methane gas produced as a result of the
          coalification process, whereby plant material is progressively converted to
          coal, generates large quantities of methane-rich gas which are stored within the
          coal.

(g)    
          Delay rental means a payment made to the lessor under a
          non-producing oil and gas lease at the end of each year to continue the lease in
          force for another year during its primary term.

(h)    
          Development well means a well drilled to a known producing formation
          in a previously discovered field, usually offsetting a producing well on the
          same or an adjacent oil and gas lease.

(i)    
          Desorption means the liberation or removal of gas from the surface
          of adsorbing material.

(j)    
          Dry hole means a well found to be incapable of producing either oil
          or gas in sufficient quantities to justify completion as an oil or gas well.

(k)    
          Exploratory well means a well drilled either (a) in search of a new
          and as yet undiscovered pool of oil or gas or (b) with the hope of significantly
          extending the limits of a pool already developed (also known as a wildcat
          well).

(l)    
          Farmin means an agreement which allows a party to earn a full or
          partial working interest (also knows as an earned working interest)
          in an oil and gas lease in return for providing exploration funds.

(m)    
          Farmout means an agreement whereby the owner of the leasehold or
          working interest agrees to assign a portion of his interest in certain acreage
          subject to the drilling of one or more specific wells or other performance by
          the assignee as a condition of the assignment. Under a farmout the owner of the
          leasehold or working interest may retain some interest such as an overriding
          royalty interest, an oil and gas payment, offset acreage or other type of
          interest.

(n)    
          Federal Unit means acreage under Federal oil and gas leases subject
          to an agreement or plan among owners of leasehold interests, which satisfies
          certain minimum arrangements and has been approved by an authorized
          representative of the United States Secretary of the Interior, to consolidate
          under a cooperative unit plan or agreement for the development of such acreage
          comprising a common oil and gas pool, field or like area, without regard to
          separate leasehold ownership of each participant and providing for the sharing
          of costs and benefits on a basis as defined in such agreement or plan under the
          supervision of a designated operator.

(o)    
          Fee land means the most extensive interest that can be owned in
          land, including surface and mineral (including oil and gas) rights.

1

---

(p)    
          Field means an area consisting of a single reservoir or multiple
          reservoirs all grouped on or related to the same individual geological
          structural feature or stratigraphic condition.

(q)    
          Gas (or Natural gas) means the lighter hydrocarbons and
          associated non-hydrocarbon substances occurring naturally in an underground
          reservoir, which under atmospheric conditions are essentially gases but which
          may contain liquids;

(r)    
          Gross acre means an acre in which an interest is owned. The number
          of gross acres is the total number of acres in which an interest is owned (see
          Net Acre below).

(s)    
          Hydraulic fracturing means a procedure to stimulate production by
          forcing a mixture of fluid and proppant (usually sand) into the formation under
          high pressure. This creates artificial fractures in the reservoir rock, which
          increases permeability and porosity.

(t)    
          Landowner royalty means that interest retained by the holder of a
          mineral interest upon the execution of an oil and gas lease which usually
          amounts to 1/8 of all gross revenues from oil and gas production unencumbered
          with any expenses of operation, development, or maintenance.

(u)    
          Leases mean full or partial interests in oil or gas properties
          authorizing the owner of the lease to drill for, produce and sell oil and gas
          upon payment of rental, bonus, royalty or any of them. Leases are generally
          acquired from private landowners (fee leases) and from Federal and State
          governments on acreage held by them.

(v)    
          Mcf is an abbreviation for 1,000 cubic feet, which is a
          unit of measurement of volume for natural gas.

(w)    
          Methane means a colorless, odorless, flammable gas, CH4, the first
          member of the methane series.

(x)    
          Net acre exists when the sum of the fractional ownership interests
          in gross acres equals one. The number of net acres is the sum of the fractional
          interests owned in gross acres.

(y)    
          Net-revenue interest means all of the working interests less all
          royalties, overriding royalties, non-participating royalties, net profits
          interest or similar burdens on or measured by production from oil and gas.

(z)    
          NYMEX means New York Mercantile Exchange.

(aa)    
          Overriding royalty means an interest in the gross revenues or
          production over and above the landowners royalty carved out of the working
          interest and also unencumbered with any expenses of operation, development or
          maintenance.

(bb)    
          Payout means the point in time when the cumulative total of gross
          income from the production of oil and gas from a given well (and any proceeds
          from the sale of such well) equals the cumulative total cost and expenses of
          acquiring, drilling, completing, and operating such well, including tangible and
          intangible drilling and completion costs.

(cc)    
          Prospect means a geological area which is believed to have the
          potential for oil and gas production.

(dd)    
          PV-10 value means the present value of estimated future gross
          revenue to be generated from the production of estimated net proved reserves,
          net of estimated production and future development costs, using prices and costs
          in effect as of the date indicated (unless such prices or costs are subject to
          change pursuant to contractual provisions), without giving effect to
          non-property related expenses such as general and administrative expenses, debt
          service and future income tax expenses or to depreciation, depletion and
          amortization, discounted using an annual discount rate of 10 percent. While this
          measure does not include the effect of income taxes as it would in the use of
          the standardized measure calculation, it does provide an indicative
          representation of the relative value of the Company on a comparative basis to
          other companies and from period to period.

2

---

(ee)    
          Productive well means a well that is producing oil or gas or that is
          capable of production.

(ff)    
          Proved developed reserves means reserves that can be expected to be
          recovered through existing wells with existing equipment and operating methods.

(gg)    
          Proved reserves means the estimated quantities of oil, gas and gas
          liquids which geological and engineering data demonstrate with reasonable
          certainty to be recoverable in future years from known reservoirs under existing
          economic and operating conditions.

(hh)    
          Proved undeveloped reserves means reserves that are expected to be
          recovered from new wells on undrilled acreage, or from existing wells where a
          relatively major expenditure is required for recompletion.

(ii)    
          Recompletion means the completion for production from an existing
          wellbore in a formation other than that in which the well has previously been
          completed.

(jj)    
          Reserve life means expressed in years, represents the estimated net
          proved reserves at a specified date divided by actual production for the
          preceding 12-month period.

(kk)    
          Royalty means the share paid to the owner of mineral rights,
          expressed as a percentage of gross income from oil and gas produced and sold
          unencumbered by expenses relating to the drilling, completing and operating of
          the affected well.

(ll)    
          Royalty interest means an interest in an oil and gas property
          entitling the owner to shares of oil and gas production free of costs of
          exploration, development and production operations.

(mm)    
          Scf means standard cubic feet.

(nn)    
          Undeveloped leasehold acreage means the leased acreage on which
          wells have not been drilled or completed to a point that would permit the
          production of commercial quantities of oil and gas, regardless of whether such
          acreage contains estimated net proved reserves.

(oo)    
          Working interest means an interest in an oil and gas lease entitling
          the holder at its expense to conduct drilling and production operations on the
          leased property and to receive the net revenues attributable to such interest,
          after deducting the landowners royalty, any overriding royalties,
          production costs, taxes and other costs.

# NOTE REGARDING
FORWARD-LOOKING STATEMENTS

This annual report contains
forward-looking statements within the meaning of section 21E of the United
States Securities Exchange Act of 1934, as amended (the Exchange Act) which
represent our expectations or beliefs about future events. These statements can be
identified generally by forward-looking words such as expect,
believe, anticipate, plan, intend,
estimate, may, will or similar words. Forward-looking
statements are statements about the future and are inherently uncertain, and our actual
achievements or other future events or conditions may differ materially from those
reflected in the forward-looking statements due to a variety of risks, uncertainties and
other factors, including, without limitation, those described in Item 3. of this annual
report under the heading, Risk Factors, and elsewhere in this annual report.
These risks and uncertainties include:

| |  |  | the
risks of the oil and gas industry, such as operational risks in exploring for, developing
and producing crude oil and               natural gas;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | market
demand;
| | - |  | --------------

| |  |  | risks
and uncertainties involving geology of oil and gas deposits;
| | - |  | ------------------------------------------------------------------

| |  |  | the
uncertainty of reserves estimates and reserves life;
| | - |  | --------------------------------------------------------

3

---

| |  |  | the
uncertainty of estimates and projections relating to production, costs and expenses;
| | - |  | ----------------------------------------------------------------------------------------

| |  |  | potential
delays or changes in plans with respect to exploration or development projects or capital
expenditures;
| | - |  | -----------------------------------------------------------------------------------------------------------------

| |  |  | fluctuations
in oil and gas prices, foreign currency exchange rates and interest rates;
| | - |  | ---------------------------------------------------------------------------------------

| |  |  | health,
safety and environmental risks;
| | - |  | ---------------------------------------

| |  |  | uncertainties
as to the availability and cost of financing; and
| | - |  | ---------------------------------------------------------------

| |  |  | the
possibility that government policies or laws may change or governmental approvals may be
delayed or withheld.
| | - |  | -----------------------------------------------------------------------------------------------------------------

Other sections of this annual report
may include additional factors that could adversely affect our business and financial
performance. Moreover, we operate in a very competitive and rapidly changing environment.
New risk factors emerge from time to time and it is not possible for our management to
predict all risk factors, nor can we assess the impact of all factors on our business or
the extent to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.

Our forward-looking statements
contained in this annual report are made as of the respective dates set forth in this
annual report. Such forward-looking statements are based on the beliefs, expectations and
opinions of management as of the date the statements are made. We do not intend to update
these forward-looking statements. For the reasons set forth above, investors should not
place undue reliance on forward-looking statements.

# PART I

# Item 1.   Identity of
Directors, Senior Management and Advisers.

Not applicable.

# Item 2.   Offer Statistics
and Expected Timetable.

Not applicable.

# Item 3.   Key Information.

| | Selected
Financial Data.
| | ------------------------

The following is a summary of certain
selected financial information for the five most recently completed fiscal years and for
certain interim periods as described below. This information has been prepared in
accordance with United States generally accepted accounting principles (U.S.
GAAP). Canadian GAAP, as applied to us, does not materially differ from U.S. GAAP.

The selected financial data for the
fiscal years ended December 31, 2005, 2004 and 2003 was extracted from our financial
statements which are contained elsewhere in this annual report. The selected financial
data for the year ended December 31, 2002 and for the seven month period ended December
31, 2001 was extracted from our audited financial statements which are not included in
this annual report.

4

---

|                            | Year Ended December 31, | Seven Months  
   Ended      
December 31,
|--------------------------- | ----------------------- | ------------------------------------------
|                            |                        
|
|                            |                        
|Income Statement Data:      |                         |                                           
|Revenues                    |                         |                                           
|Costs and Expenses          |                         |                                           
|Net (Income) Loss           |                         |                                           
|Net (Income) Loss per Share |                         |                                           

|                        | As at December 31,
|----------------------- | ------------------
|                        |                   
|
|                        |                   
|Balance Sheet Data:     |                   
|Current Assets          |                   
|Property and Equipment  |                   
|Total Assets            |                   
|Current Liabilities     |                   
|Long-term Debt          |                   
|Shareholder's Equity    |                   
|Weighted Average Number |                   
|of Shares Outstanding   |                   

Except where otherwise indicated, all
information extracted from or based on the consolidated financial statements of the
Company are presented in accordance with US GAAP.

No dividends have been declared in
any of the periods presented above.

# Capitalization and
Indebtedness

Not applicable.

# Exchange Rate Information

In this annual report, unless
otherwise specified, all dollar amounts are expressed in United States dollars. References
in this document to $ refer to US dollars, unless otherwise specified; and
references to Cdn$ refer to Canadian dollars.

The following tables set forth the
high and low rates of exchange for the Canadian dollar, expressed as U.S. dollars per
Canadian dollar, for each month during the previous six months and the average of
such exchange rates during each of the five most recent years ended December 31,
2005. The average rates presented in the table below represent the average of the exchange
rates on the last day of each month during the period. Exchange rates represent the noon
buying rate in New York City for cable transfers payable in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York. The noon rate of
exchange on December 31, 2005 and March 31, 2006 as reported by the United
States Federal Reserve Bank of New York for the conversion of Canadian dollars into United
States dollars was US$1.00 = Cdn$0.8579 and Cdn$0.8568, respectively.

5

---

U.S. Dollar/Canadian Dollar Exchange
Rates for Five Most Recent Financial Years

|                       | Year Ended December 31,
|---------------------- | -----------------------
|                       |                        
|
|                       |                        
|End of period          |                        
|Average for the period |                        
|High during the period |                        
|Low during the period  |                        

U.S. Dollar/Canadian Dollar Exchange
Rates for Previous Six Months

|     | October2005 | November2005 | December2005 | January2006 | February2006 | March2006
|---- | ----------- | ------------ | ------------ | ----------- | ------------ | ---------
|     |            
|High |             | 0.8601       |              | 0.8574      |              | 0.8682   
|Low  |             | 0.8416       |              | 0.8377      |              | 0.8524   

# Reasons for the Offer
and Use of Proceeds.

Not applicable.

# Risk Factors

We are subject to a number of risks
due to the nature of our business and the present state of development of our business.
The following factors should be considered:

# Risks Relating to the
Company

Our operations require significant
additional capital, which may not be available to us on acceptable terms, or at all.

The exploration and development of
our properties depends on our ability to obtain financing through joint ventures, debt
financing, equity financing, production sharing arrangements or other means. The
Companys plan of operation for 2006 contemplates capital expenditures of $30 million
for the development of existing properties and anticipated property acquisitions. In
February 2006, the Company issued 19,514,268 common shares for net proceeds of
$37,138,452. Accordingly, at March 31, 2006 the Company had working capital of
approximately $29.5 million, which amount the Company believes is, together with revenues
from operations, sufficient to fund its 2006 exploration and development program.

There can be no assurance that we
will obtain necessary financing or that any joint venture partner will obtain financing
required under the terms of any joint venture agreement into which it enters with us. Our
failure to obtain financing on a timely basis or on favorable terms could result in the
loss or substantial dilution of our interests (as existing or as proposed to be acquired)
in our properties as disclosed in this annual report. In addition, the failure of any
joint venture partner to obtain any required financing could adversely affect our ability
to complete the exploration or development of any such joint venture project on a timely
basis. See Special Note Regarding Forward-Looking Statements and
Managements Discussion and Analysis of Financial Condition and Results of
Operations.

Should we elect to satisfy our cash
commitments through the issuance of securities, by way of either private placement or
public offering, there can be no assurance that our efforts to raise such funding will be
successful, or achieved on terms favorable to us or our shareholders.

6

---

Our future performance is
difficult to evaluate because we have a limited operating history. Because of our
historical losses and expected losses in the future, it will be difficult to forecast when
we will achieve profitability, if ever.

We have historically incurred losses
from operations and have a limited history in the oil and gas business. As at December 31,
2005, we had a cumulative deficit of $5,829,627. We are in the process of developing some
of our properties, but most of our properties are in the exploration stage, which means
that we are still in the process of determining if the property is economically feasible
and that the property is not in the production stage. There can be no assurance that we
will successfully implement our business plan or that we will achieve commercial
profitability in the future. In addition, should we be unable to continue as a going
concern, realization of assets and settlement of liabilities in other than the normal
course of business may be at amounts significantly different from those in the financial
statements included in this annual report. As a result, we have little historical
financial and operating information available to help you evaluate our performance or an
investment in our common stock

Our interests are held in the form
of licenses and leases that may terminate.

Our properties are held in the form
of licenses and leases, and working interests in licenses and leases. If we or the holder
of the license or lease fails to meet the specific requirements of each license or lease,
the license or lease may terminate or expire. There can be no assurance that any of the
obligations required to maintain each license or lease will be met. The termination or
expiration of our licenses or leases or the working interests relating to licenses or
leases may have a material adverse effect on our results of operation and business.

# Many of our interests
are operated by others.

Although we own interests in a large
number of properties that are potentially valuable for, or are producing, oil or gas, we
do not operate all of these interests. For all of the properties which are operated by
others, we are dependent on their decision-making with respect to day-to-day operations
over which we have little control.

# Our officers and
directors may become subject to conflicts of interest.

Certain of our directors and officers
may also become directors, officers, contractors, shareholders and/or employees of other
companies engaged in oil and gas exploration and development. To the extent that such
other companies may participate in ventures in which we may participate, our directors may
have a conflict of interest in negotiating and concluding terms respecting the extent of
such participation. In the event that such a conflict of interest arises at a meeting of
the directors of the Company, a director who has such a conflict will declare his interest
and abstain from voting for or against the approval of such participation or such terms.
In appropriate cases, we will establish a special committee of independent directors to
review a matter in which several directors, or management, may have a conflict. From time
to time, several companies may participate in the acquisition, exploration and development
of oil and gas properties thereby allowing for their participation in larger programs,
permitting involvement in a greater number of programs and reducing financial exposure in
respect of any one program. A particular company may assign all or a portion of its
interest in a particular program to another of these companies due to the financial
position of the company making the assignment.

In accordance with the laws of the
Yukon Territory, our directors are required to act honestly, in good faith and in the best
interests of the Company. In determining whether or not we will participate in a
particular program and the interest therein to be acquired by it, the officers will
primarily consider the potential benefits to the Company, the degree of risk to which we
may be exposed and its financial position at the time. Other than as indicated, we have no
other procedures or mechanisms to deal with conflicts of interest. See Interest of
Management in Certain Transactions.

Our constating documents permit us
to issue an unlimited number of shares without shareholder approval.

The Companys Articles of
Continuation permit it to issue an unlimited number of common shares. Subject to the
requirements of any exchange on which the Company may be listed, the Company will not be
required to obtain the approval of shareholders for the
issuance of additional common shares. In 2005, the Company issued 20,671,875

7

---

common shares
for gross proceeds of $17,935,173. In February 2006 the Company issued 19,514,268 common
shares for net proceeds of $37,138,452. The Company anticipates that it will from time to
time issue additional Common Shares to provide working capital for future operations. Any
further issuances of Common Shares from the Companys treasury will result in
immediate dilution to existing shareholders and may have an adverse effect on the value of
their shareholdings.

Our shareholders may experience
dilution as a result of our issuance of additional common shares or the exercise of
outstanding options.

As at December 31, 2005, there were
options outstanding to purchase, in the aggregate, 3,938,500 common shares. See
Options to Purchase Securities from Registrant or Subsidiaries. Such options,
if fully exercised, would constitute approximately 6% of our resulting share capital. The
exercise of such options and the subsequent resale of such common shares in the public
market could adversely affect the prevailing market price and our ability to raise equity
capital in the future at a time and price which we deem appropriate. We may also enter
into commitments in the future which would require the issuance of additional common
shares and we may grant share purchase warrants and stock options. Any share issuances
from the Companys treasury will result in immediate dilution to existing
shareholders.

We are continued under the laws of
the Yukon Territory which may affect the ability of our shareholders to enforce their
rights.

We were continued under the laws of
the Yukon Territory, Canada, and certain of our directors are residents of Canada.
Consequently, it may be difficult for United States investors to effect service of process
within the United States upon the Company or upon that director who are not residents of
the United States, or to realize in the United States upon judgments of United States
courts predicated upon civil liabilities under the Exchange Act. A judgment of a U.S.
court predicated solely upon such civil liabilities would probably be enforceable in
Canada by a Canadian court if the U.S. court in which the judgment was obtained had
jurisdiction, as determined by the Canadian court, in the matter. There is substantial
doubt whether an original action could be brought successfully in Canada against any of
such persons or the Company predicated solely upon such civil liabilities.

We depend on Messrs. Peterson and
Catlin for critical management decisions and industry contacts.

We are heavily dependent upon the
expertise of Messrs. Peterson and Catlin, and the loss of either of these individuals
could have a material adverse effect on us. Neither of these individuals have entered into
employment agreements with us. We have obtained key man insurance for our
management. The loss of the services of either of our executive officers, through
incapacity or otherwise, would be costly to us and would require us to seek and retain
other qualified personnel.  See Management.

We have never declared or paid
cash dividends on our common stock. We currently intend to retain future earnings to
finance the operation, development and expansion of our business.

We do not anticipate paying cash
dividends on our common stock in the foreseeable future. Payment of future cash dividends,
if any, will be at the discretion of our board of directors and will depend on our
financial condition, results of operations, contractual restrictions, capital
requirements, business prospects and other factors that our board of directors considers
relevant. Accordingly, investors will only see a return on their investment if the value
of our securities appreciates.

# Risks Relating to our
Industry

The oil and gas industry is
subject to significant competition, which may increase costs or otherwise adversely affect
our ability to compete.

Oil and gas exploration is intensely
competitive and involves a high degree of risk. There can be no assurance that commercial
production of hydrocarbons can be obtained from any of our properties, nor are there any
assurances that production, if obtained, will be in sufficient quantities to be
profitable. In our efforts to acquire properties, we

8

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compete with other companies that
have greater resources. Many of these companies not only explore for and produce oil and
gas, but also conduct refining and petroleum marketing operations on a worldwide basis.

Competition for producing properties
will be affected by the amount of funds available to us, information available to us and
any standards established by us for the minimum projected return on investment.
Competition may also be presented by alternative fuel sources and technologies.

Drilling for and producing oil and
natural gas are high risk activities with many uncertainties that could substantially
increase our costs and reduce our profitability.

There can be no assurance that we
will recover commercial quantities of hydrocarbons in the future. The total cost of
drilling, completing and operating wells is uncertain before drilling commences. Overruns
in budgeted expenditures are common risks that can make a particular project uneconomical.
Further, many factors may curtail, delay or cancel drilling, including the following:

| |  |  | delays
imposed by or resulting from compliance with regulatory requirements;
| | - |  | ----------------------------------------------------------------------------

| |  |  | pressure
or irregularities in geological formations;
| | - |  | ----------------------------------------------------

| |  |  | shortages
of or delays in obtaining equipment and qualified personnel;
| | - |  | ----------------------------------------------------------------------

| |  |  | equipment
failures or accidents;
| | - |  | --------------------------------

| |  |  | adverse
weather conditions;
| | - |  | ---------------------------

| |  |  | reductions
in oil and natural gas prices;
| | - |  | -----------------------------------------

| |  |  | land
title problems; and
| | - |  | ------------------------

| |  |  | limitations
in the market for oil and natural gas.
| | - |  | --------------------------------------------------

In addition, hazards such as unusual
or unexpected formations, pressures or other conditions are involved in drilling and
operating wells. We may have the benefit of insurance, but we may be subject to liability
for pollution, blow-outs or other hazards against which we cannot insure or which we may
elect not to insure against because of high premium costs or other reasons. The payment of
such liabilities may reduce the funds available for drilling and production activities or
could result in the loss of property.

Our operations are subject to
significant environmental regulation which may increase costs or limit our ability to
develop our properties.

We may encounter hazards incident to
the exploration and development of oil and gas properties such as accidental spills or
leakage of petroleum liquids and other unforeseen conditions. We may be subject to
liability for pollution and other damages due to hazards which cannot be insured against
due to prohibitive premium costs or for other reasons. Governmental regulations relating
to environmental matters could also increase the cost of doing business or require
alteration or cessation of operations in certain areas.

Existing and possible future
environmental legislation, regulations and actions could give rise to additional expense,
capital expenditures, restrictions and delays in our activities, the extent of which
cannot be predicted. Regulatory requirements and environmental standards are subject to
constant evaluation and may be significantly increased, which could materially and
adversely affect our business or our ability to develop its properties on an economically
feasible basis. Before development and production can commence on any properties, we must
obtain regulatory and environmental approvals. There is no assurance that such approvals
will be obtained on a timely basis or at all. The cost of compliance with changes in
governmental regulations has the potential to reduce the profitability of operations or
preclude entirely the economic development of a property.

9

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We may incur substantial losses
and be subject to substantial liability claims as a result of our oil and natural gas
operations.

Our operations will be subject to all
of the operating risks associated with drilling for and producing oil and natural gas,
including the possibility of:

| |  |  | environmental
hazards, such as uncontrollable flows of oil, natural gas, brine, well fluids, toxic gas
or other pollution into the environment, including groundwater contamination;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | abnormally
pressured formations;
| | - |  | --------------------------------

| |  |  | mechanical
difficulties, such as stuck oilfield drilling and service tools and casing collapse;
| | - |  | -----------------------------------------------------------------------------------------------

| |  |  | fires
and explosions;
| | - |  | ---------------------

| |  |  | personal
injuries and death; and
| | - |  | --------------------------------

| |  |  | natural
disasters.
| | - |  | ------------------

Any of these risks could adversely
affect our ability to operate or result in substantial losses. These risks may not be
insurable or we may elect not to obtain insurance if the cost of available insurance is
excessive relative to the risks presented. In addition, pollution and environmental risks
generally are not fully insurable. If a significant accident or other event that is not
fully covered by insurance occurs, it could adversely affect us.

A substantial or extended decline
in oil and natural gas prices could reduce our future revenue and earnings.

As with most other companies involved
in resource exploration, we may be adversely affected by future increases in the costs of
conducting exploration, development and resource extraction that may not be fully offset
by increases in the price received on sale of the petroleum or natural gas.

Our revenues, profitability and
future growth and the carrying value of its oil and gas properties are substantially
dependent on prevailing prices of oil and gas. Our ability to borrow and to obtain
additional capital on attractive terms is also substantially dependent upon oil and gas
prices. Prices for oil and gas are subject to large fluctuations in response to relatively
minor changes in the supply of and demand for oil and gas, market uncertainty and a
variety of additional factors beyond our control. These factors include economic
conditions in the United States and Canada, the actions of the Organization of Petroleum
Exporting Countries, governmental regulation, political stability in the Middle East and
elsewhere, the foreign supply of oil and gas, the price of foreign imports and the
availability of alternate fuel sources. Any substantial and extended decline in the price
of oil and gas would have an adverse effect on the carrying value of our properties,
borrowing capacity, revenues, profitability and cash flows from operations.

Volatile oil and gas prices make it
difficult to estimate the value of producing properties for acquisition and often cause
disruption in the market for oil and gas producing properties, as buyers and sellers have
difficulty agreeing on such value. Price volatility also makes it difficult to budget for
and project the return on acquisitions and development and exploitation projects.

Local, national and international
economic conditions are beyond our control and may have a substantial adverse affect on
our efforts. We cannot guard against the effects of these potential adverse conditions.

Our operating results are likely to
vary due to seasonal factors. Demand for oil and gas products will generally increase
during the winter because they are often used as heating fuels. The amount of such
increased demand will depend to some extent upon the severity of winter. Because of the
seasonality of our business and continuous fluctuations in the prices of our products,
our operating results are likely to fluctuate from period to period. In addition, our
federal leases generally include restrictions on drilling during the period of November 15
to April 30. These restrictions are intended to protect big game winter habitat and
not to restrict operations or maintenance of

10

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production facilities. To the extent
that our exploration and drilling program on its federal leases cannot be completed
during the period of May 1 through November 14, our drilling program may be
delayed.

# The title to our
properties may be defective.

It is our practice in acquiring oil
and gas leases or interests in oil and gas leases not to undergo the expense of retaining
lawyers to fully examine the title to the interest to be placed under lease or already
placed under lease. Rather, we rely upon the judgment of oil and gas lease brokers or
landmen who actually do the field work in examining records in the appropriate
governmental office before attempting to place under lease a specific interest. We believe
that this practice is widely followed in the oil and gas industry.

Prior to drilling a well for oil and
gas, it is the normal practice of the oil and gas industry for the person or company
acting as the operator of the well to hire a lawyer to examine the title to the unit
within which the proposed oil and gas well is to be drilled. Frequently, as a result of
such examination, certain curative work must be done to correct deficiencies in the
marketability of the title, and the curative work entails expense. The work might include
obtaining an affidavit of heirship or causing an estate to be administered. From time to
time, the examination made by the title lawyers reveals that the oil and gas lease or
leases are worthless, having been purchased in error from a person who is not the owner of
the mineral interest desired. In such instances, the amount paid for such oil and gas
lease or leases may be lost.

Market conditions or operational
impediments may hinder our access to oil and natural gas markets or delay our production.

Market conditions or the
unavailability of satisfactory oil and natural gas transportation arrangements may hinder
access to oil and natural gas markets or delay production, if any, at the wells. The
availability of a ready market for our future oil and natural gas production will depend
on a number of factors, including the demand for and supply of oil and natural gas and the
proximity of reserves to pipelines and terminal facilities.

We are subject to complex laws
that can affect the cost, manner and feasibility of doing business thereby increasing our
costs and reducing our profitability.

Development, production and sale of
oil and natural gas are subject to laws and regulations. We may be required to make large
expenditures to comply with governmental regulations. Matters subject to regulation
include:

| |  |  | discharge
permits for drilling operations;
| | - |  | ------------------------------------------

| |  |  | drilling
bonds;
| | - |  | ---------------

| |  |  | reports
concerning operations;
| | - |  | ------------------------------

| |  |  | spacing
of wells;
| | - |  | -----------------

| |  |  | unitization
and pooling of properties; and
| | - |  | ------------------------------------------

| |  |  | taxation.
| | - |  | ---------

Failure to comply with these laws may
also result in the suspension or termination of operations and liabilities under
administrative, civil and criminal penalties. Moreover, these laws could change in ways
that substantially increase the costs of doing business. Any such liabilities, penalties,
suspensions, terminations or regulatory changes could materially and adversely affect our
financial condition and results of operations.

11

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The unavailability or high cost of
drilling rigs, equipment, supplies, personnel and oilfield services could adversely affect
our ability to execute our plans on a timely basis and within our budget.

Shortages or the high cost of
drilling rigs, equipment, supplies or personnel could delay or adversely affect our
development operations, which could have a material adverse effect on our business,
financial condition or results of operations.

# Item 4.   Information on
the Company.

| | History
and Development of the Company.
| | ---------------------------------------

Kodiak Oil & Gas Corp.
(us, we or the Company) was incorporated as a company
on March 17, 1972 in the Province of British Columbia, Canada, under the name
Pacific Talc Ltd. pursuant to the Company Act (British Columbia). On November
12, 1998, the name of the Company was changed to Columbia Copper Company Ltd.
and the Company consolidated its share capital on the basis of four old shares for one new
share. On September 28, 2001, the Company was continued from British Columbia to the Yukon
Territory and the name of the Company was changed to Kodiak Oil & Gas
Corp. On September 23, 2003 we incorporated a wholly-owned subsidiary, Kodiak Oil
& Gas (USA) Inc. in Colorado. Kodiak Oil & Gas (USA) Inc. was formed to hold all
of our US oil and gas properties.

Our head office is located at Suite
330, 1625 Broadway, Denver, CO 80202, phone: 303-592-8075. Our registered and records
offices are located at Suite 202-208 Main Street, Whitehorse, Yukon Territory, Y1A 2A9.

We focus primarily on exploring,
developing and producing hydrocarbons in the Rocky Mountain Region of the United States.
Current management acquired control of the company in early 2001 and advanced the Company
by initially acquiring prospect lands in Wyoming. Our initial project was in a coalbed
methane project in southwestern Wyoming. At the time, Kodiak did not have sufficient
resources to fulfil its drilling commitments. Accordingly, we entered into an agreement
with CP Resources LLC (CP LLC), a private company that was controlled by
Messrs. Peterson and Catlin, directors of the Company, pursuant to which CP LLC agreed to
pay for the costs to drill two wells on the Pacific Rim CBM Prospect. Based on the
drilling results, Warren Resources, Inc. (Warren) entered into an agreement
with CP LLC in June 2003 to jointly explore the Pacific Rim Coalbed Methane Prospect.
Under the agreement, Warren paid 100% of the first $2,500,000 of exploration expenditures.
Subsequent expenditures were paid for in relationship to the parties respective
working interests. CP LLCs interest in the agreement and the Pacific Rim Prospect
were subsequently assigned to the Company in exchange for the issuance of 1,000,000 common
shares of the Company and the delivery of a promissory note in the amount of $264,000,
representing 120% of the drilling costs incurred by CP LLC on the Pacific Rim Prospect.

During September 2003, we completed a
private placement consisting of 3,857,500 units for net proceeds of $303,590. Each unit
consisted of one common share and one-half non-transferable share purchase warrant. One
whole warrant entitled the holder to purchase one additional common share at a price of
Cdn$0.15 per share for a period of six months from closing, until April 6, 2004. The
proceeds of the private placement were used to fund the Pacific Rim Coalbed Methane
Project and for general corporate purposes. We also issued a warrant for 370,000 shares
exercisable at Cdn$0.115 until September 17, 2004, to Union Securities Ltd. in connection
with the offering. All of the warrants were exercised.

In February 2004, we issued
11,428,572 units for net proceeds of $2,972,061. Each unit consisted of one common share
and one half common share purchase warrant, with a full warrant exercisable at Cdn$0.50
per share on or before 12 months following closing. We paid a commission of 8% of the
subscription proceeds and agents warrants equal to 8% of the number of units sold.
In August 2004, the Company received proceeds of $2,174,810 from the early exercise of
5,649,286 purchase warrants (total of 5,714,286 warrants outstanding). As an incentive to
the warrant holders to exercise six
months early, we issued an additional one half common share purchase warrant, or 2,824,643
bonus warrants, for each common share purchase warrant exercised. Each bonus warrant was
exercisable at Cdn$1.00 per share. In August 2005, we received $2,137,223 from the
exercise of 2,561,618 bonus barrants (263,025 bonus warrants expired). Proceeds from the
transaction were used in part to fund our exploration and development program and for
working capital and general corporate purposes.

12

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In March 2005, we completed a private
placement of 10 million shares, generating net proceeds of $6,707,630. Proceeds from this
transaction have been used in part to fund our exploration and development program.

In December 2005, we completed a
private placement of 7 million shares in a non-brokered transaction, generating net
proceeds of $8,492,475. Proceeds from the offering have been and will continue to be used
to fund exploration and drilling programs and for working capital and general corporate
purposes.

In February 2006, we completed a
private placement of 19,514,268 common shares to a group of accredited investors
generating net proceeds of $37,138,452. The proceeds will be used in part to fund
exploration and drilling programs and for working capital and general corporate purposes
as set forth in 4.B below.

| | Business
Overview
| | -----------------

We are engaged in the business of
exploration and development of oil and gas properties. Our principal focus is on the
exploration and development of oil and gas properties within two producing basins in the
Rocky Mountain Region of the United States. We are exploring for natural gas in the Green
River Basin in southwestern Wyoming and oil in the Williston Basin in Montana and North
Dakota.

The following table sets forth our
planned capital expenditures for our principal properties in 2006:

|Prospect name            | WI | # of 
Wells | Net
Wells | Well
Costs | Total
Costs
|------------------------ | -- | ----------- | --------- | ---------- | -----------
|                        
|Pacific Rim Almond-Sands |    | 50.0        |           | 10         |            
|Pacific Rim Almond-Coals |    | 50.0        |           | 3          |            
|Pacific Rim Ericson      |    | 50.0        |           | 2          |            
|Vermillion Basin Deep    |    | 33.0        |           | 2          |            
|Masterson/Shiprock       |    | 50.0        |           | 4          |            
|Popskull                 |    | 33.3        |           | 1          |            
|Acreage                  |    |             |           |            |            
|                        
|Total Wyoming            |    |             |           | 22         |            
|Williston Basin          |   
|                        
|Mission Canyon           |    | 50.0        |           | 2          |            
|Red River C              |    | 50.0        |           | 5          |            
|Bakken                   |    | 62.5        |           | 2          |            
|Acreage                  |    |             |           |            |            
|                        
|Total Williston          |    |             |           | 9          |            
|                        
|Total Kodiak             |    |             |           | 31         |            
|                        

# Leasing and Property
Acquisition Activities

As at December 31, 2005, we had
several hundred lease agreements representing approximately 124,734 gross acres (77,737
net acres). Our leases are located in the Williston Basin in eastern Montana and western
North Dakota and the Green River Basin in southwestern Wyoming. We have focused our
leasing activities in areas that are serviced by existing pipeline systems.

The majority of our acreage located
in the greater Green River Basin is federal lands administered by the Bureau of Land
Management (BLM). Typically these lands are acquired through a public auction and have a
primary lease term of 10 years. The US Department of Interior normally retains a 12.5%
royalty interest in these lands. Most of our lands in this area are encompassed within
federal operating units approved by the BLM that allow for the orderly exploration and
development of the federal lands. Generally coalbed methane units require the drilling of
a minimum of 5 wells each year in order to maintain the federal unit, whereas exploratory
units require the drilling of a minimum of one well per year. In the event these minimum
well requirements are not met, the unit will contract to the existing producing well(s)
and the remaining acreage will expire within the primary term of the leases. In the

13

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event the leases are beyond the
primary term, the leases will be given an automatic two year extension. In most cases
these federal lands require an annual delay rental of $1.50 per net acre.

Our acreage located in the Williston
Basin is primarily fee leases. These leases typically carry a primary term of 3-5 years
with landowner royalties of 12.5% to 16.6%. In most cases we obtain paid up
leases that do not require annual delay rentals.

All of our leases grant us the
exclusive right to explore for and develop oil, gas and other hydrocarbons and minerals
that may be produced from wells drilled on the leased property without any depth
restrictions. Our federal leases generally include restrictions on drilling during the
period of November 15 to April 30. These restrictions are intended to protect
big game winter habitat and do not restrict operations or maintenance of production
facilities.

The following table sets forth the
gross and net acres of developed and undeveloped oil and gas leases held by Kodiak as of
December 31, 2005.

|Location          | Undeveloped
Acreage(2) | Developed
Acreage(1) | Total 
Acreage
|----------------- | ---------------------- | -------------------- | --------------
|                  |                        |                      |               
|
|                  |                        |                      |               
|Green River Basin |                        |                      |               
|Wyoming           |                        | 69,941               |               
|Williston Basin   |                        |                      |               
|Montana           |                        | 45,545               |               
|North Dakota      |                        | 2,828                |               
|                  |                        |                      |               
|Acreage Totals    |                        | 118,314              |               
|                  |                        |                      |               

| |  | (1) |  | Developed
acreage is acreage assigned to producing wells for the spacing unit of the production
formation.
| |  | --- |  | ----------------------------------------------------------------------------------------------------------

| |  | (2) |  | Undeveloped
acreage is lease acreage on which wells have not been drilled or completed to a point
that would permit the          production of commercial quantities of oil and gas.
| |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Substantially all of the leases
summarized in the preceding table will expire at the end of their respective primary terms
unless the existing leases are renewed or production has been obtained from the acreage
subject to the lease prior to that date, in which event the lease will remain in effect
until the cessation of production. The following table sets forth the gross and net acres
subject to leases summarized in the preceding table that will expire during the periods
indicated:

|                  | Expiring Acreage
|----------------- | ----------------
|                  |                 
|
|                  |                 
|December 31, 2006 |                 
|December 31, 2007 |                 
|December 31, 2008 |                 
|                  |                 
|Total             |                 

In December, 2005, we acquired
interests in leases covering approximately 6,600 net acres in the Green River Basin in
Sweetwater County, Wyoming. The seller was not affiliated with the Company. The purchase
price was $1,450,000 and the transaction was completed in January, 2006. Upon completion
of the acquisition, the Company became operator.

In November, 2005, we acquired an
additional 25% interest in the Grizzly Prospect, located in McKenzie County, North Dakota
for a purchase price of $1,616,081 paid to an unaffiliated seller. In December 2005, we
acquired an additional 25% working interest in the Wrangler Prospect, located in Sheridan
County, Montana for a purchase price of $1,900,000, also paid to an unaffiliated seller.
We also acquired an additional 12.5% interest in the Great Bear Prospect in Divide County,
North Dakota for $200,000.

14

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In March, 2006, we acquired 10,629
gross (9,566 net) acres of mineral leasehold in Sweetwater County, Wyoming. The purchase
price of $6.9 million was paid to an unaffiliated seller. The lands are located in our
Pacific Rim Project area, which is also referred to as our Vermillion Basin properties.

# Pipeline Service

Our properties in the Green River
Basin are located near existing pipeline systems, owned by operators such as BP and
Questar. We believe that these systems have sufficient take away capacity to accommodate
our current and anticipated production. Production from our properties in the Williston
Basin is stored at the well site in tanks and sold to crude oil buyers who transport the
oil by truck to various transportation terminals.

The operator of the Chicken Springs
property, Warren Resources, has entered into a Gas Gathering and Processing Agreement with
Questar Gas Management Company. Under the agreement, Questar agrees to gather, process and
market the gas delivered by Warren to the Questar Vermillion Creek Gas Plant. The
agreement has a term of 5 years, at which time it may be terminated by either party on 30
days written notice.

# Coal Methane Gas
Production

CBM production is similar to
conventional natural gas production in terms of the physical production facilities and the
product produced. However, surface mechanics and some production characteristics of CBM
wells are quite different from traditional natural gas production wells. Methane gas is
created as part of the coalification process. Coals vary in their methane gas content
which is defined by the industry as cubic feet of gas per ton of coal. Conventional
natural gas wells assume a porous and permeable reservoir, hydrocarbon migration and a
natural structural or stratigraphic trap. However, CBM is trapped in the molecular
structure of the coal itself until it is released by pressure changes, resulting from
water removal from the coal-bed.

Water completely permeates coal-beds
and the natural fracture system or cleats as they are normally referred. In good producing
areas the cleats are pervasive throughout the coal-beds. CBM gas, principally methane, is
adsorbed onto the grain surfaces of the coal. To produce CBM, the water must be drawn off
first, lowering the pressure so that the methane gas will desorb from the coal thus
allowing gas to flow from the coal into the de-watered cleats that act as high permeable
conduits to the well bore, where gas can be produced at the well head. These cleats are
assumed to have been formed during the coalification and uplifting processes. If cleat
permeability is adequately developed it may allow commercial quantities of methane gas to
be produced from the well. The qualities of productive CBM wells include coal quality, the
content of natural gas per ton of coal, thickness of the coal-beds, reservoir pressure,
existence of natural fractures, and overall permeability of the coal-bed.

CBM production also differs from
conventional gas production that normally starts at its highest production rate and then
declines with time. Because coal-beds have water residing within the cleats the water
needs to be withdrawn in order to promote production of the adsorbed gases. Thus, for the
case of CBM, initial water production is high and diminishes with time. CBM gas
production, however, starts at a relatively low rate reaching a peak some months later and
then begins to decline. One of the significant issues in CBM production is the disposal of
water. The water produced is non-potable and must be disposed of in accordance with all
applicable environmental and water quality regulations.

# Governmental Regulations

Regulation of Oil and Natural
Gas Production   Our oil and natural gas exploration, production and related
operations, when developed, are subject to extensive rules and regulations promulgated by
federal, state, tribal and local authorities and agencies. For
example, some states in which we may operate require permits for drilling operations,
drilling bonds and reports concerning operations and impose other requirements relating to
the exploration and production of oil and natural gas. Such states may also have statutes
or regulations addressing conservation matters, including provisions for the unitization
or pooling of oil and natural gas properties, the establishment of maximum rates of
production from wells, and the regulation of spacing, plugging and abandonment of such
wells. Failure to comply with any such rules and regulations can result in substantial
penalties. The regulatory burden on the oil and gas industry will most likely increase our
cost of doing business and may affect our

15

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profitability. Although we believe we are
currently in substantial compliance with all applicable laws and regulations, because such
rules and regulations are frequently amended or reinterpreted, we are unable to predict
the future cost or impact of complying with such laws. Significant expenditures may be
required to comply with governmental laws and regulations and may have a material adverse
effect on our financial condition and results of operations.

Federal Regulation of Natural
Gas.  The Federal Energy Regulatory Commission (FERC) regulates
interstate natural gas transportation rates and service conditions, which may affect the
marketing of natural gas produced by us, as well as the revenues that may be received by
us for sales of such production. Since the mid-1980s, FERC has issued a series of
orders, culminating in Order Nos. 636, 636-A and 636-B (Order 636), that have
significantly altered the marketing and transportation of natural gas. Order 636 mandated
a fundamental restructuring of interstate pipeline sales and transportation service,
including the unbundling by interstate pipelines of the sale, transportation, storage and
other components of the city-gate sales services such pipelines previously performed. One
of FERCs purposes in issuing the order was to increase competition within all phases
of the natural gas industry. The United States Court of Appeals for the District of
Columbia Circuit largely upheld Order 636 and the Supreme Court has declined to hear the
appeal from that decision. Generally, Order 636 has eliminated or substantially reduced
the interstate pipelines traditional role as wholesalers of natural gas in favor of
providing only storage and transportation service, and has substantially increased
competition and volatility in natural gas markets.

The price we may receive from the
sale of oil and natural gas liquids will be affected by the cost of transporting products
to markets. Effective January 1, 1995, FERC implemented regulations establishing an
indexing system for transportation rates for oil pipelines, which, generally, would index
such rates to inflation, subject to certain conditions and limitations. We are not able to
predict with certainty the effect, if any, of these regulations on our intended
operations. However, the regulations may increase transportation costs or reduce well head
prices for oil and natural gas liquids.

# Environmental Matters.

Our operations and properties are
subject to extensive and changing federal, state and local laws and regulations relating
to environmental protection, including the generation, storage, handling, mission,
transportation and discharge of materials into the environment, and relating to safety and
health. The recent trend in environmental legislation and regulation generally is toward
stricter standards, and this trend will likely continue. These laws and regulations may:

| |  |  | require
the acquisition of a permit or other authorization before construction or drilling
commences and for certain other activities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

| |  |  | limit
or prohibit construction, drilling and other activities on certain lands lying within
wilderness and other protected               areas; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | impose
substantial liabilities for pollution resulting from our operations.
| | - |  | ---------------------------------------------------------------------------

The permits required for our
operations may be subject to revocation, modification and renewal by issuing authorities.
Governmental authorities have the power to enforce their regulations, and violations are
subject to fines or injunctions, or both. In the opinion of management, we are in
substantial compliance with current applicable environmental laws and regulations, and
have no material commitments for capital expenditures to comply with existing environmental requirements.
Nevertheless, changes in existing environmental laws and regulations or in interpretations
thereof could have a significant impact on us, as well as the oil and natural gas industry
in general.

The Comprehensive Environmental,
Response, Compensation, and Liability Act (CERCLA) and comparable state
statutes impose strict, joint and several liability on owners and operators of sites and
on persons who disposed of or arranged for the disposal of hazardous substances found
at such sites. It is not uncommon for the neighbouring land owners and other third
parties to file claims for personal injury and property damage allegedly caused by the
hazardous substances released into the environment. The Federal Resource Conservation and
Recovery Act (RCRA) and comparable state statutes govern the disposal of
solid waste and hazardous waste and authorize

16

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the imposition of substantial fines
and penalties for noncompliance. Although CERCLA currently excludes petroleum from its
definition of hazardous substance, state laws affecting our operations may
impose clean-up liability relating to petroleum and petroleum related products. In
addition, although RCRA classifies certain oil field wastes as non-hazardous, such
exploration and production wastes could be reclassified as hazardous wastes thereby
making such wastes subject to more stringent handling and disposal requirements.

The Endangered Species Act
(ESA) seeks to ensure that activities do not jeopardize endangered or
threatened animal, fish and plant species, nor destroy or modify the critical habitat of
such species. Under ESA, exploration and production operations, as well as actions by
federal agencies, may not significantly impair or jeopardize the species or its habitat.
ESA provides for criminal penalties for wilful violations of the Act. Other statutes that
provide protection to animal and plant species and that may apply to our operations
include, but are not necessarily limited to, the Fish and Wildlife Coordination Act, the
Fishery Conservation and Management Act, the Migratory Bird Treaty Act and the National
Historic Preservation Act. Although we believe that our operations will be in substantial
compliance with such statutes, any change in these statutes or any reclassification of a
species as endangered could subject us to significant expenses to modify our operations or
could force us to discontinue certain operations altogether.

| | Organizational
Structure.
| | -------------------------

We have a single subsidiary, Kodiak
Oil & Gas (USA) Inc., which is wholly-owned and was incorporated in the State of
Colorado.

| | Property,
Plants and Equipment.
| | -------------------------------

Our exploration focus is on two
geographic areas within the Rocky Mountain Region. We explore for tight gas sands and
other unconventional gas plays, such as coalbed methane, in the greater Green River Basin
located in southwestern Wyoming. We explore for oil in the Williston Basin in eastern
Montana and western North Dakota. In identifying our prospects existing oil and gas
pipeline infrastructure is of critical importance. In most cases, our gas prospects are
within a reasonable distance of natural gas pipelines, therefore requiring minimal
construction of pipelines to tie into the existing lines. Our oil is mostly transported by
trucks and/or pipelines, if available.

Set forth below is a description of
our material resource properties and their current state of development:

GREATER GREEN RIVER
BASINSWEETWATER COUNTY, WYOMING

Our primary leaseholdings in the
Greater Green River Basin are located in an area we refer to as the Pacific Rim area or
more recently the Vermillion Basin. The area is a geologic region where gas is trapped in
various sands, coals, and shales at depths ranging from 2,000 feet to nearly 15,000 feet.
As of March 31, 2006 we have accumulated 62,147 gross acres 34,107 net acres in the region
and have participated in the formation of five federal exploratory oil and gas units
whereby the majority of our lands are included in these federal units. Our exploration
program consists of evaluating these potential zones within the different units. Our
Pacific Isle CBM project has potential in only the coals as the sands in the area are
principally water bearing. Our other lands included within, or contiguous, to the Chicken
Springs, Chicken Ranch, Whiskey Canyon, and Horseshoe Basin Units hold the potential for
production from the Almond and Ericson sands, the Baxter shales, and the Frontier and
Dakota sands.

Vermillion Basin Shallow
 Almond Sandstone, Almond Coals and Ericson Sandstone

During 2005 we participated in the
drilling of six wells that evaluated the natural gas potential in the Almond and Ericson
formations. Two of the three wells drilled in the Chicken Springs Unit were drilled
vertically to test the only the Almond sands. One well in the Chicken Springs Unit was
drilled horizontally to evaluate the gas potential of the Almond coals. In addition, we
participated in two wells in the Chicken Ranch Unit and acreage contiguous to the Unit to
evaluate the gas potential of both the Almond and Ericson sands

We believe the property has the
potential for over 100 drilling locations based upon 160 acre spacing. However the
spacing pattern could be downsized to 80 acre spacing and/or horizontal drilling
technology could be utilized to

17

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exploit the potential reserves.
Further drilling and/or completion activity in these areas have been discontinued until
the second quarter of 2006 due to industry winter drilling stipulations particular to BLM
leases.

During 2006 we intend to participate
in the drilling of up to ten wells to test the Almond and the Ericson Formations. We will
have both non-operated and operated wells and our share of drilling and completion costs
for the wells is estimated at $8,000,000.

| | Chicken
Springs Unit (Conventional Tight Gas Sandstone and CBM)
| | ---------------------------------------------------------------

We own an interest in 12,873 gross
acres within the Chicken Springs Coalbed Methane Gas (CBM) Unit, a 19,800 acre
federal oil and gas CBM unit that was approved in July 2004. We have a 50% before payout
(an approximate 40% after payout) working interest in the 12,873 gross acres. The initial
exploratory test, CSFED 14100 SW 29, was drilled to a depth of 6,180 feet to evaluate the
natural gas potential of the Almond sandstones and Almond coals during 2004.

The initial exploratory test
encountered 24 feet of Almond coals and 114 feet of Almond sands, of which 94 feet showed
gas indications. Completion work was completed in three stages. The first stage involved
an injection test of the Almond coals in an effort to gain information on the permeability
of the coals. The second and third stages included fracture stimulation procedures on the
two primary Almond sand zones. A three-mile pipeline was constructed to connect the well
to Questars transmission facilities. Production from the well commenced in June
2005. Two development wells, CSFED 14100 4-32 and the CSFED 14100 4-29 wells, were drilled
during the third quarter of 2005. These wells have been completed and connected to the
existing production facilities and sales line. Compression facilities were installed and
completed in the fourth quarter of 2005. The wells were connected to compression
facilities at that time and are currently producing 500-600 Mcf per day cumulatively.

One mile to the west, the CSFED 14100
2-31H well (50% WI; non-operator) reached total depth on January 8, 2006. Horizontal
drilling technology was used to evaluate the potential of the thick Almond coal. Casing
was set just above the coals at approximately 6,200 feet and the well reached total
measured depth of 7,890 feet. This 16-foot bench of coal is present in the surrounding
wells and was tested for gas content in the CSFED 14100 SW29 well. The gas content of the
coals was nearly 500 standard cubic feet per ton based upon side wall cores taken from the
well. Production liner has been set and the well is currently being flow tested. It has
been connected to the Chicken Springs production facilities and production testing will
continue.

| | Chicken
Ranch (Conventional Tight Gas Sand Prospect)
| | ----------------------------------------------------

We acquired an interest in 7,858
gross acres on our Chicken Ranch Prospect located in Sweetwater County, Wyoming,
immediately northeast of our Chicken Springs Project. We entered into an exploration
agreement on a 2,240-acre block within the prospect area to jointly evaluate the potential
of the Almond and Ericson sands at depths ranging from 8,500 feet to 10,500 feet. We
retained a 33.34% working interest in the 2,240 acres. Drilling of the initial test well
commenced during the third quarter of 2005 and production casing has been set to 8,684
feet. Completion work was suspended during the fourth quarter of 2005 due to lease
stipulations. The Almond and Ericson sands produce in the immediate area in our Chicken
Springs Prospect as well as the Trail Canyon Field to the south. The well is a one mile
offset to a well drilled in 1982 that was completed in the Ericson sands and tested at a
rate of 750 mcf gas per day. The well was plugged and abandoned due to the lack of
pipeline infrastructure and low natural gas prices.

In February 2006 we acquired
additional interests within the Chicken Ranch Unit and in contiguous lands. We acquired an
approximate 90% working interest in 10,629 gross acres (9,566 net acres).

Vermillion Basin Deep-Gas
Project  Baxter Shale and Frontier and Dakota Sandstone

| | Chicken
Springs, Chicken Ranch, Whiskey Canyon, Horseshoe Basin Units
| | ---------------------------------------------------------------------

During 2005 the Vermillion Basin
area saw six wells drilled by another company that evaluated the deeper natural gas
potential of the Baxter shales, Frontier sands, Mowry shales, and Dakota sands at depths
ranging to

18

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approximately 14,000 feet. Based
upon the results from those wells additional drilling has occurred in 2006. The
prospective zones are present over a very large geologic area and include our acreage
positions in this area, with the exception of our acreage in the Pacific Isle CBM
project. Based upon early exploration work, the current production drainage projections
would require well spacing of a maximum of 40 acre spacing. While the total prospective
productive area is unknown at this time, it has the potential to encompass much of our
acreage estimated at 28,337 net acres. Based upon a 40 acre spacing pattern we have the
potential for over 700 locations. Permitting procedures are in process for two wells on
our Vermillion Basin acreage in Sweetwater County, Wyoming. We anticipate having an
approximate 35%-50% working interest in the two wells that will evaluate the potential of
the developing deep-gas play in the Baxter Shale and Frontier sandstone at a proposed
total depth of 14,000 feet. We anticipate that we will spud the initial test well in the
summer of 2006. We expect to spud the second well in the fall of 2006. We estimate that
our share of drilling and completion costs for these wells will be $4,500,000.

Coalbed Methane

| | Pacific
Isle Coalbed Methane (CBM) Gas Unit
| | -------------------------------------------

We own a 20% working interest, 16%
net revenue interest, in the Pacific Isle Coalbed Methane Gas (CBM) Unit. The
CBM Unit is being developed on a 160 acre spacing pattern designed to dewater the coals.
The water is being re-injected into the Ericson sandstone below the coals. 15 wells have
been drilled, completed and hooked up to production facilities. One of the wells has been
completed in an Almond sand providing gas to run the production facilities during the
early production stages, which has significantly reduced the operating costs.

The working interest owners have
completed an Environmental Assessment (EA) that encompasses the lands within
the Pacific Isle CBM Unit. The EA, approved by the Bureau of Land Management
(BLM) in September 2004, streamlines the permitting procedures for the
development locations and addresses environmental concerns. A three-mile pipeline has been
constructed from the production facilities to an existing pipeline that connects to a main
Questar Pipeline. Compression facilities have been installed and gas sales commenced
during the third quarter of 2005. We believe that our current Pacific Isle CBM Unit lease
holdings have the potential for 80 locations based upon 160 acre spacing. Ultimately the
spacing could be downsized to 80 acres spacing and/or horizontal drilling technology could
be utilized to exploit the potential reserves. Warren is the operator and owns the
remaining 80% working interest.

The federal unit requires the
drilling of five wells each twelve month period. The operator, however, receives the
benefit of cumulative drilling. Drilling permits have been obtained for eleven additional
locations and the extent of development work for 2006 will be determined at a later date.
If the five wells are not drilled in 2006, the Unit would be contracted down to the
existing locations.

The initial rates of gas produced
from the coalbed wells are typically modest and the production rates increase during the
dewatering phase. Gas production steadily rises, usually over the course of the first
three to five years in the life of the well and then slowly decreases over a lifespan that
often exceeds 20 years.

Other Wyoming Prospects
Frontier and Muddy Formations

| | Masterson
/Shiprock Prospects
| | -----------------------------

We have a 70% working interest, 57%
net revenue interest, in 6,416 gross acres. The initial test well was drilled and cased to
a depth of 6,970 feet in January 2005 to test the Second Frontier and the lower Muddy
sandstone. During drilling operations, three porous sands were encountered in the Second
Frontier Formation at a depth of 6,234 to 6,288 feet. The Muddy sandstone was tested at
non-commercial rates and plugged off. The Second Frontier was completed in June 2005.
Production from the well commenced in August 2005. We intend to drill one offset to this
well in 2006.

19

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We are seeking permits to drill wells
at additional locations in the same geologic region and intend to participate in the
drilling of up to three wells in 2006. Our share of the drilling and completion costs is
estimated to be approximately $1,600,000.

WILLISTON BASIN 
EASTERN MONTANA AND WESTERN NORTH DAKOTA

Great Bear Prospect

The Great Bear Prospect is located
along the northwest flank of the Williston Basin in Divide County, North Dakota. The main
reservoir objective is porous dolomite in the Ordovician Red River Formation. The Red
River Formation produces oil and natural gas from structural and stratigraphic traps in
the area of interest. In the Great Bear Prospect we intend to utilize new horizontal
drilling technology to more effectively develop a stratigraphically trapped hydrocarbon
accumulation. Vertical wellbores have produced commercial volumes of oil from the Red
River Formation in the Great Bear Prospect area. However, we expect that horizontal
lateral bore holes may increase the recovery efficiency from the productive interval.

We have acquired an interest under
approximately 18,600 gross acres on the Great Bear Prospect. The Pederson well on our
Great Bear Prospect in Divide County, North Dakota reached total depth on January 22. The
horizontal well was drilled to an approximate vertical depth of 10,600 feet and a total
measured depth of 14,725 feet to test the Red River C Formation. Based upon sample shows
recovered during drilling, production liner has been set and completion work continues.
The well is a direct offset to a vertical well drilled in 1984 with cumulative production
of 173,000 barrels of oil and is currently producing approximately 20 BOPD. It is expected
that the horizontal drilling technology will improve the recovery efficiency of the
productive interval. We operate the well and have a 43.75% working interest. Completed
well costs were approximately $1,531,250 net to the Companys working interest. The
Bakken Formation is a secondary objective in the Project area and produces in the general
area.

Approximately three miles east of the
Pederson well, we have completed drilling of the Nielsen #14-12 well (50% WI; operated by
Kodiak) that was drilled to a vertical depth of 10,750 feet to evaluate the Red River C
Formation. Completion work continues at this time. Completed well costs are approximately
$1,274,500 to our 50% working interest.

Wrangler Project

We own a 50% working interest in the
Wrangler Project located in Sheridan County, Montana encompassing approximately 8,400
gross acres. The Project includes two prospects that evaluated the potential of the
Mission Canyon Formation. The initial test well on the Lowell Prospect (State #8-16) was
drilled to a depth of 7,700 feet. The well encountered 13 feet of porosity and was placed
on production in early September 2005. We have completed drilling of three 160 acre
offsets (State #6-16), (State #10-16) and (Christensen Trust 15-9). Current field
production from the four wells is approximately 400 barrels of oil per day (BOPD). We have
begun permitting procedures for two additional development drilling locations in 2006. Our
share of drilling and completion for the two wells is estimated to be approximately
$1,000,000.

Further to the west, the North
Wrangler Prospect was drilled during 2005 resulting in a plugged and abandoned well.
However, based upon the drilling results the Mission Canyon will be further evaluated at a
later date though seismic acquisition or further drilling. Additionally, the Red River
Formation is a secondary objective in the Project area and has been productive in nearby
wells. We are currently seeking permits to cover a 3-D seismic program for the area. If we
obtain the permits as we expect, we would expect to have the seismic work completed by
third quarter of 2006. Drilling activity could follow in late 2006 if the seismic work and
other geologic information support that decision.

Grizzly Prospect

We own a 62.5% working interest in
3,474 acres in McKenzie County, North Dakota. The lands are located in western McKenzie
County, North Dakota near the Montana border and part of the Middle Bakken horizontal oil

20

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play. Our acreage has been directly
offset to the north with two multi-lateral wells that are currently producing from the
Bakken Formation.

The Middle Bakken horizontal oil play
in eastern Montana and western North Dakota has resulted in the discovery of one of the
largest onshore oil fields found in recent years in the continental United States. The
Middle Bakken pay zone is a Devonian silty dolomite sandwiched between the Upper Bakken
Shale and either a thin lower Bakken shale or the Three Forks Formation. The zone is
generally produced with from one to three 4,000-5,000-foot horizontal laterals or
occasionally one longer 8,000-9,000-foot lateral. Completed well costs range from $3.5
million to $4.0 million, depending upon the amount of lateral. To date, the most common
completion practice is to complete two laterals open hole with large gelled water sand
fracs. Current drilling operations are evaluating the use of three laterals per 640 acres
and slick water frac technology.

We are currently drilling the initial
test well on our acreage and the well should reach total depth in 30 days. The well is
expected to be drilled to an approximate vertical depth of 10,600 feet, with multilateral
legs for total measured depth of approximately 22,000 feet to test the oil-prone Bakken
Formation. Approximately two miles to the west, we are seeking permits to the Grizzly
Federal #4-11H well (62.5% WI; operated by Kodiak) which the Company plans to drilled
immediately following the Kodiak Grizzly #13-6H well. We are the operator of the property.
Our share of the costs for drilling and completing the two completed wells is estimated to
be $4,400,000.

# Reserves

The reserve estimates at December 31,
2005 presented below were reviewed by Sproule Associates Inc. All reserves are located
within the continental United States. The reserve estimates are developed using geological
and engineering data and interests and burdens information developed by the Company.
Reserve estimates are inherently imprecise and are continually subject to revisions based
on production history, results of additional exploration and development, prices of oil
and gas, and other factors. The notes following the table should be read in connection
with the reserve estimates.

|                                                      | As of
December 31, 2005
|----------------------------------------------------- | -----------------------
|                                                      |                        
|Proved Developed Oil Reserves (MBbls)                 |                        
|Proved Undeveloped Oil Reserves (MBbls)               |                        
|Total Proved Oil Reserves (MBbls)                     |                        
|Proved Developed Gas Reserves (MMcf)                  |                        
|Proved Undeveloped Gas Reserves (MMcf)                |                        
|Total Proved Gas Reserves (MMcf)                      |                        
|Total Proved Gas Equivalents (MMcfe)(3)               |                        
|Present Value of Estimated Future Net Revenues Before |                        
|Income Taxes, Discounted at 10%(M$)(2)                |                        
|Present Value of Estimated Future Net Revenues After  |                        
|Income Taxes, Discounted at 10%(M$)(4)                |                        

| |  | (1) |  | The
Company's annual reserve reports are prepared as of the last day of the Company's fiscal
year.
| |  | --- |  | --------------------------------------------------------------------------------------------------

| |  | (2) |  | The
present value of estimated future net revenues as of each date shown was calculated using
oil and gas prices being          received by each respective property as of that date.
 The average prices utilized for December 31, 2005 were $8.11 per Mcf          and $57.57
per barrel of oil.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (3) |  | Oil
is converted to Mcf of gas equivalent at one barrel equals 6,000 cubic feet.
| |  | --- |  | --------------------------------------------------------------------------------

| |  | (4) |  | The
Present Value of Estimated Future Net Revenues After Income Taxes, Discounted at 10%, is
referred to as the          "Standardized Measure," as described in Note 10 to the
Company's financial statements.
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Reference should be made to the
supplemental oil and gas information included in this Form 20-F for additional information
pertaining to the Companys oil and gas reserves as of the end of the fiscal year.

21

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# Production

The following table sets forth oil
and gas production from our net interests in producing properties for the year ended
December 31, 2005

|                            | Year Ended
December 31, 2005
|--------------------------- | ----------------------------
|                            |                             
|Oil (Bbls)                  |                             
|Gas (MMcf)                  |                             
|Average sales price per Bbl |                             
|Average sales price per Mcf |                             

# Drilling Activity

All of our drilling activities are
conducted on a contract basis with independent drilling contractors. We do not own any
drilling equipment. The following table sets forth the number and type of all wells which
we drilled as of December 31, 2005.

|               | 2005
|-------------- | ----
|               |     
|
|               |     
|Development:   |     
|Oil            |     
|Gas            |     
|Non-Productive |     
|Exploratory:   |     
|Oil            |     
|Gas            |     
|Non-Productive |     
|               |     
|Total          |     
|               |     

# Item 4A.   Unresolved
Staff Comments.

Not applicable.

# Item 5.   Operating and
Financial Review and Prospects.

# Overview of the Company

| | General
Overview
| | ----------------

Kodiak Oil & Gas Corp. is a
public company listed on the TSX Venture Exchange, under the trading symbol
KOG, with its corporate headquarters located in Denver, Colorado. We are an
independent energy company focused on the exploration, exploitation, acquisition and
production of natural gas and crude oil in the United States. Our oil and gas reserves and
operations are concentrated in two Rocky Mountain Basins, including the Greater Green
River and the Williston Basins. We are exploring for natural gas in the Green River Basin
in southwestern Wyoming and oil in the Williston Basin in Montana and North Dakota. Our
corporate strategy is to grow through the drilling of prospects. To this end, we have
developed a balanced portfolio of proved reserves, development drilling opportunities and
non-conventional gas prospects.

As of December 31, 2005, we had
estimated proved reserves of 6.0 BCFE, with a PV-10 value of $18.2 million. Our reserves
are 79% proved developed and are comprised of 48% natural gas and 52% crude oil. The
fiscal year ended December 31, 2005 marked the first year that we recorded natural gas and
crude oil reserves.

22

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Results of our operations and
financial conditions are significantly affected by oil and natural gas commodity markets,
which can fluctuate dramatically. In 2005, oil and gas producers benefited from high oil
and gas commodity prices. Increased prices of natural gas were caused by several
conditions, including a finite storage capacity in North America, a limited import market
and fluctuations in domestic demand created by weather conditions. Oil price fluctuations
are more closely related to global events as opposed to domestic events, although the
inability to increase supply domestically continues to be a factor. The global conditions
that affect the price of oil include a continuing increase in demand from the global
economy, political instability in parts of the world, and a decrease in excess of
worldwide production capacity.

| | Overview
of 2005
| | ----------------

2005 marked the first revenues from
the sale of natural gas and crude oil in the history of the Company. For the twelve month
period ended December 31, 2005, we closed on $17,935,173 of financings through the
issuance of common stock. The proceeds have and will primarily be used to finance our
drilling operations and to acquire additional oil and gas leaseholds. As of December 31,
2005, we held a working interest under 124,734 gross acres and 77,737 net acres located in
Wyoming, Montana and North Dakota.

Our share of acquisition and
exploration costs on oil and gas properties was $15,160,609 for the year ended December
31, 2005. This represents a 900% increase over the $1,672,300 spent during the year ended
December 31, 2004. We participated in the drilling of 12 gross (five net) wells during
2005. Seven of these wells were completed as producing wells, four wells are still being
evaluated through production tests, and one exploration well was plugged and abandoned.

In 2005 oil prices rose to record
levels as the demand for oil was impacted by the growing economies of China and India, as
well as from a recovering US economy, as well as the negative impact of Hurricanes Katrina
and Rita which adversely impacted U.S. refining capacity and production in the Gulf of
Mexico and certain onshore locations. Spot market prices reflected worldwide concerns
about producer ability to ensure sufficient supply to meet increasing demand amid a host
of uncertainties caused by weather-related destruction, political instability, a weaker US dollar and crude oil
refining constraints. Average natural gas prices for the year were at an all-time high due
to supply and transportation constraints, weatherrelated lost production and
continuing strong demand for natural gas in domestic markets resulting from an improving
economy and the effect of high oil prices have on natural gas demand. New York Mercantile
Exchange (NYMEX) prices for the year averaged $8.55 MMBtu and $56.56 per Bbl. At December
31, 2005, the 12-month NYMEX strip was $63.18 per Bbl for oil and $8.11 per MMBtu for gas.
As of March 31, 2006 these same prices were $62.69 per Bbl for oil and $7.12 per MMBtu for
gas. We receive a lower price for our gas production than what is posted on the NYMEX
strip. The price differential received for our gas in the Rocky Mountain Region was $2.72
at December 31, 2005 and $1.30 as of March 31, 2006. We also receive lower
prices for our oil production in the Williston Basin than what is posted on the NYMEX
strip. The price adjustment received was $5.40 at December 31, 2005 and $13.30 at March
31, 2006. These adjustments include transportation, gravity adjustment and price
differential.

| | Outlook
for 2006
| | ----------------

We believe that oil and gas prices
will remain volatile during 2006 but marked by upward pressure resulting from the
international political situation and continuing pressure from growing economies in the
Far East and elsewhere. While we have attractive prospects to drill, our ability to grow
could be adversely affected by the potential shortage of qualified crews to work on
drilling rigs. We have felt the impact of escalating rig and other service costs.

We have adopted a capital expenditure
budget of $30 million for 2006. We intend to spend $27.7 million of our budget on
exploration and development of our properties that we have acquired over the past two
years with $2.3 million allocated to additional land acquisition. Our $30 million budget
is allocated among our core areas as follows:

| |  |  | Pacific
Rim/Vermillion BasinWe plan to participate in approximately 17 wells in this area
of the Greater Green River Basin in southwestern Wyoming with total capital expenditures
of $12.5 million. This exploration and development work will include the drilling of
wells to develop the shallow
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23

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| | Almond
and Ericson formations in the coals and the sands. We intend to exploit the potential of
these reservoirs through both vertical wellbores and utilizing horizontal drilling
technologies. We are planning to participate in the drilling of at least two wells to
evaluate the natural gas potential of the deeper Baxter shale and Frontier sandstone in
this area. These wells are expected to reach a total depth of 14,500 feet and cost $4 to
$6 million dollars to drill and complete to 100% working interest.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Other
Wyoming prospectsWe are planning to participate in the drilling of five additional
wells with total capital of $2.4 million as our share of these well costs. Most of these
wells are located in the Greater Green River Basin and will evaluate the natural gas
potential of the Frontier formation at depths of 7,000-8,000 feet.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We
are planning to participate in approximately nine wells in the Williston Basin (Montana
and North Dakota) in 2006 with total capital of $12.8 million. The planned capital
expenditures will be allocated between our prospects were we are developing oil reserves
from the Bakken, Red River and Mission Canyon formations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We
acquired a 90% working interest in 10,629 gross acres (9,566 net) in lands contiguous to
our Pacific Rim projects (also known as the Vermillion Basin) for $6.9 million in March
2006. Our first well to evaluate the Baxter shale and Frontier sandstone will be located
on these recently acquired lands and we intend to commence drilling operations in late
second quarter 2006.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Critical Accounting
Policies and Estimates

Financial statements have been
prepared on a going concern basis. As at December 31, 2005, we have accumulated losses of
$5,829,627 since inception and we have yet to achieve profitable operations. Our ability
to continue as a going concern is dependent upon our success in generating profitable
operations in the future and/or to obtaining the necessary financing to meet our
obligations and repay our liabilities arising from normal business operations when they come due. Our financial
statements do not give effect to adjustments that would be necessary to the carrying
values and classification of assets and liabilities should we be unable to continue as a
going concern.

The preparation of our consolidated
financial statements in conformity with generally accepted accounting principals in the
United States requires management to make assumptions and estimates that affect the
reported amounts of assets, liabilities, revenues, and expenses, as well as the disclosure
of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. The following is a
summary of the significant accounting policies and related estimates that affect our
financial disclosures.

| | Oil
and gas reserves
| | --------------------

Estimated reserve quantities and the
related estimates of future net cash flows are the most important estimates for an
exploration and production company because they affect the perceived value of our
company, are used in comparative financial analysis ratios, and are used as the basis for
the most significant accounting estimates in our financial statements which include the
periodic calculation of depletion, depreciation and impairment for our proved oil and gas
properties. Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas, and natural gas liquids which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future periods from known reservoirs under
existing economic and operating conditions. Future cash inflows and future production and
development costs are determined by applying benchmark prices and costs, including
transportation, quality and basis differentials, in effect at the end of each period to
the estimated quantities of oil and gas remaining to be produced as of the end of that
period. Expected cash flows are reduced to present value using a discount rate that
depends upon the purpose for which the reserve estimates will be used. For example, the
standardized measure calculation required by SFAS No. 69, Disclosures about Oil and Gas
Producing Activities, requires a 10% discount rate to be applied. Although reserve
estimates are inherently imprecise, and estimates of new discoveries and undeveloped
locations are more imprecise than those of established proved producing oil and gas
properties, we make considerable effort to estimate our reserves, including the use of
independent reserves engineering consultants. We expect that periodic reserve estimates
will change in the future as additional information becomes available or as

24

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oil and gas prices and operating and
capital costs change. We evaluate and estimate our oil and gas reserves as of December 31
of each year and at other such times throughout the year that seem appropriate. For
purposes of depletion, depreciation, and impairment, reserve quantities are adjusted at
all interim periods for the estimated impact of additions and dispositions. Changes in
depletion, depreciation or impairment calculations caused by changes in reserve
quantities or net cash flows are recorded in the period that the reserves estimates
change.

| | Impairment
of Long-lived Assets
| | -------------------------------

Our property and equipment is
recorded at cost. The cost of the Companys unproved properties is withheld from the
depletion base as described above, until such a time as the properties are either
developed or abandoned. These properties are reviewed periodically for possible
impairment. An impairment allowance is provided on unproved property when we determine
that the property will not be developed or the carrying value will not be realized. We
evaluate the realizability of our proved properties and other long-lived assets whenever
events or changes in circumstances indicate that impairment may be appropriate. Our
impairment test compares the expected undiscounted future net revenue from a property,
using escalated pricing, with the related net capitalized costs of the property at the end
of each period. When the net capitalized costs exceed the undiscounted future net revenue
of a property the cost of the property is added to the full cost pool.

| | Revenue
Recognition
| | -------------------

Our revenue recognition policy is
significant because revenue is a key component of our results of operations and our
forward-looking statements contained in our analysis of liquidity and capital resources.
We derive our revenue primarily from the sale of produced natural gas and crude oil. We
report revenue as the gross amounts we receive before taking into account production taxes
and transportation costs, which are reported as separate expense. Revenue is recorded in
the month our production is delivered to the purchaser, but payment is generally received
30 and 90 days after the date of production. At the end of each month, we make estimates
of the amount of production delivered to the purchaser and the price we will receive. We
use our knowledge of our properties, their historical performance, the anticipated effect
of weather conditions during the month of production, NYMEX and local spot market prices
and other factors as the basis for these estimates. Variances between our estimates and
the actual amounts received are recorded in the month payment is received.

| | Asset
Retirement Obligations
| | ----------------------------

We are required to recognize an
estimate liability for future costs associated with the abandonment of our oil and gas
properties including (without limitation) the costs of reclamation of our drilling sites,
storage and transmission facilities and access roads. We base our estimate of the
liability on our historical experience in abandoning oil and gas wells projected into the
future based on our current understanding of federal and state regulatory requirements.
Our present value calculations require us to estimate the economic lives of our
properties, assume what future inflation rates apply to external estimates as well as
determine what credit adjusted risk-free rate to use. The statement of operations impact
of theses estimates is reflected in our depreciation, depletion and amortization
calculations and occurs over the remaining life of our oil and gas properties.

| | Stock-based
compensation
| | ------------------------

We have historically accounted for
stock-based compensation under the provisions of SFAS No. 123. This statement requires us
to record expense associated with the fair value of stock-based compensation. We currently
use the Black-Scholes option valuation model to calculate stock based compensation.

| | Oil
and Gas Properties  Full-cost method of accounting
| | -------------------------------------------------------

The Company follows the full cost
method of accounting whereby all costs related to the acquisition and development of oil
and gas properties are capitalized into a single cost center referred to as a full cost
pool. Such costs include land acquisition costs, geological and geophysical expenses,
carrying charges on non-producing properties, costs of drilling and overhead charges
directly related to acquisition and exploration activities.

25

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Costs capitalized, together with the
costs of production equipment, are depleted and amortized on the unit-of-production method
based on the estimated gross proved reserves as determined by independent petroleum
engineers. Petroleum products and reserves are converted to a common unit of measure.

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

Proceeds from a sale of petroleum and
natural gas properties are applied against capitalized costs, with no gain or loss
recognized, unless such a sale would alter the rate of depletion by more than 20%.
Royalties paid net of any tax credits received are netted with oil and gas sales.

In applying the full cost method, we
perform a ceiling test on properties which restricts the capitalized costs less
accumulated depletion from exceeding an amount equal to the estimated undiscounted value
of future net revenues from proved oil and gas reserves, as determined by independent
engineers, based on sales prices achievable under existing contracts and posted, average
reference prices in effect at the end of the year and current costs, and after deducting
estimated future general and administrative expenses, production related expenses,
financing costs, future site restoration costs and income taxes. Under the full cost
method of accounting, capitalized oil and gas property costs less accumulated depletion
and net of deferred income taxes may not exceed an amount equal to the present value,
discounted at 10%, of estimated future net revenues from proved oil and gas reserves, plus
the cost, or estimated fair value if lower, of unproved properties. Should capitalized
costs exceed this ceiling, an impairment would be recognized.

| | Foreign
Currency Fluctuations
| | -----------------------------

Monetary items denominated in a
foreign currency, other than U.S. dollars, are converted into U.S. dollars at exchange
rates prevailing at the balance sheet date. Foreign currency denomination revenue and
expense items are translated at exchange rates prevailing at the transaction date. Gains
or losses arising from the translations are included in operations. See Risk
Factors.

# A.   Operating Results.

| | Fiscal
Year Ended December 31, 2005 as Compared to Fiscal Year Ended December 31, 2004
| | --------------------------------------------------------------------------------------

We recorded revenues of $453,135
during 2005 compared to $20,449 during 2004. Oil and gas revenues accounted for $365,580
of the 2005 revenues and resulted from the sale of 2,699 bbls of oil and 37,751 Mcf of
natural gas at an average price of $51.89 per bbl and $7.11 per Mcf. Interest income
increased $67,106 during 2005 compared to 2004 primarily due to higher average cash and
cash equivalent and short term investment balances during 2005, relating primarily to
proceeds from our financing activities. We anticipate that our revenues will increase
significantly during our 2006 fiscal year because our wells will be on production for a
full year. We also expect to put additional wells on production during 2006. While we
cannot predict the prices we receive for our oil and gas production, we anticipate
commodity prices remaining at similar levels as we experienced in 2005.

We recorded oil and gas production
expenses of $201,885 during 2005 that were the result of placing wells on production. We
anticipate that our oil and gas production expenses will increase significantly during
2006 because of our expanding operating activity. We also expect increasing costs of oil
field operations that will result in significantly greater expenses for drilling rigs and
oil field services.

General and administrative expenses
increased $865,157 during 2005 as compared to 2004. The increase in these expenses is
primarily due to additional salary expense and office overhead associated with our
increased operational level (our staff increased from five to eight); shareholder
relations costs as we continued to increase our exposure to the US markets; and stock
based compensation ($541,111) related to the issuance of stock options to employees. The
remaining increase in our general and administrative expenses is due to the fluctuation
in numerous other expenses that reflect the increased level of activity, none of which
are individually significant. We anticipate that

26

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our general and administrative
expenses will increase during 2006 as we will most likely require additional staff to
meet our operating needs.

| | Fiscal
year ended December 31, 2004 as compared to fiscal year ended December 31, 2003
| | --------------------------------------------------------------------------------------

During the year ended December 31,
2004, we began to evaluate and develop additional gas prospects in southwestern Wyoming
and to expand our operations into the Williston Basin in Montana and North Dakota. We
incurred $399,758 for the acquisition of lands and $1,272,542 for the exploration and
development of the properties during the period ended December 31, 2004. This compares to
$263,415 and $322,406 for the same expenditures for the year ended December 31, 2003.
General and administrative expenses increased significantly as we increased staff from two
to five in September 2004 and increased our activity level after the closing of the
private placement in February 2004 and the exercise of warrants in August 2004.

Our net loss from operations for the
year ended December 31, 2004 was $1,062,100, compared with a losses of $275,683 for the
year ended 2003. The net loss before depreciation and gain on foreign currency exchange in
2004 was $1,117,003, compared to $273,185 in 2003, including stock based compensation
charges of $411,238 and $93,289 for the years ended December 31, 2004 and 2003,
respectfully. The increased loss was the result of the increased level of activity and the
additional staff employed in September 2004.

| | Fiscal
year ended December 31, 2003 as compared to Fiscal year ended December 31, 2002
| | --------------------------------------------------------------------------------------

Our level of activity greatly
increased during the year as we progressed into the production and development stages of
the Pacific Rim Prospect. During the twelve-month period ended December 31, 2003, we paid
management fees of $76,950 and paid $27,000 for
office expenses to CP Resources LLC compared to $19,109 and $16,198, respectively for the
year ended December 31, 2002. The increase in office expense is due primarily to our
assumption of a greater share of the monthly office rent as our activity increased. Office
rent for the period ended December 31, 2003 was $18,900 compared to $11,465 for the same
period ended December 31, 2002. General and administrative expenses for the period ending
December 31, 2003 included $23,467 for investor relations compared to $4,062 for the same
period ending December 31, 2002. We entered into an investor relations agreement in August
2003 with a third party. The agreement requires us to pay Cdn$5,000 per month plus
expenses and can be cancelled by either party with 30 days written notice.

Our net loss from operations for the
year ended December 31, 2003 was $275,683, compared with a losses of $87,670 for the year
ended 2002. The net loss before depreciation, stock-based compensation and gain on foreign
currency exchange in 2003 was $179,896, compared to $84,419 in 2002. The increased loss
was the result of the increased level of activity.

# B.   Liquidity and Capital
Resources.

As of December 31, 2005, we had
working capital of $3,578,994 and no long term debt.

In February 2006, we issued
19,514,268 shares of common stock in private placement that resulted in net proceeds of
$37,138,452.

Our cash flow has increased following
completion of drilling operations on certain projects and connection of those wells to
sales lines and the sale of our oil production to crude oil buyers. However, revenues from
operations are not expected to generate sufficient cash to fund our operations in the near
future. We currently do not have a line of credit or other sources of debt financing.

We own depleting assets. In order to
sustain our projected growth levels, we will have to successfully invest capital into new
projects and acquisitions. The following analysis and discussion includes our assessments
of market risk and possible effects of inflation and changing prices.

Our principal sources of liquidity
are sales of equity securities and cash generated by sales of gas and oil. These sources
can be impacted by the general condition of our industry and by significant fluctuations
in oil and gas prices,

27

---

operating costs and volumes
produced. We have no control over the market prices for oil and gas. A decrease in market
prices would reduce expected cash flow from operating activities and historically the
resulting decreases in market prices have limited our industrys access to the
capital markets. The availability of capital has a high correlation to overall commodity
prices. Our current cash on hand is adequate to fund our exploration and development
program for 2006. If additional development or acquisition opportunities arise that
exceed our currently available resources, we may consider other forms of financing,
including the public offering or private placement of equity or debt securities. We do
not currently have any credit facility in place.

We use cash for the acquisition,
exploration and development of oil and gas properties and for the payment of debt
obligations, trade payables and general and administrative expenses. Since inception of
the Company through to December 31, 2005, we have not had adequate revenues from
operations to cover our general and administrative expenses. We recorded our first
revenues from the sale of oil and gas during the second half of 2005 and we expect that
these revenues will continue to grow during 2006, which should cover our general and
administrative expenses. Expenditures for exploration and development of oil and gas
properties are the primary use of our capital resources. We anticipate spending
approximately $30 million for capital and exploration expenditures in 2006. We regularly
review our capital budget to reflect changes in current and projected cash flows and
acquisition opportunities.

We believe that we have sufficient
capital, including cash on hand and internally generated cash flow to fund our planned
operations, drilling and acquisition expenditures for 2006. However, subject to the
results of our drilling program it is possible that we would need to raise additional
capital for 2007. We will consider several options for raising additional funds such as
entering into a revolving line of credit, selling securities, farm-out agreements or similar arrangements. Any financing
obtained through the sale of securities will likely result in substantial dilution to the
Companys shareholders.

# C.   Research and
Development, Patents and Licenses, etc.

As an exploration stage natural
resource company, we do not normally engage in research and there were no development
activities, and research and development expenditures made in the last three fiscal years.

# D.   Trend Information.

Our industry has experienced a
significant increase in the cost of drilling rigs and related oil field services. Drilling
rigs have been very difficult to contract and we cannot be assured that we can secure
third party contracts. Commodity prices are at or near all time levels and we cannot be
assured that they will continue at these levels. It is very difficult to assure that we
can retain qualified employees during a very competitive period in the industry. Some or
all of these situations are likely to have a material effect upon our net sales or
revenues, income from continuing operations, profitability, liquidity or capital
resources, or that would cause reported financial information not necessarily to be
indicative of future operating results or financial condition.

# E.   Off balance sheet
arrangements

We have no off balance sheet
arrangements that have or are reasonably likely to have a current or future effect on the
Companys financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that is
material to investors.

# F.   Tabular disclosure of
contractual obligations

The following table lists as of
December 31, 2005 information with respect to our known contractual obligations.

|                                        | Payments due by Period
|--------------------------------------- | ----------------------
|                                        |                       
|
|                                        |                       
|Long-Term Obligations-Office Facilities |                       

28

---

The Company has not included asset
retirement obligations as discussed in Note 2 of the accompanying financial statements, as
the Company cannot determine with accuracy the timing of such payments.

# G.   Safe Harbor.

See Note Regarding
Forward-Looking Statements.

# Item 6.   Directors,
Senior Management and Employees.

# Directors and Senior
Management.

The following table lists as of March
31, 2006 the names of the directors and senior management of the Company. The directors
and senior management have served in their respective capacities since their election
and/or appointment and will serve until the next Annual General Meeting of Shareholders or
until a successor is duly elected, unless the office is vacated in accordance with the
Companys Articles.

|Name and Municipality               of Residence | Position(s) held | Date of FirstAppointment       | Age
|------------------------------------------------ | ---------------- | ------------------------------ | ---
|Lynn E. Peterson - Denver, Colorado              |                  | Director, President & CEO      |    
|James A. Catlin - Denver, Colorado               |                  | Director, Vice-President & COO |    
|Rodney D. Knutson - Denver, Colorado             |                  | Director                       |    
|Hugh J. Graham - Burnaby, BC Canada              |                  | Director                       |    
|Herrick K. Lidstone, Jr. - Denver, Colorado      |                  | Director                       |    

| | Biographical
Information
| | ------------------------

The following is a brief description
of the employment background ofthe Companys directors and senior management:

Lynn A. Peterson has served as a
Director of the Company since November 2001, and President and CEO since July 2002. Mr.
Peterson has over 25 years of industry experience. Mr. Peterson was an owner of CP
Resources, LLC, an independent oil and gas company since 1986. Mr. Peterson served as
Treasurer of Deca Energy from 1981 to 1986. Mr. Peterson was employed by Ernst and Whinney
as a certified public accountant prior to this time. He received a B.Sc. degree in
Accounting from the University of Northern Colorado in 1975. Mr. Peterson is primarily
responsible for the financial activities of the Company. Mr. Peterson oversees the
Companys exploration program in conjunction with Mr. Catlin.

James E. Catlin has served as
Director of the Company since February 2001 and Vice President and COO since July 2002.
Mr. Catlin has over 30 years of geologic experience, primarily in the Rocky Mountain
Region. Mr. Catlin was an owner of CP Resources LLC, an independent oil and gas company
since 1986. Mr. Catlin was a founder and Vice-President of Deca Energy from 1980 to 1986
and worked as a district geologist for Petroleum Inc. and Fuelco prior to this time. He
received a B.A. and Masters degree in geology from the University of Northern Illinois in
1973. Mr. Catlin is responsible for supervising the development of the exploration
projects and the drilling activities related to these projects. Mr. Catlin oversees the
Companys exploration program in conjunction with Mr. Peterson.

Rodney D. Knutson, has served as a
Director of the Company since March 2001. Mr. Knutson is an Attorney at Law in a private
practice and over 30 years experience working with oil, gas and mining companies. Mr.
Knutson has been in private practice over the past ten years. Mr. Knutson has a B.E.E.
(1965) from the University of Minnesota and a J.D. (1972) from the University of Denver.
Mr. Knutson is a past president of the Rocky Mountain Mineral Law Foundation.

Hugh J. Grahamhas served as a
Director of the Company since December 1998.  Mr. Graham is the President and CEO of
the Murex Corporation located in Vancouver, Canada.   Mr. Graham is the past
President of Hunter Douglas

29

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(Canada) Inc., the Canadian division
of the international conglomerate and smelter of aluminum.  Mr. Graham currently
serves on the board of three International corporations.

Mr. 
          Lidstone has served as a Director of the Company since March 2006. Mr. Lidstone
          is an Attorney at Law in Denver and is currently with Burns, Figa & Will,
          P.C., where he emphasizes a practice in corporate/securities law, dealing
          frequently with mergers and acquisitions, finance transactions, and private and
          public security offerings.

Mr. 
          Lidstone currently serves on the Securities Board for the Department of
          Regulatory Agencies in Colorado. He has been Adjunct Professor of Law at the
          University of Denver and has taught continuing education courses for the
          National Business Institute. He has numerous legal publications and
          presentations to his credit. Mr. Lidstone received an A.B. degree from Cornell
          University in 1971 and a J.D. degree from the University of Colorado School of
          Law in 1978.

There are no family relationships
among the members of the board of directors or the members of senior management of the
Company. There are no arrangements or understanding with major shareholders, customers, suppliers or others, pursuant to
which any member of the board of directors or member of senior management was selected.

# Compensation.

We have two Executive Officers: Lynn
A. Peterson, President and Chief Executive Officer, and James E. Catlin, Chief Operating
Officer, Vice-President and Secretary. Set out below is a summary of the compensation paid
to the Chief Executive Officer and all Executive Officers receiving total compensation in
excess of $100,000 (collectively Named Executive Officers) of the Company for
the three most recently completed fiscal years is set out below:

|                 
|-----------------
|
|
|
|                 
|Lynn A. Peterson 
|President, CEO   
|USA              
|                 
|                 
|James E. Catlin  
|Chairman of the  
|Board, Secretary,
|USA              
|                 
|                 

| | (1) |  | Management
fees in the amount of US$6,412 per month in 2003 (US$1,600 per month in 2002) were paid
              to CP Resources LLC, a private company wholly-owned by Mr. Catlin and Mr.
Peterson.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Office
expenses of US$1,500 per month in 2003 (US$1,400 per month in 2002) were paid to CP
Resources               LLC for rent, telephone and office expense.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

We do not provide any pension,
retirement plan or other remuneration for our directors or officers, nor are there any
plans or arrangements in respect of compensation received or that may be received by
Executive Officers in our most recently completed or current financial year to compensate
such officers in the event of the termination of employment or a change in control of the
Company.

30

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# Board Practices.

The directors of the Company are
elected annually and hold office until the next Annual General Meeting of the members of
the Company or until their successors in office are duly elected or appointed. All
directors are elected for a one-year term. All officers serve at the pleasure of the Board
of Directors.

Currently, there are no
directors service contracts with the Company or any of its subsidiaries providing
for benefits upon termination of employment.

Our Board of Directors has
established an audit committee, the members of which are Messrs. Lidstone, Graham and
Knutson. The audit committee meets with the Registrants independent accountants and
management periodically to review the scope and results of the annual audit and to review
the Registrants financial statements and related reporting matters prior to the
submission of the financial statements to the Board. Mr. Lidstone is chairman of this
committee.

The audit committee meets as often as
it determines, but not less frequently than quarterly. The committee reviews all financial
statements prior to the submission of those statements to the Board of Directors for
approval. In addition, the committee meets with
the independent auditors at least on an annual basis to review and discuss the audit of
the Registrants financial statements. The audit committee pre-approves all the audit
engagement terms and all non-audit services. Certain services are pre-approved by the
audit committee on an annual basis.

We have established an audit
committee charter which deals with the establishment of the audit committee and sets out
its duties and responsibilities.

Our Board of Directors has
established a compensation committee, the members of which are Messrs. Knutson, Graham,
and Lidstone.  Mr. Knutson is chairman of this committee.

# Employees.

The Company had seven full time
employees at December 31, 2005.

# Share Ownership.

| | Beneficial
Ownership of Common Shares
| | -------------------------------------

The following table sets forth, as of
December 31, 2005, the number of the Common Shares beneficially owned by (a) the directors
and members of senior management of the Company, individually, and as a group, and (b) the
percentage ownership of the outstanding Common Shares represented by such shares. The
security holders listed below are deemed to be the beneficial owners of Common Shares
underlying options and warrants which are exercisable within 60 days from the above date.

Unless otherwise indicated, the
shareholders listed possess sole voting and investment power with respect to the shares
shown. The Companys directors and members of senior management do not have different
voting rights from other shareholders.

31

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|Title of Class | Name of Beneficial
          Owner | Amount andNature         | Percentageof Class(1)
|-------------- | ---------------------------------- | ------------------------ | ---------------------
|Common         |                                    | Lynn A. Peterson         |                      
|Common         |                                    | James E. Catlin          |                      
|Common         |                                    | Rodney D. Knutson        |                      
|Common         |                                    | Hugh J. Graham           |                      
|Common         |                                    | All Directors and Senior |                      
|               |                                    | Management as a group    |                      
|               |                                    | (4 individuals)          |                      

| | (1) |  | Based
on 54,547,158 shares outstanding as of December 31, 2005, plus any Common Shares deemed
to be beneficially owned by          the individual (or, for the last row of the table,
by the group) pursuant to options and warrants which are exercisable by          the
individual (or, for the last row of the table, by the group) within 60 days from the
above date.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Includes
2,810,671 shares held directly by the individual, 500,000 shares held by individual's
children, and 1,143,500          options to exercise at various dates.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) |  | Includes
1,946,250 shares held by individual and 1,143,500 options to exercise at various dates.
| | --- |  | ------------------------------------------------------------------------------------------------

| | (4) |  | Includes
252,750 shares held by individual and 300,000 options to exercise at various dates.
| | --- |  | --------------------------------------------------------------------------------------------

| | (5) |  | Includes
186,676 shares held by individual and 350,000 options to exercise at various dates.
| | --- |  | --------------------------------------------------------------------------------------------

| | * |  | Less
than 1%.
| | - |  | -------------

| | Stock
Options
| | -------------

We established an Incentive Share
Option Plan (the Plan) for directors, officers, employees and consultants of
the Company, under which stock options are granted. The Plan was approved by our
shareholders at our 2003 shareholders meeting.

The following table sets forth, as of
December 31, 2005, all stock options held by the directors and members of senior
management of the Company, individually, including the title and amount of securities
called for by the options, the exercise price and the expiration date of the options.

|                                |                  |                                                            |                                                               
|------------------------------- | ---------------- | ---------------------------------------------------------- | --------------------------------------------------------------
|                                |                  |                                                            |                                                               
|Title of ClassUnderlyingOptions | Name of Optionee | Exercise Price (Cdn.)                                      | Expiration Date                                               
|                               
|Common                          | Lynn A Peterson  | 468,500 @ $0.15425,000 @ $0.50
250,000 @ $1.20             | December 4, 2008March 1, 2009
October 16, 2010                
|                               
|Common                          | James E Catlin   | 468,500 @ $0.15425,000 @ $0.50
250,000 @ $1.20             | December 4, 2008March 1, 2009
October 16, 2010                
|                               
|Common                          | Rodney D Knutson | 25,000 @ $0.15125,000 @ $0.1575,000 @ $0.50
75,000 @ $1.20 | December 6, 2006December 4, 2008March 1, 2009
October 16, 2010
|                               
|Common                          | Hugh J Graham    | 75,000 @ $0.15125,000 @ $0.1575,000 @ $0.50
75,000 @ $1.20 | December 6, 2006December 4, 2008March 1, 2009
October 16, 2010

On April 17, 2006, we granted
1,300,000 incentive stock options to certain directors and officers. The options were
granted under the Companys Incentive Stock Option Plan and are exercisable at the
price of Cdn$3.51 per share for

32

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a period of five years from the date
of the grant. The option price was determined in accordance with the policies of the TSX
Venture Exchange based upon the last closing price of the common stock. Each director of
the Company was granted an option to acquire 100,000 shares which will vest immediately.
In addition, the two principal officers (Mr. Peterson and Mr. Catlin) were each granted an
option to acquire 400,000 shares of which 100,000 vest immediately, 150,000 shares vest on
April 1, 2007 and 150,000 vest on April 1, 2008.

Stock options are determined by the
Companys directors and are only granted in compliance with applicable laws and
regulatory policy. The policies of the TSX Venture Exchange (TSX-V) limit the
granting of stock options to directors, officers and employees of the Company and provide
limits on the length, number and exercise price of such options. Under the terms of the
Plan, we have authorized the reservation of up to 10% of our issued and outstanding common
shares for the grant of options from time to time. Some of the significant terms of the
Plan are as follows:

| | 1. |  | Options
may be granted on authorized but unissued common shares up to but not
               exceeding 10% of the issued and outstanding common shares of the Company
at the                time of any such grant of options.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. |  | The
total number of common shares to be reserved for issuance over the previous
               12 month period for any optionee shall not exceed 5% of the issued common
shares                of the Company at the time of grant with the exception that, as
long as the                Companys common shares are listed on Tier 2 of the TSX
Venture Exchange                (TSX-V), the total number of common shares
that may be reserved for                issuance over the previous 12 month period for
individuals engaged in an                investor relations capacity shall not exceed 2%
of the issued common shares of                the Company at the time of grant. In
addition, the total number of common shares                to be reserved for issuance
over the previous 12 month period for any one                consultant, shall not exceed
2% of the issued common shares of the Company at                the time of grant.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. |  | While
the Companys common shares are listed on the TSX-V, the purchase
               price per common share for any option granted under the Plan shall not be
less                than the discounted market price of the Companys common shares
in                accordance with the policies of the TSX-V. At such time as the Companys
               common shares are listed on the Toronto Stock Exchange (the TSX),
if                ever, the purchase price per common share for any option granted under
the Plan                shall be not less than the fair market value in accordance with
the policies of                the TSX.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. |  | Options
granted must expire not later than a maximum of five years from the date
               of the grant while the Companys common shares are listed on Tier 2
of the                TSX-V. At such time as the Companys common shares are listed
on Tier 1 of                the TSX-V or the TSX options granted must expire not later
than a maximum of 10                years from the date of grant.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. |  | Options
may be subject to vesting restrictions, to be determined by the Board at
               the time of grant.
| | -- |  | ------------------------------------------------------------------------------------------------------------------

| | 6. |  | All
options granted pursuant to the Plan shall be non-assignable and
               non-transferable.
| | -- |  | -----------------------------------------------------------------------------------------------------

# Item 7.   Major
Shareholders and Related Party Transactions.

# Major Shareholders.

A major shareholder of the Company is
a person that beneficially owns, directly or indirectly, more than 5% of the
Companys Common Shares. The following table sets forth to the best of the
Companys knowledge, as of March 31, 2006, the number of the Companys Common
Shares beneficially owned by (a) each major shareholder of the Company, and (b) the
percentage ownership of the outstanding Common Shares represented by such shares. The
major shareholders listed below are deemed to be the beneficial owners of Common Shares
underlying options and warrants which are exercisable within 60 days from the above date.
Unless otherwise indicated, to the best of the Companys knowledge, the shareholders
listed possess sole voting and investment power with respect to the shares shown.

33

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|                           |                  |                            
|-------------------------- | ---------------- | ---------------------------
|                           |                  |                            
|Shareholder Name           | Number of Shares | Percentage of Issued Shares
|                          
|Wellington Management      | 11,337,000       | 14.53%                     
|Strategic Capital Partners | 9,319,150        | 11.95%                     

To the best of the Companys
knowledge, there have been no significant changes in the percentage ownership held by the
Companys major shareholders during the past three years, except as previously noted
The Companys major shareholders do not have different voting rights from other
shareholders.

To the best of the Companys
knowledge, there are no arrangements the operation of which may result in a change in
control of the Company.

# Related Party
Transactions.

During the twelve months ended
December 31, 2005, there were no related party transactions.

# Interests of Experts and
Counsel.

Not applicable.

# Item 8.   Financial
Information.

# Consolidated Statements
and Other Financial Information.

Included in this annual report are
consolidated financial statements audited by an independent registered public accounting
firm and accompanied by an audit report consisting of the following:

| |  |  | Balance
Sheet as of December 31, 2005 and 2004
| | - |  | ----------------------------------------------

| |  |  | Statement
of Operations for the years ended December 31, 2005, 2004 and 2003;
| | - |  | -----------------------------------------------------------------------------

| |  |  | Statement
of Stockholders' Equity for the years ended December 31, 2005, 2004 and 2003;
| | - |  | ---------------------------------------------------------------------------------------

| |  |  | Statement
of Cash Flows for the years ended December 31, 2005, 2004 and 2003; and
| | - |  | ---------------------------------------------------------------------------------

| |  |  | Notes
to Consolidated Financial Statements.
| | - |  | -------------------------------------------

There are no legal proceedings
currently pending which may have, or have had in the recent past, significant effects on
the Companys financial position or profitability. There are no material legal
proceedings currently pending in which any director, any member of senior management, or
any of the Companys affiliates is either a party adverse to the Company or its
subsidiaries or has a material interest adverse to the Company or its subsidiaries.

We have not paid dividends in the
past and do not expect to pay dividends in the near future.

# Significant Changes.

There have been no significant
changes since the date of our most recent interim financial statements included in this
annual report.

# Item 9.   The Offer and
Listing.

# Offer and Listing
Details.

Our Common Shares without par value
are issued in registered form. The transfer agent for the Common Shares is CIBC Mellon
Trust Company at its principal office at Suite 1600, 1066 West Hastings Street,
Vancouver, B.C.,

34

---

Canada. No significant trading
suspensions have occurred in the Common Shares in the last three years. Our Common Shares
have been listed and posted for trading on the TSX Venture Exchange under the current
name since September 28, 2001. Our Common Shares are not regularly traded in an organized
market in the United States.

The following tables set forth the
reported high and low closing bid prices (all expressed in Canadian dollars) on the TSX
Venture Exchangefor (a) each of the five most recent full financial years of the
Company, (b) each full financial quarter in the last two full financial years of the
Company, and any full financial quarters in the Companys current financial year, and
(c) each of the most recent six months.

High and Low Price for
the Five Most Recent Fiscal Years Expressed in Cdn$

|                            |       |      
|--------------------------- | ----- | -----
|                            |       |      
|Fiscal YearendedDecember 31 | High  | Low  
|2005                        | $2.40 | $0.70
|2004                        | $1.15 | $0.29
|2003                        | $0.40 | $0.05
|2002                        | $0.29 | $0.06
|2001                        | $0.25 | $0.05

High and Low Prices
for Each Quarter in the Last Two Fiscal Years, and any Subsequent Quarters Expressed in Cdn$

|                   |              |      
|------------------ | ------------ | -----
|                   |              |      
|Period Ended:      | High         | Low  
|December 31, 2005  | $       2.40 | $0.91
|September 30, 2005 | $       1.05 | $0.72
|June 30, 2005      | $       1.12 | $0.70
|March 31, 2005     | $       0.75 | $1.26
|December 31, 2004  | $       0.67 | $0.95
|September 30, 2004 | $       0.73 | $1.15
|June 30, 2004      | $       0.46 | $0.83
|March 31, 2004     | $       0.29 | $0.65

High and Low Prices for
the Most Recent Six Months Expressed in Cdn$

|              |       |      
|------------- | ----- | -----
|              |       |      
|Period:       | High  | Low  
|March 2006    | $2.81 | $2.31
|February 2006 | $3.24 | $2.45
|January 2006  | $3.17 | $2.15
|December 2005 | $2.40 | $1.41
|November 2005 | $1.63 | $1.38
|October 2005  | $1.55 | $0.91

On December 30, 2005, the closing
price of the Common Shares on the TSX Venture Exchange was $2.40 per Common Share.

# Plan of Distribution.

Not applicable.

# Markets.

Our Common Shares are listed on the
TSX Venture Exchange under the trading symbol KOG.

35

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# Selling Shareholders.

Not applicable.

# Dilution.

Not applicable.

# Expenses of the Issue.

Not applicable.

# Item 10.   Additional
Information.

# Share Capital.

Not applicable.

# Memorandum and Articles
of Association.

| | Objects
and Purposes of the Company
| | -----------------------------------

The Articles and Bylaws of the
Company places no restrictions upon the Companys objects and purposes.

| | Directors Powers
| | -----------------

The Companys Bylaws provide
that a director must disclose any material interest in a proposal, arrangement or contract
with the Company, and must refrain from voting on any resolution with respect to such
proposal, arrangement or contract except as may be permitted by the Business Corporations
Act (Yukon Territory).

Section 4.1 of the Bylaws
provides that the quorum necessary for the transaction of the business of the directors at
any meeting of the board of directors shall consist of a majority of the directors holding
office.

Section 4.18 of the Bylaws
provides that the remuneration of the directors may be determined from time to time by the
directors. There are no restrictions in the Bylaws upon the directors power, in the
absence of an independent quorum, to vote compensation to themselves or any members of
their body.

Section 2.01 of the Bylaws gives
directors a broad discretion to borrow money upon the credit of the Company, issue,
re-issue, sell or pledge bonds, debentures, notes or other evidences of indebtedness or
guarantee of the Company, whether secured or unsecured; to the extent permitted by the
Business Corporations Act (Yukon Territory), give a guarantee on behalf of the Company to
secure performance of any present or future indebtedness, liability or obligation of any
person; and mortgage, hypothecate, pledge or otherwise create a security interest in all
or any currently owned or subsequently acquired real or personal, moveable or immoveable,
property of the Company including book debts, rights, powers, franchises and undertakings,
to secure any bonds, debentures, notes or other evidences of indebtedness or guarantee or
any other present or future indebtedness, liability or obligation of the Company.

| | Qualifications
of Directors
| | ---------------------------

There is no provision in the Articles
or Bylaws imposing a requirement for retirement or non-retirement of directors under an
age limit requirement.

Section 4.2 of the Bylaws
provides that a director shall not be required to hold a share in the capital of the
Company as qualification for his office but no person shall be qualified for election as
a director if he is less than 19 years of

36

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age, if he is of unsound mind and
has been so found by a court in Canada or elsewhere; if he is not an individual; or if he
has the status of a bankrupt.

| | Share
Rights
| | ------------

All of the authorized Common Shares
of the Company are of the same class and, once issued, rank equally as to dividends,
voting powers, and participation in assets and in all other respects, on liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, or any other
distribution of the assets of the Company among its shareholders for the purpose of
winding up its affairs. The issued Common Shares are not subject to call or assessment
rights or any pre-emptive or conversion rights. The holders of Common Shares are entitled
to one vote for each Common Share on all matters to be voted on by the shareholders. There
are no provisions for redemption, purchase for cancellation, surrender or purchase funds.

To change the rights of shareholders
of stock, where such rights are attached to an issued class or series of shares, the
Business Corporations Act (Yukon Territory)requires the consent by a separate
resolution of the shareholders of the class or series of shares, as the case may be,
requiring a majority of 2/3 of the votes cast by all the shareholders entitled to vote on
that resolution.

| | Meetings
| | --------

The Business Corporations Act (Yukon
Territory)provides that the directors of the Company must call an annual general
meeting of shareholders not later than 15 months after the last preceding annual
meeting. The Company must give to its shareholders, directors and auditor entitled to
receive notice of a general meeting not less than 21 days and not more than
50 days notice before the meeting of the Company, but shareholders and any
other person entitled to attend a meeting of shareholders may waive notice for a
particular meeting. The Business Corporations Act (Yukon Territory)requires
management of a corporation, concurrently with giving notice of a meeting of shareholders,
to send a form of proxy in a prescribed form to each shareholder who is entitled to
receive notice of the meeting. However a proxy is not required to be sent where the
corporation has not more than 15 shareholders entitled to vote at a meeting of
shareholders with 2 or more joint shareholders being counted as 1 shareholder, or if all
of the shareholders entitled to vote at a meeting waive this requirement.

| | Limitations
on Ownership of Securities
| | --------------------------------------

There are no limitations on the right
to own securities, imposed by foreign law or by the charter or other constituent document
of the Company.

| | Change
in Control of Company
| | ----------------------------

No provision of the Companys
articles of association, charter or bylaws would have the effect of delaying, deferring,
or preventing a change in control of the Company, and operate only with respect to a
merger, acquisition or corporate restructuring of the Company or any of its subsidiaries.

| | Ownership
Threshold
| | -------------------

There are no bylaw provisions
governing the ownership threshold above which shareholder ownership must be disclosed.

| | Material
Contracts.
| | -------------------

Other than as already disclosed
elsewhere in this annual report, the Company has not entered into any material contracts,
other than contracts entered into in the ordinary course of business, during the two year
period immediately preceding the filing of this annual report.

37

---

| | Exchange
Controls.
| | ------------------

Canada has no system of exchange
controls. There are no exchange restrictions on borrowing from foreign countries nor on
the remittance of dividends, interest, royalties and similar payments, management fees,
loan repayments, settlement of trade debts, or the repatriation of capital. However, any
dividends remitted to U.S. Holders, as defined below, will be subject to withholding tax.
See Item 10E  Taxation.

Except as provided in the Investment
Canada Act (the Act), as amended by the Canada-United States Free Trade
Implementation Act (Canada) and the Canada-United States Free Trade Agreement, there are
no limitations specific to the rights of non-Canadians to hold or vote the common shares
of the Company under the laws of Canada or the Yukon Territory or in the charter documents
of the Company.

Management of the Company considers
that the following general summary fairly describes those provisions of the Act pertinent
to an investment in the Company by a person who is not a Canadian resident (a non
Canadian). However, provisions of the Act are complex and any non-Canadian
contemplating an investment to acquire control of the Company should consult professional
advisors as to whether and how the Act might apply.

The Act requires a non-Canadian
making an investment which would result in the acquisition of control of a Canadian
business, the gross value of the assets of which exceed certain threshold levels or the
business activity of which is related to Canadas cultural heritage or national
identity, to either notify, or file an application for review with, Investment Canada, the
federal agency created by the Act.

The notification procedure involves a
brief statement of information about the investment on a prescribed form which is required
to be filed with Investment Canada by the investor at any time up to 30 days following
implementation of the investment. It is intended that investments requiring only
notification will proceed without government intervention unless the investment is in a
specific type of business activity related to Canadas cultural heritage and national
identity.

If an investment is reviewable under
the Act, an application for review in the form prescribed is normally required to be filed
with Investment Canada prior to the investment taking place and the investment may not be
implemented until the review has been completed and the Minister responsible for
Investment Canada is satisfied that the investment is likely to be of net benefit to
Canada.

Factors to be considered include: (i)
the effect of the investment on the level and nature of economic activity in Canada,
including employment, on resource processing, on utilization of parts, components and
services produced in Canada and on exports from Canada; (ii) the degree and significance
of participation by Canadians in the Canadian business or new Canadian business and in any
industry or industries in Canada of which the Canadian business or new Canadian business
forms or would form a part; (iii) the effect of the investment on productivity, industrial
efficiency, technological development, product innovation and product variety in Canada;
(iv) the effect of the investment on competition within any industry or industries in
Canada; (v) the compatibility of the investment with national industrial, economic and
cultural policies, taking into consideration industrial, economic and cultural objectives
enunciated by the government or legislature of any province likely to be significantly
affected by the investment; and (vi) the contribution of the investment to Canadas
ability to compete in world markets.

If the Minister is not satisfied that
the investment is likely to be of net benefit to Canada, the non-Canadian must not
implement the investment or, if the investment has been implemented, may be required to
divest himself of control of the business that is the subject of the investment.

The following investments by
non-Canadians are subject to notification under the Act:

| | (a) |  | an
investment to establish a new Canadian business; and
| | --- |  | -------------------------------------------------------

| | (b) |  | an
investment to acquire control of a Canadian business that is not reviewable
          pursuant to the Act.
| | --- |  | -------------------------------------------------------------------------------------------------------------

The following investments by a
non-Canadian are subject to review under the Act:

38

---

| | (a) |  | direct
acquisitions of control of Canadian businesses with assets of $5,000,000
               or more, unless the acquisition is being made by a World Trade
Organization                (WTO) member country investor (the United States
being a member of                the WTO);
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | direct
acquisitions of control of Canadian businesses with assets of                $223,000,000
or more by a WTO investor;
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------

| | (c) |  | indirect
acquisitions of control of Canadian businesses with assets of                $5,000,000
or more if such assets represent more than 50% of the total value of                the
assets of the entities, the control of which is being acquired, unless the
               acquisition is being made by a WTO investor, in which case there is no
review;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) |  | indirect
acquisitions of control of Canadian businesses with assets of                $50,000,000
or more even if such assets represent less than 50% of the total                value of
the assets of the entities, the control of which is being acquired,                unless
the acquisition is being made by a WTO investor, in which case there is                no
review;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) |  | indirect
acquisitions of control of Canadian businesses with assets of                $223,000,000
or more by a WTO investor if such assets represent more than 50% of                the
total value of the assets of the entities, the control of which is being
               acquired; and
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) |  | an
investment subject to notification that would not otherwise be reviewable if
               the Canadian business engages in the activity of publication, distribution
or                sale of books, magazines, periodicals, newspapers, film or video
recordings,                audio or video music recordings, or music in print or
machine-readable form.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Generally speaking, an acquisition is
direct if it involves the acquisition of control of the Canadian business or of its
Canadian parent or grandparent and an acquisition is indirect if it involves the
acquisition of control of a non-Canadian parent or grandparent of an entity carrying on
the Canadian business. Control may be acquired through the acquisition of actual or lawful
voting control of a Canadian corporation or through the acquisition of substantially all
of the assets of the Canadian business. No change of voting control will be deemed to have
occurred if less than one-third of the voting control of a Canadian corporation is
acquired by an investor.

A WTO investor, as defined in the
Act, includes an individual who is a national of a member country of the World Trade
Organization or who has the right of permanent residence in relation to that WTO member, a
government or government agency of a WTO investor-controlled corporation, limited
partnership, trust or joint venture and a corporation, limited partnership, trust or joint
venture that is neither WTO-investor controlled or Canadian controlled of which two-thirds
of its board of directors, general partners or trustees, as the case may be, are any
combination of Canadians and WTO investors. The WTO review threshold ($223,000,000) is
adjusted annually by a formula relating to increases in the nominal gross domestic product
of Canada.

The higher thresholds for WTO
investors do not apply if the Canadian business engages in activities in certain sectors
such as uranium, financial services (except insurance), transportation services or media
activities.

The Act specifically exempts certain
transactions from either notification or review. Included among this category of
transactions is the acquisition of voting shares or other voting interests by any person
in the ordinary course of that persons business as a trader or dealer in securities.

| | Taxation.
| | ---------

A brief description of certain
provisions of the tax treaty between Canada and the United States is included below,
together with a brief outline of certain taxes, including withholding provisions, to which
United States security holders are subject under existing laws and regulations of Canada
and the United States. The consequences, if any, of provincial, state and local taxes are
not considered.

39

---

The following information is general
and security holders should seek the advice of their own tax advisors, tax counsel or
accountants with respect to the applicability or effect on their own individual
circumstances of the matters referred to herein and of any provincial, state or local
taxes.

# U.S. Federal Income Tax
Consequences

The following is a summary of certain
material U.S. federal income tax consequences to a U.S. Holder (as defined below) arising
from and relating to the acquisition, ownership, and disposition of common shares of the
Company (Common Shares).

This summary is for general
information purposes only and does not purport to be a complete analysis or listing of all
potential U.S. federal income tax consequences that may apply to a U.S. Holder as a result
of the acquisition, ownership, and disposition of Common Shares. In addition, this summary
does not take into account the individual facts and circumstances of any particular U.S.
Holder that may affect the U.S. federal income tax consequences of the acquisition,
ownership, and disposition of Common Shares. Accordingly, this summary is not intended to
be, and should not be construed as, legal or U.S. federal income tax advice with respect
to any U.S. Holder. Each U.S. Holder should consult its own tax advisor regarding the U.S.
federal income, U.S. state and local, and foreign tax consequences of the acquisition,
ownership, and disposition of Common Shares.

# Scope of this Summary

# Authorities

This summary is based on the Internal
Revenue Code of 1986, as amended (the Code), Treasury Regulations (whether
final, temporary, or proposed), published rulings of the Internal Revenue Service (the
IRS), published administrative positions of the IRS, the Convention Between
Canada and the United States of America with Respect to Taxes on Income and on Capital,
signed September 26, 1980, as amended (the Canada-U.S. Tax Convention), and
U.S. court decisions that are applicable and, in each case, as in effect and available, as
of the date of this Annual Report. Any of the authorities on which this summary is based
could be changed in a material and adverse manner at any time, and any such change could
be applied on a retroactive basis. This summary does not discuss the potential effects,
whether adverse or beneficial, of any proposed legislation that, if enacted, could be
applied on a retroactive basis.

# U.S. Holders

For purposes of this summary, a
U.S. Holder is a beneficial owner of Common Shares that, for U.S. federal
income tax purposes, is (a) an individual who is a citizen or resident of the U.S.,
(b) a corporation, or any other entity classified as a corporation for U.S. federal
income tax purposes, that is created or organized in or under the laws of the U.S., any
state in the U.S., or the District of Columbia, (c) an estate if the income of such
estate is subject to U.S. federal income tax regardless of the source of such income, or
(d) a trust if (i) such trust has validly elected to be treated as a U.S. person
for U.S. federal income tax purposes or (ii) a U.S. court is able to exercise primary
supervision over the administration of such trust and one or more U.S. persons have the
authority to control all substantial decisions of such trust.

# Non-U.S. Holders

For purposes of this summary, a
non-U.S. Holder is a beneficial owner of Common Shares other than a U.S.
Holder. This summary does not address the U.S. federal income tax consequences of the
acquisition, ownership, and disposition of Common Shares to non-U.S. Holders. Accordingly,
a non-U.S. Holder should consult its own tax advisor regarding the U.S. federal income,
U.S. state and local, and foreign tax consequences (including the potential application of
and operation of any income tax treaties) of the acquisition, ownership, and disposition
of Common Shares.

40

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# U.S. Holders Subject to
Special U.S. Federal Income Tax Rules Not Addressed

This summary does not address the
U.S. federal income tax consequences of the acquisition, ownership, and disposition of
Common Shares to U.S. Holders that are subject to special provisions under the Code,
including the following U.S. Holders: (a) U.S. Holders that are tax-exempt
organizations, qualified retirement plans, individual retirement accounts, or other
tax-deferred accounts; (b) U.S. Holders that are financial institutions, insurance
companies, real estate investment trusts, or regulated investment companies; (c) U.S.
Holders that are dealers in securities or currencies or U.S. Holders that are traders in
securities that elect to apply a mark-to-market accounting method; (d) U.S. Holders
that have a functional currency other than the U.S. dollar; (e) U.S.
Holders that are liable for the alternative minimum tax under the Code; (f) U.S.
Holders that own Common Shares as part of a straddle, hedging transaction, conversion
transaction, constructive sale, or other arrangement involving more than one position;
(g) U.S. Holders that acquired Common Shares in connection with the exercise of
employee stock options or otherwise as compensation for services; (h) U.S. Holders
that hold Common Shares other than as a capital asset within the meaning of
Section 1221 of the Code; or (i) U.S. Holders that own (directly, indirectly, or
constructively) 10% or more of the total combined voting power of all classes of shares of
the Company entitled to vote. U.S. Holders that are subject to special provisions under
the Code, including U.S. Holders described immediately above, should consult their own tax
advisors regarding the U.S. federal income tax consequences of the acquisition, ownership,
and disposition of Common Shares.

If an entity that is classified as a
partnership for U.S. federal income tax purposes holds Common Shares, the U.S. federal
income tax consequences of the acquisition, ownership, and disposition of Common Shares to
such partnership and the partners of such partnership generally will depend on the
activities of the partnership and the status of such partners. Partners of entities that
are classified as partnerships for U.S. federal income tax purposes should consult their
own tax advisors regarding the U.S. federal income tax consequences of the acquisition,
ownership, and disposition of Common Shares.

# Tax Consequences Other
than U.S. Federal Income Tax Consequences Not Addressed

This summary does not address the
U.S. state and local, U.S. federal estate and gift, or foreign tax consequences to U.S.
Holders of the acquisition, ownership, and disposition of Common Shares. Each U.S. Holder
should consult its own tax advisor regarding the U.S. state and local, U.S. federal estate
and gift, and foreign tax consequences of the acquisition, ownership, and disposition of
Common Shares.

U.S. 
          Federal Income Tax Consequences of the Acquisition, Ownership, and Disposition
          of Common Shares

# Distributions on Common
Shares

| | General
Taxation of Distributions
| | ---------------------------------

Subject to the passive foreign
investment company rules discussed below, a U.S. Holder that receives a
distribution, including a constructive distribution, with respect to the Common Shares
will be required to include the amount of such distribution in gross income as a dividend
(without reduction for any Canadian income tax withheld from such distribution) to the
extent of the current or accumulated earnings and profits of the Company. To
the extent that a distribution exceeds the current and accumulated earnings and
profits of the Company, such distribution will be treated (a) first, as a
tax-free return of capital to the extent of a U.S. Holders tax basis in the Common Shares and,
(b) thereafter, as gain from the sale or exchange of such Common Shares. (See more
detailed discussion at Disposition of Common Shares below).

| | Reduced
Tax Rates for Certain Dividends
| | ---------------------------------------

For taxable years beginning after
December 31, 2002 and before January 1, 2009, a dividend paid by the Company generally
will be taxed at the preferential tax rates applicable to long-term capital gains if
(a) the Company is a qualified foreign corporation (as defined below),
(b) the U.S. Holder receiving such dividend is an individual, estate, or trust, and
(c) such dividend is paid on Common Shares that have been held by such U.S. Holder
for at least 61 days during the 121-day period beginning 60 days before the
ex-dividend date.

41

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The Company generally will be a
qualified foreign corporation under Section 1(h)(11) of the Code (a
QFC) if (a) the Company is incorporated in a possession of the U.S.,
(b) the Company is eligible for the benefits of the Canada-U.S. Tax Convention, or
(c) the Common Shares are readily tradable on an established securities market in the
U.S. However, even if the Company satisfies one or more of such requirements, the Company
will not be treated as a QFC if the Company is a passive foreign investment
company (as defined below) for the taxable year during which the Company pays a
dividend or for the preceding taxable year. In 2003, the U.S. Department of the Treasury
(the Treasury) and the IRS announced that they intended to issue Treasury
Regulations providing procedures for a foreign corporation to certify that it is a QFC.
Although these Treasury Regulations have not yet been issued, the Treasury and the IRS
have confirmed their intention to issue these Treasury Regulations. It is expected that
these Treasury Regulations will obligate persons required to file information returns to
report a dividend paid by a foreign corporation as a dividend from a QFC if the foreign
corporation has, among other things, certified under penalties of perjury that the foreign
corporation was not a passive foreign investment company for the taxable year
during which the foreign corporation paid the dividend or for the preceding taxable year.

As discussed below, the Company
believes that it may have been a passive foreign investment company for the
taxable year ended December 31, 2005, and expects that it may be a passive foreign
investment company for the taxable year ending December 31, 2006. (See more detailed
discussion at Additional Rules that May Apply to U.S. HoldersPassive Foreign
Investment Company below). Accordingly, the Company may not be a QFC for the taxable
year ending December 31, 2006.

If the Company is not a QFC, a
dividend paid by the Company to a U.S. Holder, including a U.S. Holder that is an
individual, estate, or trust, generally will be taxed at ordinary income tax rates (and
not at the preferential tax rates applicable to long-term capital gains). The dividend
rules are complex, and each U.S. Holder should consult its own tax advisor regarding the
dividend rules.

| | Distributions
Paid in Foreign Currency
| | --------------------------------------

The amount of a distribution received
on the Common Shares in foreign currency generally will be equal to the U.S. dollar value
of such distribution based on the exchange rate applicable on the date of receipt. A U.S.
Holder that does not convert foreign currency received as a distribution into U.S. dollars
on the date of receipt generally will have a tax basis in such foreign currency equal to
the U.S. dollar value of such foreign currency on the date of receipt. Such a U.S. Holder
generally will recognize ordinary income or loss on the subsequent sale or other taxable
disposition of such foreign currency (including an exchange for U.S. dollars).

| | Dividends
Received Deduction
| | ----------------------------

Dividends received on the Common
Shares generally will not be eligible for the dividends received deduction.
The availability of the dividends received deduction is subject to complex limitations
that are beyond the scope of this summary, and a U.S. Holder that is a corporation should
consult its own tax advisor regarding the dividends received deduction.

# Disposition of Common
Shares

A U.S. Holder will recognize gain or
loss on the sale or other taxable disposition of Common Shares in an amount equal to the
difference, if any, between (a) the amount of cash plus the fair market value of any
property received and (b) such U.S. Holders tax basis in the Common Shares sold
or otherwise disposed of. Subject to the passive foreign investment company
rules discussed below, any such gain or loss generally will be capital gain or loss, which
will be long-term capital gain or loss if the Common Shares are held for more than one
year.

Preferential tax rates apply to
long-term capital gains of a U.S. Holder that is an individual, estate, or trust. There
are currently no preferential tax rates for long-term capital gains of a U.S. Holder that
is a corporation. Deductions for capital losses are subject to significant limitations
under the Code.

42

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# Foreign Tax Credit

A U.S. Holder that pays (whether
directly or through withholding) Canadian income tax with respect to dividends received on
the Common Shares generally will be entitled, at the election of such U.S. Holder, to
receive either a deduction or a credit for such Canadian income tax paid. Generally, a
credit will reduce a U.S. Holders U.S. federal income tax liability on a
dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holders income
subject to U.S. federal income tax. This election is made on a year-by-year basis and
applies to all foreign taxes paid (whether directly or through withholding) by a U.S.
Holder during a taxable year.

Complex limitations apply to the
foreign tax credit, including the general limitation that the credit cannot exceed the
proportionate share of a U.S. Holders U.S. federal income tax liability that such
U.S. Holders foreign source taxable income bears to such U.S.
Holders worldwide taxable income. In applying this limitation, a U.S. Holders
various items of income and deduction must be classified, under complex rules, as either
foreign source or U.S. source. In addition, this limitation is
calculated separately with respect to specific categories of income (including
passive income, high withholding tax interest, financial
services income, general income, and certain other categories of
income). Gain or loss recognized by a U.S. Holder on the sale or other taxable disposition
of Common Shares generally will be treated as U.S. source for purposes of
applying the foreign tax credit rules. Dividends received on the Common Shares generally
will be treated as foreign source and generally will be categorized as
passive income or, in the case of certain U.S. Holders, financial
services income for purposes of applying the foreign tax credit rules. However, for
taxable years beginning after December 31, 2006, the foreign tax credit limitation
categories are reduced to passive category income and general category
income (and the other categories of income, including financial services
income, are eliminated). The foreign tax credit rules are complex, and each U.S.
Holder should consult its own tax advisor regarding the foreign tax credit rules.

# Information Reporting;
Backup Withholding Tax

Payments made within the U.S., or by
a U.S. payor or U.S. middleman, of dividends on, or proceeds arising from the sale or
other taxable disposition of, Common Shares generally will be subject to information
reporting and backup withholding tax, at the rate of 28%, if a U.S. Holder (a) fails
to furnish such U.S. Holders correct U.S. taxpayer identification number (generally
on Form W-9), (b) furnishes an incorrect U.S. taxpayer identification number,
(c) is notified by the IRS that such U.S. Holder has previously failed to properly
report items subject to backup withholding tax, or (d) fails to certify, under
penalty of perjury, that such U.S. Holder has furnished its correct U.S. taxpayer
identification number and that the IRS has not notified such U.S. Holder that it is
subject to backup withholding tax. However, U.S. Holders that are corporations generally
are excluded from these information reporting and backup withholding tax rules. Any
amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit
against a U.S. Holders U.S. federal income tax liability, if any, or will be
refunded, if such U.S. Holder furnishes required information to the IRS. Each U.S. Holder
should consult its own tax advisor regarding the information reporting and backup
withholding tax rules.

# Additional Rules that
May Apply to U.S. Holders

If the Company is a controlled
foreign corporation or a passive foreign investment company (each as
defined below), the preceding sections of this summary may not describe the U.S. federal
income tax consequences to a U.S. Holder of the acquisition, ownership, and disposition of
Common Shares.

# Controlled Foreign
Corporation

The Company generally will be a
controlled foreign corporation under Section 957(a) of the Code (a
CFC) if more than 50% of the total voting power or the total value of the
outstanding shares of the Company is owned, directly or indirectly, by citizens or
residents of the U.S., domestic partnerships, domestic corporations, domestic estates, or
domestic trusts (each as defined in Section 7701(a)(30) of the Code), each of which
own, directly or indirectly, 10% or more of the total voting power of the outstanding
shares of the Company (a 10% Shareholder).

If the Company is a CFC, a 10% Shareholder
generally will be subject to current U.S. federal income tax with respect to (a) such
10% Shareholders pro rata share of the subpart F income (as defined in
Section 952 of the

43

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Code) of the Company and (b) such
10% Shareholders pro rata share of the earnings of the Company invested in
United States property (as defined in Section 956 of the Code). In
addition, under Section 1248 of the Code, any gain recognized on the sale or other
taxable disposition of Common Shares by a U.S. Holder that was a 10% Shareholder at
any time during the five-year period ending with such sale or other taxable disposition
generally will be treated as a dividend to the extent of the earnings and profits of
the Company that are attributable to such Common Shares. If the Company is both a CFC and
a passive foreign investment company (as defined below), the Company
generally will be treated as a CFC (and not as a passive foreign investment company)
with respect to any 10% Shareholder.

The Company does not believe that it
has previously been, or currently is, a CFC. However, there can be no assurance that the
Company will not be a CFC for the current or any subsequent taxable year.

# Passive Foreign
Investment Company

The Company generally will be a
passive foreign investment company under Section 1297(a) of the Code (a
PFIC) if, for a taxable year, (a) 75% or more of the gross income of the
Company for such taxable year is passive income or (b) on average, 50% or more of the
assets held by the Company either produce passive income or are held for the production of
passive income, based on the fair market value of such assets (or on the adjusted tax
basis of such assets, if the Company is not publicly traded and either is a
controlled foreign corporation or makes an election). Passive
income includes, for example, dividends, interest, certain rents and royalties,
certain gains from the sale of stock and securities, and certain gains from commodities
transactions. However, for transactions entered into after December 31, 2004, active
business gains arising from the sale or exchange of commodities by the Company generally
are excluded from passive income if substantially all of the Companys
commodities are (a) stock in trade of the Company or other property of a kind that would
properly be included in inventory of the Company, or property held by the Company
primarily for sale to customers in the ordinary course of business, (b) property used in
the trade or business of the Company that would be subject to the allowance for
depreciation under section 167 of the Code, or (c) supplies of a type regularly used or
consumed by the Company in the ordinary course of its trade or business.

For purposes of the PFIC income test
and asset test described above, if the Company owns, directly or indirectly, 25% or more
of the total value of the outstanding shares of another foreign corporation, the Company
will be treated as if it (a) held a proportionate share of the assets of such other
foreign corporation and (b) received directly a proportionate share of the income of
such other foreign corporation. In addition, for purposes of the PFIC income test and
asset test described above, passive income does not include any interest,
dividends, rents, or royalties that are received or accrued by the Company from a
related person (as defined in Section 954(d)(3) of the Code), to the
extent such items are properly allocable to the income of such related person that is not
passive income.

The Company believes that it may have
been a PFIC for the taxable year ended December 31, 2005, and expects that it maybe a PFIC for the taxable year ending December 31, 2006. The determination of whether
the Company was, or will be, a PFIC for a taxable year depends, in part, on the
application of complex U.S. federal income tax rules, which are subject to various
interpretations. In addition, whether the Company will be a PFIC for the taxable year
ending December 31, 2006 and each subsequent taxable year depends on the assets and income
of the Company over the course of each such taxable year and, as a result, cannot be
predicted with certainty as of the date of this Annual Report. Accordingly, there can be
no assurance that the IRS will not challenge the determination made by the Company
concerning its PFIC status or that the Company was not, or will not be, a PFIC for any
taxable year.

| | Default
PFIC Rules Under Section 1291 of the Code
| | -------------------------------------------------

If the Company is a PFIC, the U.S.
federal income tax consequences to a U.S. Holder of the acquisition, ownership, and
disposition of Common Shares will depend on whether such U.S. Holder makes an election to
treat the Company as a qualified electing fund or QEF under
Section 1295 of the Code (a QEF Election) or a mark-to-market election
under Section 1296 of the Code (a Mark-to-Market Election). A U.S. Holder
that does not make either a QEF Election or a Mark-to-Market Election will be referred to
in this summary as a Non-Electing U.S. Holder.

44

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A Non-Electing U.S. Holder will be
subject to the rules of Section 1291 of the Code with respect to (a) any gain
recognized on the sale or other taxable disposition of Common Shares and (b) any
excess distribution received on the Common Shares. A distribution generally will be an
excess distribution to the extent that such distribution (together with all
other distributions received in the current taxable year) exceeds 125% of the average
distributions received during the three preceding taxable years (or during a U.S.
Holders holding period for the Common Shares, if shorter).

Under Section 1291 of the Code,
any gain recognized on the sale or other taxable disposition of Common Shares, and any
excess distribution received on the Common Shares, must be ratably allocated to each day
in a Non-Electing U.S. Holders holding period for the Common Shares. The amount of
any such gain or excess distribution allocated to prior years of such Non-Electing U.S.
Holders holding period for the Common Shares (other than years prior to the first
taxable year of the Company beginning after December 31, 1986 for which the Company was
not a PFIC) will be subject to U.S. federal income tax at the highest tax rate applicable
to ordinary income in each such prior year. A Non-Electing U.S. Holder will be required to
pay interest on the resulting tax liability for each such prior year, calculated as if
such tax liability had been due in each such prior year. Such a Non-Electing U.S. Holder
that is not a corporation must treat any such interest paid as personal
interest, which is not deductible. The amount of any such gain or excess
distribution allocated to the current year of such Non-Electing U.S. Holders holding
period for the Common Shares will be treated as ordinary income in the current year, and
no interest charge will be incurred with respect to the resulting tax liability for the
current year.

If the Company is a PFIC for any
taxable year during which a Non-Electing U.S. Holder holds Common Shares, the Company will
continue to be treated as a PFIC with respect to such Non-Electing U.S. Holder, regardless
of whether the Company ceases to be a PFIC in one or more subsequent taxable years. A
Non-Electing U.S. Holder may terminate this deemed PFIC status by electing to recognize
gain (which will be taxed under the rules of Section 1291 of the Code discussed
above) as if such Common Shares were sold on the last day of the last taxable year for
which the Company was a PFIC.

| | QEF
Election
| | ------------

The procedure for making a QEF
Election, and the U.S. federal income tax consequences of making a QEF Election, will
depend on whether such QEF Election is timely. A QEF Election generally will be
timely if it is made for the first year in a U.S. Holders holding period
for the Common Shares in which the Company is a PFIC. In this case, a U.S. Holder may make
a timely QEF Election by filing the appropriate QEF Election documents with such U.S.
Holders U.S. federal income tax return for such first year. However, if the Company
was a PFIC in a prior year in a U.S. Holders holding period for the Common Shares,
then in order to be treated as making a timely QEF Election, such U.S. Holder
must elect to recognize gain (which will be taxed under the rules of Section 1291 of
the Code discussed above) as if the Common Shares were sold on the qualification date for
an amount equal to the fair market value of the Common Shares on
the qualification date. The qualification date is the first day of the first
taxable year in which the Company was a QEF with respect to such U.S. Holder. In addition,
under very limited circumstances, a U.S. Holder may make a retroactive QEF Election if
such U.S. Holder failed to file the QEF Election documents in a timely manner.

A QEF Election will apply to the
taxable year for which such QEF Election is made and to all subsequent taxable years,
unless such QEF Election is invalidated or terminated or the IRS consents to revocation of
such QEF Election. If a U.S. Holder makes a QEF Election and, in a subsequent taxable
year, the Company ceases to be a PFIC, the QEF Election will remain in effect (although it
will not be applicable) during those taxable years in which the Company is not a PFIC.
Accordingly, if the Company becomes a PFIC in another subsequent taxable year, the QEF
Election will be effective and the U.S. Holder will be subject to the QEF rules described
above during any such subsequent taxable year in which the Company qualifies as a PFIC. In
addition, the QEF Election will remain in effect (although it will not be applicable) with
respect to a U.S. Holder even after such U.S. Holder disposes of all of such U.S.
Holders direct and indirect interest in the Common Shares. Accordingly, if such U.S.
Holder reacquires an interest in the Company, such U.S. Holder will be subject to the QEF
rules described above for each taxable year in which the Company is a PFIC.

45

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A U.S. Holder that makes a timely QEF
Election generally will not be subject to the rules of Section 1291 of the Code
discussed above. For example, a U.S. Holder that makes a timely QEF Election generally
will recognize capital gain or loss on the sale or other taxable disposition of Common
Shares.

However, for each taxable year in
which the Company is a PFIC, a U.S. Holder that makes a QEF Election will be subject to
U.S. federal income tax on such U.S. Holders pro rata share of (a) the net
capital gain of the Company, which will be taxed as long-term capital gain to such U.S.
Holder, and (b) and the ordinary earnings of the Company, which will be taxed as
ordinary income to such U.S. Holder. Generally, net capital gain is the excess
of (a) net long-term capital gain over (b) net short-term capital loss, and
ordinary earnings are the excess of (a) earnings and profits
over (b) net capital gain. A U.S. Holder that makes a QEF Election will be subject to
U.S. federal income tax on such amounts for each taxable year in which the Company is a
PFIC, regardless of whether such amounts are actually distributed to such U.S. Holder by
the Company. However, a U.S. Holder that makes a QEF Election may, subject to certain
limitations, elect to defer payment of current U.S. federal income tax on such amounts,
subject to an interest charge. If such U.S. Holder is not a corporation, any such interest
paid will be treated as personal interest, which is not deductible.

A U.S. Holder that makes a QEF
Election generally (a) may receive a tax-free distribution from the Company to the
extent that such distribution represents earnings and profits of the Company
that were previously included in income by the U.S. Holder because of such QEF Election
and (b) will adjust such U.S. Holders tax basis in the Common Shares to reflect
the amount included in income or allowed as a tax-free distribution because of such QEF
Election.

Each U.S. Holder should consult its
own tax advisor regarding the availability of, and procedure for making, a QEF Election.
U.S. Holders should be aware that there can be no assurance that the Company will satisfy
record keeping requirements that apply to a QEF, or that the Company will supply U.S.
Holders with information that such U.S. Holders require to report under the QEF rules, in
the event that the Company is a PFIC and a U.S. Holder wishes to make a QEF Election.

| | Mark-to-Market
Election
| | -----------------------

A U.S. Holder may make a
Mark-to-Market Election only if the Common Shares are marketable stock. The Common Shares
generally will be marketable stock if the Common Shares are regularly traded
on a qualified exchange or other market. For this purpose, a qualified exchange or
other market includes (a) a national securities exchange that is registered
with the Securities and Exchange Commission, (b) the national market system
established pursuant to section 11A of the Securities and Exchange Act of 1934, or
(c) a foreign securities exchange that is regulated or supervised by a governmental
authority of the country in which the market is located, provided that (i) such
foreign exchange has trading volume, listing, financial disclosure, surveillance, and
other requirements designed to prevent fraudulent and manipulative acts and practices,
remove impediments to and perfect the mechanism of a free, open, fair, and
orderly market, and protect investors (and the laws of the country in which the foreign
exchange is located and the rules of the foreign exchange ensure that such requirements
are actually enforced) and (ii) the rules of such foreign exchange effectively
promote active trading of listed stocks. If the Common Shares are traded on such a
qualified exchange or other market, the Common Shares generally will be regularly
traded for any calendar year during which the Common Shares are traded, other than
in de minimis quantities, on at least 15 days during each calendar quarter.

A Mark-to-Market Election applies to
the taxable year in which such Mark-to-Market Election is made and to each subsequent
taxable year, unless the Common Shares cease to be marketable stock or the IRS
consents to revocation of such election. Each U.S. Holder should consult its own tax
advisor regarding the availability of, and procedure for making, a Mark-to-Market
Election.

A U.S. Holder that makes a
Mark-to-Market Election generally will not be subject to the rules of Section 1291 of
the Code discussed above. However, if a U.S. Holder makes a Mark-to-Market Election after
the beginning of such U.S. Holders holding period for the Common Shares and such
U.S. Holder has not made a timely QEF Election, the rules of Section 1291 of the Code
discussed above will apply to certain dispositions of, and distributions on, the Common
Shares.

46

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A U.S. Holder that makes a
Mark-to-Market Election will include in ordinary income, for each taxable year in which
the Company is a PFIC, an amount equal to the excess, if any, of (a) the fair market
value of the Common Shares as of the close of such taxable year over (b) such U.S.
Holders adjusted tax basis in such Common Shares. A U.S. Holder that makes a
Mark-to-Market Election will be allowed a deduction in an amount equal to the lesser of
(a) the excess, if any, of (i) such U.S. Holders adjusted tax basis in the
Common Shares over (ii) the fair market value of such Common Shares as of the close
of such taxable year or (b) the excess, if any, of (i) the amount included in
ordinary income because of such Mark-to-Market Election for prior taxable years over
(ii) the amount allowed as a deduction because of such Mark-to-Market Election for
prior taxable years.

A U.S. Holder that makes a
Mark-to-Market Election generally will adjust such U.S. Holders tax basis in the
Common Shares to reflect the amount included in gross income or allowed as a deduction
because of such Mark-to-Market Election. In addition, upon a sale or other taxable
disposition of Common Shares, a U.S. Holder that makes a Mark-to-Market Election will
recognize ordinary income or loss (not to exceed the excess, if any, of (a) the
amount included in ordinary income because of such Mark-to-Market Election for prior
taxable years over (b) the amount allowed as a deduction because of such
Mark-to-Market Election for prior taxable years).

| | Other
PFIC Rules
| | ----------------

Under Section 1291(f) of the
Code, the IRS has issued proposed Treasury Regulations that, subject to certain
exceptions, would cause a U.S. Holder that had not made a timely QEF Election to recognize
gain (but not loss) upon certain transfers of Common Shares that would otherwise be
tax-deferred (such as gifts and exchanges pursuant to tax-deferred reorganizations under
Section 368 of the Code). However, the specific U.S. federal income tax consequences to a
U.S. Holder may vary based on the manner in which Common Shares are transferred.

Certain additional adverse rules will
apply with respect to a U.S. Holder if the Company is a PFIC, regardless of whether such
U.S. Holder makes a QEF Election. For example under Section 1298(b)(6) of the Code, a
U.S. Holder that uses Common Shares as security for a loan will, except as may be provided
in Treasury Regulations, be treated as having made a taxable disposition of such Common
Shares.

The PFIC rules are complex, and each
U.S. Holder should consult its own tax advisor regarding the PFIC rules and how the PFIC
rules may affect the U.S. federal income tax consequences of the acquisition, ownership,
and disposition of Common Shares.

| | Canadian
Federal Income Tax Considerations
| | ------------------------------------------

The summary below is restricted to
the case of a holder (a Holder) of one or more Common shares who for the
purposes of the Income Tax Act (Canada) (the Act) is a non-resident of Canada,
holds his Common shares as capital property and deals at arms length with the
Company.

| | Dividends
| | ---------

A Holder will be subject to Canadian
withholding tax (Part XIII Tax) equal to 25%, or such lower rate as may be
available under an applicable tax treaty, of the gross amount of any dividend paid or
deemed to be paid on these Common shares. Under the 1995 Protocol amending the Canada-U.S.
Income Tax Convention (1980) (the Treaty) the rate of Part XIII Tax is
applicable to a dividend on Common shares paid to a Holder who is a resident of the United
States. The Company will be required to withhold the applicable amount of Part XIII Tax
from each dividend so paid and remit the withheld amount directly to the Receiver General
for Canada for the account of the Holder, which is 15% reduced to 5% if the shareholder
owns at least 10% of the outstanding Common shares of the Company.

| | Disposition
of Common Shares
| | ----------------------------

A Holder who disposes of a Common
share, including by deemed disposition on death, will not be subject to Canadian tax on
any capital gain (or capital loss) thereby realized unless the Common share constituted
taxable Canadian property as defined by the Act. A capital gain occurs when
proceeds from the disposition of a share of

47

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other capital property exceeds the
original cost. A capital loss occurs when the proceeds from the disposition of a share
are less than the original cost. Under the Act, capital gain is effectively taxed at a
lower rate as only 50% of the gain is effectively included in the Holders taxable
income.

Generally, a Common share will not
constitute taxable Canadian property of a Holder unless he held the Common shares as
capital property used by him carrying on a business (other than an insurance business) in
Canada, or he or persons with whom he did not deal at arms length alone or together
held or held options to acquire, at any time within the five years preceding the
disposition, 25% or more of the shares of any class of the capital stock of the Company.
The disposition of a Common share that constitutes taxable Canadian property
of a Holder could also result in a capital loss which can be used to reduce taxable income
to the extent that such Holder can offset it against a capital gain. A capital loss cannot
be used to reduce all taxable income (only that portion of taxable income derived from a
capital gain).

A Holder who is a resident of the
United States and realizes a capital gain on disposition of a Common share that was
taxable Canadian property will nevertheless, by virtue of the Treaty, generally be exempt
from Canadian tax thereon unless (a) more than 50% of the value of the Common share
is derived from, or forms an interest in, Canadian real estate, including Canadian mineral
resource properties, (b) the Common share formed part of the business property of a
permanent establishment that the Holder has or had in Canada within the 12 months
preceding disposition, or (c) the Holder (i) was a resident of Canada at any
time within the ten years immediately, and for a total of 120 months during the 20 years,
preceding the disposition, and (ii) owned the Common share when he ceased to be
resident in Canada.

A Holder who is subject to Canadian
tax in respect of a capital gain realized on disposition of a Common share must include
one-half of the capital gain (taxable capital gain) in computing his taxable income earned
in Canada. This Holder may, subject to certain limitations, deduct one-half of any capital
loss (allowable capital loss) arising on disposition of taxable Canadian property from
taxable capital gains realized in the year of disposition in respect to taxable Canadian
property and, to the extent not so deductible, from such taxable capital gains of any of
the three preceding years or any subsequent year.

| | Dividends
and Paying Agents.
| | ----------------------------

Not applicable.

# Statement by Experts.

Not applicable.

# Documents on Display.

The documents described herein may be
inspected at the principal executive offices of the Company, 1625 Broadway, Suite 330,
Denver Colorado, 80202, during normal business hours.

# Subsidiary Information.

Not applicable.

# Item 11.   Quantitative
and Qualitative Disclosures About Market Risk.

Inherent in development of oil and
gas reserves are risks, among others, of drilling dry holes, encountering production or
drilling difficulties or experiencing high decline rates in producing wells. In addition,
a major market risk exposure is in the pricing applicable to our oil and gas production.
Realized pricing is primarily driven by the prevailing worldwide price for crude oil and
spot prices applicable to our oil and natural gas production. Prices received for oil and
gas production have been and remain volatile and unpredictable. If oil and gas prices
decline significantly, even if only for a short period of time, it is possible that
non-cash write-downs of our oil and gas

48

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properties could occur. We have not
entered into any derivative securities or hedging instruments to manage oil and gas
risks.

# Item 12.   Description of
Securities Other than Equity Securities.

Not applicable.

# PART II

# Item 13.   Defaults,
Dividend Arrearages and Delinquencies.

None

Item 14.   Material Modifications to
the Rights of Security Holders and Use of Proceeds.

Not applicable.

# Item 15.   Controls and
Procedures

Evaluation of Disclosure Controls
and Procedures. The Company maintains a small head office staff which, because of its
size, precludes the functioning of all internal controls, most notably division of duties.
To compensate for this situation management through its Chief Accounting Officer performs
a thorough review of any and all financial and corporate information disclosed to the
public markets. In addition, the Companys Audit Committee reviews and recommends to
the Board of Directors approval of any and all financial information reviewed and referred
to it by management for disclosure to the public markets.

The Companys Chief Executive
Officer and Chief Accounting Officer have evaluated the effectiveness of the
Companys disclosure controls and procedures (as such term is defined in Rules 13a-15
and 15d-15 under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) as of the end of the period covered by this Annual Report (the
Evaluation Date). Based on such evaluation, such officers have concluded that,
as of the Evaluation Date, the Companys disclosure controls and procedures are
effective in alerting them on a timely basis to material information relating to
the Company required to be included in our reports filed or submitted under the Exchange
Act.

Changes in Internal Controls over
Financial Reporting. During the fiscal year covered by this Annual Report, there have
not been any changes in the Companys internal controls over financial reporting or
in other factors that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.

# Item 16.   [Reserved]

# Item 16A.   Audit
Committee Financial Expert

The Company currently does not have
an audit committee financial
expert  serving on its audit committee.  The Companys
Committee consists of three directors, all of whom are financially literate, have
experience with public companies, and are very knowledgeable about the Companys business
and financial position.  Due to the nature of the Companys operations, the Board of
Directors does not believe an audit committee financial expert is needed at this time.

# Item 16B.   Code of Ethics

The Company has adopted a Code of
Ethics that applies to the Companys executive officers, directors and employees. The
Code of Ethics has been filed as an exhibit to this Annual Report and is available for
viewing on the Companys website.

49

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# 16C.   PRINCIPAL
ACCOUNTANT FEES AND SERVICES

Hein & Associates LLP serve as
the independent auditors for the Company and have acted as the Companys independent
auditor for the fiscal year ended December 31, 2005. Prior to this date, we used Amisano
Hansen for the year ended December 31, 2004. The chart below sets forth the total amount
billed by the accounting firms for services performed in the last two fiscal years and
breaks down these amounts by category of service (for audit fees, audit-related fees, tax
fees and other fees).

Audit Fees are the
aggregate fees billed by Hein & Associates LLP and Amisano Hanson for the audit of the
Companys annual consolidated financial statements, reviews of interim consolidated
financial statements and attestation services that are provided in connection with
statutory and regulatory filings or engagements.

Audit-Related Fees are
fees charged by Hein & Associates, LLP and Amisano Hanson for assurance and related
services that are reasonably related to the performance of the audit or review of the
Companys consolidated financial statements and are not reported under Audit
Fees. This category comprises fees billed for independent accountant review of the
interim consolidated financial statements and management discussion and analysis, as well
as advisory services associated with the Companys financial reporting.

Tax Fees are fees for
professional services rendered by Hein & Associates, LLP and Amisano Hanson for tax
compliance, tax advice on actual or contemplated transactions.

Fees disclosed under the category
All Other Fees for the 2005 fiscal year are related to a review of a Company
private placement.

|                    | Fiscal Year Ended
December 31
|------------------- | -----------------------------
|                    |                              
|
|                    |                              
|Audit Fees:         |                              
|Audit Fees:         |                              
|Audit-Related Fees: |                              
|Tax Fees            |                              
|All Other Fees      |                              
|                    |                              
|Total Fees:         |                              
|                    |                              

# Audit Committees
pre-approval policies and procedures

The Audit Committee nominates and
engages the independent auditors to audit the consolidated financial statements, and
approves all audit services, audit-related services, tax services and other services
provided by Hein & Associates, LLP. Any services provided by Hein & Associates,
LLP that are not specifically included within the scope of the audit must be pre-approved
by the Audit Committee prior to any engagement.

# Item 16D.   Exemptions
from the Listing Standards for Audit Committees.

Not applicable.

Item 16E.   Purchases of
Equity Securities by the Issuer and Affiliated Purchasers.

Not applicable.

50

---

# PART III

# Item 17.   Financial
Statements.

Not applicable.

# Item 18.   Financial Statements.

The Companys Consolidated
Financial Statements are stated in United States Dollars and are prepared in accordance
with United States Securities and Exchange (SEC) GAAP.

The Consolidated Financial Statements
of the Company as required under Item 18 of Form 20-F attached hereto are individually
listed under Item 19, and are found immediately following the text of this annual report.
The audit report of Hein & Associates, LLP, Registered Public Accounting Firm, is
included herein immediately preceding the Consolidated Financial Statements.

# Item 19.   Exhibits.

# Financial Statements

The Consolidated Financial Statements
of the Corporation and exhibits listed below are filed with this annual report on Form
20-F in the United States.

The following financial statements
are attached to and form part of this annual report:

| |  | Auditors
Report to the Shareholders of Kodiak Oil & Gas Corp. dated April 26, 2006 | F-1
| |  | ----------------------------------------------------------------------------------- | ---

| |  | Consolidated
Balance Sheets as at December 31, 2005 and 2004 | F-3
| |  | ------------------------------------------------------------ | ---

| |  | Consolidated
Statements of Operations for the years ended December 31, 2005, 2004 and 2003 | F-4
| |  | ------------------------------------------------------------------------------------------ | ---

| |  | Statement
of Stockholders Equity and Comprehensive Loss for the years ended 
December 31, 2005, 2004 and 2003 | F-5
| |  | -------------------------------------------------------------------------------------------------------------- | ---

| |  | Consolidated
Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 | F-6
| |  | ------------------------------------------------------------------------------------------ | ---

| |  | Notes
to the Consolidated Financial Statements | F-7
| |  | ---------------------------------------------- | ---

# Exhibits

The following exhibits are attached
to and form part of this annual report:

|Exhibit
Number | Description
|-------------- | -----------
|1              | .1(1)      
|1              | .2(1)      
|1              | .3(1)      
|4              | .1(1)      
|4              | .3(1)      
|4              | .4(1)      
|4              | .5(1)      

51

---

|Exhibit
Number | Description
|-------------- | -----------
|               |            
|4              | .6(2)      
|4              | .7(2)      
|4              | .8(2)      
|4              | .9(2)      
|4              | .10(3)     
|4              | .11(3)     
|4              | .12(3)     
|4              | .13        
|11             | .1         
|12             | .1         
|13             | .1         
|15             | .4         
|23             | .1         
|23             | .2         
|23             | .3         

_________________

| |  | (1) |  | Previously
filed with Form 20FR12G (SEC File No. 000-51635)
| |  | --- |  | -----------------------------------------------------------

| |  | (2) |  | Previously
filed with Form 20FR12G/A Amendment No. 2 (SEC File No. 000-51635)
| |  | --- |  | -----------------------------------------------------------------------------

| |  | (3) |  | Previously
filed with Form 20FR12G/A Amendment No. 3 (SEC File No. 000-51635)
| |  | --- |  | -----------------------------------------------------------------------------

52

---

# SIGNATURES

The registrant hereby certifies that
it meets all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.

| | KODIAK OIL & GAS CORP.(Registrant)/s/ Lynn A. Peterson
Lynn A. Peterson
President
| | ---------------------------------------------------------------------------------

Date:  May 1, 2006

53

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
Kodiak Oil & Gas Corp.
Denver, Colorado

We have audited the consolidated
balance sheet of Kodiak Oil & Gas Corp. and subsidiaries (the Company) as
of December 31, 2005, and the related consolidated statements of operations,
stockholders equity, and cash flows for the year ended December 31, 2005. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the 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 audit 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 Kodiak Oil & Gas Corp. and subsidiaries as of December 31, 2005,
and the results of their operations and their cash flows for the year ended
December 31, 2005, in conformity with U.S. generally accepted accounting principles.

/s/ Hein & Associates
LLP
Denver, Colorado 
April 26, 2006

F-1

---

|A PARTNERSHIP OF INCORPORATED PROFESSIONALS | AMISANO HANSON
CHARTERED ACCOUNTANTS
|------------------------------------------- | ------------------------------------

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Shareholders,
Kodiak Oil & Gas Corp.

We have audited the consolidated
balance sheet of Kodiak Oil & Gas Corp. as at December 31, 2004 and the consolidated
statements of operations, stockholders equity and comprehensive income and cash flows for
each of the years in the two year period ended December 31, 2004. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance
with Canadian generally accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States of America). Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated
financial statements present fairly, in all material respects, the financial position of
Kodiak Oil & Gas Corp. as at December 31, 2004 and the results of its operations and
its cash flows for each of the years in the two year period ended December 31, 2004 in
accordance with Canadian generally accepted accounting principles.

|Vancouver, Canada 
April 12, 2005 | Amisano HansonChartered Accountants
|--------------------------------- | -------------------------------------

|750 WEST PENDER STREET, SUITE 604  
VANCOUVER CANADA                   
V6C 2T7 | TELEPHONE:  604-689-0188
   FACSIMILE:  604-689-9773
 E-MAIL:  amishan@telus.net
|------------------------------------------------------------------------------- | --------------------------------------------------------------------------------

F-2

---

# KODIAK OIL & GAS
CORP. 
CONSOLIDATED BALANCE SHEETS

|                                                              | December 31,
2005 | December 31,
2004
|------------------------------------------------------------- | ----------------- | -----------------
|                                                              |                   |                  
|ASSETS                                                        |                   |                  
|Current assets:                                               |                   |                  
|Cash and cash equivalents                                     |                   |                  
|Accounts receivable                                           |                   |                  
|Prepaid expenses and other                                    |                   |                  
|                                                              |                   |                  
|Total current assets                                          |                   |                  
|                                                              |                   |                  
|Property and equipment (full cost method), at cost:           |                   |                  
|Proved oil and gas properties                                 |                   |                  
|Unproved oil and gas properties                               |                   |                  
|Less-accumulated depletion, depreciation and amortization     |                   |                  
|                                                              |                   |                  
|                                                              |                   |                  
|                                                              |                   |                  
|Other property and equipment, net of accumulated depreciation |                   |                  
|of $47,525 in 2005 and $13,671 in 2004                        |                   |                  
|                                                              |                   |                  
|                                                              |                   |                  
|                                                              |                   |                  
|Restricted Investment                                         |                   |                  
|                                                              |                   |                  
|Total Assets                                                  |                   |                  
|                                                              |                   |                  
|LIABILITIES AND STOCKHOLDERS EQUITY                          |                   |                  
|Current liabilities:                                          |                   |                  
|Accounts payable                                              |                   |                  
|Accrued expenses                                              |                   |                  
|                                                              |                   |                  
|Total current liabilities                                     |                   |                  
|                                                              |                   |                  
|Noncurrent liabilities:                                       |                   |                  
|Asset retirement obligation                                   |                   |                  
|                                                              |                   |                  
|Commitments and Contingencies, Notes 6 and 10                 |                   |                  
|Stockholders' equity:                                         |                   |                  
|Common stock, $0.01 par value: authorized-100,000,000         |                   |                  
|Issued:  54,547,158 shares in 2005 and 33,875,283 in 2004     |                   |                  
|Additional paid in capital                                    |                   |                  
|Accumulated deficit                                           |                   |                  
|                                                              |                   |                  
|Total stockholders' equity                                    |                   |                  
|                                                              |                   |                  
|Total Liabilities and Stockholders Equity                    |                   |                  
|                                                              |                   |                  

SEE ACCOMPANYING NOTES

F-3

---

# KODIAK OIL & GAS CORP. 
CONSOLIDATED STATEMENTS OF OPERATIONS

|                                          | For the Years Ended December 31
|----------------------------------------- | -------------------------------
|                                          |                                
|
|                                          |                                
|Revenues:                                 |                                
|Gas production revenues                   |                                
|Oil production revenues                   |                                
|                                          |                                
|Interest income                           |                                
|                                          |                                
|                                          |                                
|Total revenue                             |                                
|                                          |                                
|Costs and expenses:                       |                                
|Oil and gas production expenses           |                                
|                                          |                                
|Depletion, depreciation, amortization     |                                
|and abandonment liability accretion       |                                
|                                          |                                
|General and administrative expenses       |                                
|                                          |                                
|(Gain) / loss on currency exchange        |                                
|                                          |                                
|                                          |                                
|Total costs and expenses                  |                                
|                                          |                                
|                                          |                                
|Net loss for the period                   |                                
|                                          |                                
|Basic & diluted weighted-average common   |                                
|share outstanding                         |                                
|                                          |                                
|Basic & diluted net loss per common share |                                
|                                          |                                

SEE ACCOMPANYING NOTES

F-4

---

# KODIAK OIL & GAS
CORP. 
STATEMENT OF STOCKHOLDERS EQUITY

|                                  | Common Stock | Contributed | Accumulated | Total     
|--------------------------------- | ------------ | ----------- | ----------- | ----------
|
|                                  |             
|Balance January 1, 2003:          |              |             |             | 8,266,175 
|                                  |              |            
|Issuance of stocks for cash:      |              |            
|-pursuant to private placement    |              |             |             | 3,857,500 
|-pursuant to exercise of warrants |              |             |             | 500,000   
|-pursuant to exercise of options  |              |             |             | 450,000   
|Stock issuance costs              |              |             |             |           
|Issuance of stocks for property   |              |             |             | 1,300,000 
|Stock based compensation          |              |             |             |           
|Net loss                          |              |             |             |           
|                                  |             
|                                  |              |            
|Balance December 31, 2003:        |              |             |             | 14,373,675
|                                  |              |            
|Issuance of stocks for cash:      |              |            
|-pursuant to private placement    |              |             |             | 11,428,572
|-pursuant to exercise of warrants |              |             |             | 7,948,036 
|-pursuant to exercise of options  |              |             |             | 50,000    
|Stock issuance costs              |              |             |             |           
|Stock based compensation          |              |             |             |           
|Employee stock options            |              |             |             | 75,000    
|Net loss                          |              |             |             |           
|                                  |             
|                                  |              |            
|Balance December 31, 2004:        |              |             |             | 33,875,283
|                                  |              |            
|Issuance of stocks for cash:      |              |            
|-pursuant to private placement    |              |             |             | 17,000,000
|-pursuant to exercise of warrants |              |             |             | 3,496,875 
|-pursuant to exercise of options  |              |             |             | 100,000   
|Stock issuance costs              |              |             |             |           
|Employee stock options            |              |             |             | 75,000    
|Stock based compensation          |              |             |             |           
|Net loss                          |              |             |             |           
|                                  |             
|                                  |              |            
|Balance December 31, 2005:        |              |             |             | 54,547,158
|                                  |             

SEE ACCOMPANYING NOTES

F-5

---

# KODIAK OIL & GAS
CORP. 
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                 | For the Years Ended December 31
|------------------------------------------------ | -------------------------------
|                                                 |                                
|
|                                                 |                                
|Reconciliation of net loss to net cash provided  |                                
|by operating activities:                         |                                
|Net loss                                         |                                
|Adjustments to reconcile net loss to net cash    |                                
|provided by operating activities:                |                                
|Depletion, depreciation, amortization and        |                                
|abandonment liability accretion                  |                                
|Stock based compensation                         |                                
|Changes in current assets and liabilities        |                                
|Accounts receivable                              |                                
|Other receivables                                |                                
|Prepaid expenses and other                       |                                
|Accounts payable                                 |                                
|Accrued expenses                                 |                                
|Due to related party                             |                                
|                                                 |                                
|Net cash used by operating activities            |                                
|                                                 |                                
|                                                 |                                
|Cash flows from investing activities             |                                
|Oil and gas properties                           |                                
|Equipment                                        |                                
|Restricted Investment                            |                                
|                                                 |                                
|Net cash used for investing activities           |                                
|                                                 |                                
|                                                 |                                
|Financing Activity                               |                                
|Proceeds from the issuance of shares             |                                
|Issuance costs                                   |                                
|Proceeds from (repayment of) related party       |                                
|note payable                                     |                                
|                                                 |                                
|Net cash provided (used in) financing activities |                                
|                                                 |                                
|                                                 |                                
|Net change in cash and cash equivalents          |                                
|Cash and cash equivalents at beginning of year   |                                
|                                                 |                                
|Cash and cash equivalents at end of the year     |                                
|                                                 |                                
|                                                 |                                
|Cash paid for interest                           |                                
|                                                 |                                
|Non-cash Items                                   |                                
|Oil & Gas Property accrual included in           |                                
|Accounts Payable                                 |                                
|                                                 |                                
|                                                 |                                
|Asset retirement obligation                      |                                
|                                                 |                                

SEE ACCOMPANYING NOTES

F-6

---

KODIAK OIL & GAS CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2005

# Note 1 
Organization

Description of Operations

Kodiak
Oil and Gas Corp. and subsidiaries (Kodiak or the Company) is a
public company listed for trading on the TSX Venture Exchange and whose corporate
headquarters are located in Denver, Colorado, USA. The Company is an independent energy
company engaged in the exploration, exploitation, development, acquisition and production
of natural gas and crude oil in the western United States.

The
Company was incorporated (continued) in the Yukon Territory on September 28, 2001.

# Note 2 
Significant Accounting Policies

Basis of Presentation

The
consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiary, Kodiak Oil & Gas (USA) Inc. All significant inter-company balances and
transactions have been eliminated. The majority of the Corporations business is
transacted in US dollars and, accordingly, the financial statements are expressed in US
dollars.

Use of Estimates in the
Preparation of Financial Statements

The
financial statements of the Company have been prepared in accordance with accounting
principles generally accepted in United States. The preparation of the financial
statements requires management to make estimates and assumptions that affect the reported
amounts of oil and gas reserves, assets and liabilities and disclosure of contingent
assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Estimates of oil and
gas reserves quantities provide the basis for calculations of depletion, depreciation, and
amortization (DD&A) and impairment, each of which represents a significant
component of the consolidated financial statements.

Cash and Cash Equivalents

Cash
and cash equivalents consist of all highly liquid investments that are readily convertible
to cash and have maturities of three months or less when purchased. The carrying value of
cash and cash equivalents approximates fair value due to the short-term nature of these
instruments.

Restricted Investment

The
restricted investment balance as of December 31, 2005 is comprised of: (a) $100,000
certificate of deposit to collateralize a surety bond to provide for state bonding
requirements for plugging and abandonment liabilities; and (b) $53,000 certificate of
deposit to collateralize the costs of office improvements that will be released over the
five year term of the lease at $10,600 per year.

F-7

---

Concentration of Credit
Risk

The
Companys cash equivalents and short-term investments are exposed to concentrations
of credit risk. The Company manages and controls this risk by investing these funds with
major financial institutions.

The
Companys receivables are comprised of oil and gas revenue receivables and joint
interest billings receivable. The amounts are due from a limited number of entities.
Therefore, the collectability is dependent upon the general economic conditions of the few
purchasers and joint interest owners. The receivables are not collateralized. However, to
date the Company has had minimal bad debts.

Oil and Gas Producing
Activities

The
Company follows the full cost method of accounting for oil and gas operations whereby all
costs related to the exploration and development of oil and gas properties are initially
capitalized into a single cost center (full cost pool). Such costs include
land acquisition costs, geological and geophysical expenses, carrying charges on
non-producing properties, costs of drilling directly related to acquisition and
exploration activities. Proceeds from property sales are generally credited to the full
cost pool, with no gain or loss recognized, unless such a sale would significantly alter
the relationship between capitalized costs and the proved reserves attributable to theses
costs. A significant alteration would typically involve a sale of 25% or more of the
proved reserves related to a single full costs pool.

Costs
capitalized, together with the costs of production equipment, are depleted and amortized
on the unit-of-production method based on the estimated gross proved reserves as
determined by independent petroleum engineers. The costs of unproved properties are
withheld from the depletion base until such time as they are either developed or
abandoned. When proved reserves are assigned or the property is considered to be impaired,
the cost of the property or the amount of the impairment is added to costs subject to
depletion calculations.

For
depletion and depreciation purposes, relative volumes of oil and gas production and
reserves are converted at the energy equivalent rate of six thousand cubic feet of natural
gas to one barrel of crude oil.

Under
the full costs method of accounting, capitalized oil and gas property costs less
accumulated depletion and net of deferred income taxes may not exceed an amount equal to
the present value, discounted at 10%, of estimated future net revenues from proved oil and
gas reserves plus the cost, or estimated fair value, if lower of unproved properties.
Should capitalized costs exceed this ceiling, an impairment is recognized. The present
value of estimated future net revenues is computed by applying current prices of oil and
gas to estimated future production of proved oil and gas reserves as of period-end, less
estimated future expenditures to be incurred in developing and producing the proved
reserves assuming the continuation of existing economic conditions.

Other Property and
Equipment

Other
property and equipment such as office furniture and equipment, vehicles, and computer
hardware and software are recorded at cost. Costs of renewals and improvements that
substantially extend the useful lives of the assets are capitalized. Maintenance and
repair costs are expensed when incurred. Depreciation is recorded using the straight-line
method over the estimated useful lives of three years for computer equipment, and five
years for office equipment and vehicles. When other property and equipment is sold or
retired, the capitalized costs and related accumulated depreciation are removed from the
accounts.

Fair Value of Financial
Instruments

The
Companys financial instruments including cash and cash equivalents, accounts
receivable and accounts payable are carried at cost, which approximates fair value due to
the short-tern maturity of these instruments.

F-8

---

Asset Retirement
Obligation

The
Company follows SFAS No. 143, Accounting for Asset Retirement Obligations,
which requires that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it was incurred if a reasonable estimate of fair value
could be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. The increase in carrying value of a property
associated with the capitalization of an asset retirement cost is included in proved oil
and gas properties in the consolidated balance sheets. The Company depletes the amount
added to proved oil and gas property costs. The future cash outflows associated with
settling the asset retirement obligations that have been accrued in the accompanying
balance sheets are excluded from the ceiling test calculations. The Company also depletes
the estimated dismantlement and abandonment costs, net of salvage values, associated with
future development activities that have not yet been capitalized as asset retirement
obligations. These costs are also included in the ceiling test calculation. The asset
retirement liability will be allocated to operating expense by using a systematic and
rational method. The Company has recorded a net asset of $67,000, a related liability of
$69,073 (using a 8.5% discount rate and a 2.97% inflation rate) and a nil cumulative
effect of change in accounting principle on prior years. The information below reconciles
the value of the asset retirement obligation for the periods presented.

|                                  | Year ended
December 31,
2005
|--------------------------------- | ----------------------------
|                                  |                             
|Balance beginning of period       |                             
|Liabilities incurred              |                             
|                                  |                             
|Liabilities settled               |                             
|Revisions in estimated cash flows |                             
|Accretion expense                 |                             
|                                  |                             
|Balance end of period             |                             
|                                  |                             

The
Company had no wells prior to January 2005.

Revenue Recognition

Revenues
from the sale of oil and gas production are recognized when title passes, net of
royalties. The Company may have an interest with other producers in certain properties, in
which case the Company uses the sales method to account for gas imbalances. Under this
method, revenue is recoded on the basis of gas actually sold by the Company, In addition,
the Company records revenue for its share of gas sold by other owners that cannot be
volumetrically balanced in the future due to insufficient remaining reserves. The Company
also reduces revenue for other owners gas sold by the Company that cannot be
volumetrically balanced in the future due to insufficient remaining reserves. The
Companys remaining over- and under-produced as balancing positions are considered in
the Companys proved oil and gas reserves. Gas imbalances at December 31, 2005 were
not significant.

Basic and Diluted
Earnings (Loss) Per Share

Basic
net income (loss) per common share of stock is calculated by dividing the income (loss)
for the period by the weighted average number of common shares outstanding during each
period. Diluted net income (loss) per common share of stock reflect the potential dilution
that could occur if potentially dilutive securities were exercised or converted to common
stock. The dilutive effect of options and warrants and their equivalent is computed by
application of the treasury stock method and the effect of convertible securities by the
if converted method. Fully diluted amounts are not presented when the effect
of the computations are anti-dilutive due to the losses incurred. Accordingly, there is no
difference in the amounts presented for basic and diluted loss per share.

F-9

---

Stock-based Compensation
Plan

The
fair value of all share purchase options granted are expensed over their vesting period
with a corresponding increase to contributed surplus. Upon exercise of share purchase
options, the consideration paid by the option holder, together with the amount previously
recognized in contributed surplus, is recorded as an increase to share capital.

The
Company uses the Black-Scholes option valuation model to calculate the fair value of share
purchase options at the date of grant. Option pricing models require the input of highly
subjective assumptions, including the expected price volatility. Changes in these
assumptions can materially affect the fair value estimate and, therefore, the existing
models do not necessarily provide a reliable single measure of the fair value of the
Companys share purchase options.

Major Customers

Although
the Company sells the majority of its production to a few purchasers, there are numerous
other purchasers in the areas in which Kodiak sells it production; therefore, the loss of
its significant customer would not adversely affect the Companys operations. During
2005, Nexen Marketing, Duke Energy Field Services and Questar Gas Marketing individually
accounted for 38%, 37% and 25% respectively of the Companys total oil and gas
production revenue.

Income Taxes

The
Company follows the asset and liability method of accounting for income taxes. Under this
method, current income taxes are recognized for the estimated income taxes payable for the
current period. Future income tax assets and liabilities are recognized for temporary
differences between the tax and accounting basis of assets and liabilities as well as for
the benefit of losses available to be carried forward to future years for tax purposes
only if it is more likely than not that they can be realized.

Foreign Currency
Translation

Monetary
items denominated in a foreign currency, other than US dollars, are translated into US
dollars at exchange rates prevailing at the balance sheet date and non-monetary items are
translated at exchange rates prevailing when the assets are acquired or obligations
incurred. Foreign currency denomination revenue and expense items are recorded at exchange
rates prevailing at the transaction date. Gains or losses arising from the transactions
are included in operations.

Reclassifications

Certain
reclassifications have been to prior years amounts to conform to the classifications
used in the current year. Such reclassifications had no effect on the Companys net
loss in any of the periods presented.

New Accounting
Pronouncements

In
June 2005, the FASB issued Statement 154, Accounting Changes and Error
Correctionswhich replaces APB Opinion 20 and FASB Statement 3. Statement 154
changes the requirements for the accounting and reporting of a change in accounting
principle. Opinion 20 previously required that most voluntary changes in accounting
principle be recognized by including the cumulative effect of the new accounting principle
in net income of the period of the change. Statement 154 now requires retrospective
application of changes in accounting principle to prior period financial statements,
unless it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. The Statement is effective for fiscal years beginning
after December 15, 2005. We do not expect the adoption of this statement will have a
material impact on our results of operations or financial position.

In
March 2005, the FASB issued FASB Interpretation (FIN) No. 47,
Accounting for Conditional Asset Retirement Obligations. This
Interpretation clarifies the definition and treatment of conditional asset retirement

F-10

---

obligations as discussed in FASB
Statement No. 143, Accounting for Asset Retirement Obligations. A
conditional asset retirement obligation is defined as an asset retirement activity in
which the timing and/or method of settlement are dependent on future events that may be
outside the control of a company. FIN 47 states that a company must record a liability
when incurred for conditional asset retirement obligations if the fair value of the
obligation is reasonably estimable. This Interpretation is intended to provide more
information about long-lived assets, more information about future cash outflows for these
obligations and more consistent recognition of these liabilities. FIN 47 is effective for
fiscal years ending after December 15, 2005. We do not believe that our financial
position, results of operations or cash flows will be impacted by this Interpretation.

In
January 2006, the Financial Accounting Standards Board published FASB Statement of
Financial Accounting Standard (SFAS) No. 155, Accounting for Certain Hybrid
Financial Instrumentsan amendment of FASB Statements No. 133 and 140,to
simplify and make more consistent the accounting for certain financial instruments.
Specifically, SFAS No. 155permit fair value remeasurement for any hybrid
financial instrument with an embedded derivative that otherwise would require bifurcation,
provided that the whole instrument is accounted for on a fair value basis. SFAS
No. 155 applies to all financial instruments acquired or issued after the beginning
of an entitys first fiscal year that begins after September 15, 2006, with
earlier application allowed. We do not expect the adoption of this statement will have a
material impact on our results of operations or finical position.

# Note 3  Oil and
Gas Properties

The
following table presents information regarding the Companys net costs incurred in
the purchase of proved and unproved properties and in the exploration and development
activities. The 2005 amounts include $67,000 of capitalized costs associated with asset
retirement obligations.

|                            | For the Years Ended December 31
|--------------------------- | -------------------------------
|                            |                                
|
|                            |                                
|Property Acquisition costs: |                                
|Proved                      |                                
|Unproved                    |                                
|Exploration costs           |                                
|Development costs           |                                
|                            |                                
|Total including asset       |                                
|retirement obligation       |                                
|                            |                                
|Total excluding asset       |                                
|retirement obligation       |                                
|                            |                                
|Depletion Rates:            |                                
|Per barrel                  |                                
|                            |                                
|Per Mcf                     |                                
|                            |                                

At December 31, the Companys
unproved properties consist of leasehold costs in the following areas:

|             | 2005 | 2004 | 2003
|------------ | ---- | ---- | ----
|             |      |      |     
|Montana      |      |      | $   
|North Dakota |      |      |     
|Wyoming      |      |      |     
|             |      |      |     
|             |      |      | $   
|             |      |      |     

F-11

---

The following table represents the additions,
net of impairments, to unproved acreage from
inception through December 31, 2005:

|                                                  | Net Acquisition
Costs
|------------------------------------------------- | ---------------------
|                                                  |                      
|2003                                              |                      
|2004                                              |                      
|2005                                              |                      
|                                                  |                      
|Unproved Mineral Interest
as of December 31, 2005 |                      
|                                                  |                      

# Note 4  Property
Acquisitions

In
November 2005, the Company acquired unproved oil and gas leases in exchange for $1.6
million in cash.

In
December 2005, the Company completed the acquisition of unproved oil and gas properties in
exchange for $1.45 million. $145,000 of the purchase price was deposited with the balance
of $1.305 million recorded as a liability as of December 31, 2005. The balance was paid in
full on January 2006.

In
December 2005, the Company completed the acquisition of unproved oil and gas properties in
exchange for $2.1 million in cash.

# Note 5 
Compensation Plan

| | Stock-based
Compensation Plan
| | -----------------------------

| | The
Company has a stock-based compensation plan whereby share purchase options may be granted
with an exercise price equal to the trading value when granted. The total number of share
purchase options outstanding cannot exceed 10% of the total number of shares issued. The
share purchase options vest when granted except for share purchase options granted to
consultants which vest at 25% every three months. During the year ended December 31,
2004, the Company also granted share purchase options to employees which vest at
one-third of the amount granted on each anniversary over a three year period.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the year ended December 31, 2004, the Company recorded stock-based compensation of
$411,238. Included in this amount is $6,943 associated with options granted to
consultants. For the year ended December 31, 2005, the Company recorded stock based
compensation of $541,111.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following assumptions were used for the Black-Scholes model:
| | ----------------------------------------------------------------

|                                                     | 2005 | 2004            
|---------------------------------------------------- | ---- | ----------------
|                                                     |      |                 
|Risk free rates                                      |      | 4.3%            
|Dividend yield                                       |      | 0%              
|Expected volatility                                  |      | 81.34%          
|Weighted average expected stock option life          |      | 2.5 yrs         
|                                                     |     
|The weighted average fair value at the date of grant |     
|for stock options granted is as follows:             |     
|Weighted average fair value per share                |      | $           0.60
|Total options granted                                |      | 900,000         
|                                                     |     
|Total weighted average fair value of options granted |      | $      541,111  

F-12

---

Stock Options

A
summary of the stock options outstanding is as follows:

|                                         | Number of Options | (CDN$)
Weighted
Average
ExercisePrice
|---------------------------------------- | ----------------- | -------------------------------------
|Balance December 31, 2003                |                   | 1,437,000                            
|
|Options Granted                          |                   | 1,751,500                            
|Options Exercised                        |                   | (50,000                              
|
|Balance outstanding at December 31, 2004 |                   | 3,138,500                            
|
|Options Granted                          |                   | 900,000                              
|Options Exercised                        |                   | (100,000                             
|
|Balance outstanding at December 31, 2005 |                   | 3,938,500                            
|
|Options exercisable at December 31, 2005 |                   | 3,688,000                            
|

At
December 31, 2005, stock options outstanding are as follows:

|(CDN$)Exercise Price | Number ofShares | Expiry Date
|-------------------- | --------------- | -----------
|                     |                 |            
|$0.15                |                 | 100,000    
|$0.15                |                 | 1,187,000  
|$0.50                |                 | 1,000,000  
|$1.00                |                 | 751,500    
|$1.00                |                 | 900,000    
|
|                     |                 | 3,938,500  
|

Share Purchase
Warrants

Share
purchase warrant transactions are summarized as follows:

|                           | Number ofWarrants | (CDN$)
Average
ExercisePrice
|-------------------------- | ----------------- | ----------------------------
|                           |                   |                             
|Balance, December 31, 2003 |                   | 2,298,750                   
|Exercised                  |                   | (2,298,750                  
|Granted                    |                   | 6,628,572                   
|Exercised                  |                   | (5,649,286                  
|Granted                    |                   | 2,824,643                   
|
|
|Balance, December 31, 2004 |                   | 3,803,929                   
|Exercised                  |                   | (3,496,875                  
|Expired                    |                   | (307,054                    
|
|
|Balance, December 31, 2005 |                   | 0                           
|

F-13

---

# Note 6  Commitments
and Contingencies

The
Company leases office facilities under an operating lease agreement that expires on June
30, 2010. Rent expense was $48,200, $29,200, and $19,000 in 2005, 2004, and 2003
respectively. The Company has no other capital leases and no other operating lease
commitments.

The
following table shows the annual rentals per year for the life of the lease:

|                          | 
|------------------------- | 
|Years Ending December 31, | 
|2006                      | 
|2007                      | 
|2008                      | 
|2009                      | 
|2010                      | 
|                          | 
|Total                     | 
|                          | 

During
the year ended December 31, 2004, the Company entered into three one-year employment
agreements. Each agreement includes the issue of 50,000 common shares, of which 25,000
were issued upon commencement and 25,000 were issued in 2005.

As
is customary in the oil and gas industry, the Company may at times have commitments in
place to reserve or earn certain acreage positions or wells. If the Company does not pay
such commitments, the acreage positions or wells may be lost.

# Note 7  Related
Party Transactions

During the
year ended December 31, 2003, in connection with oil and gas acquisitions, the Company
issued a promissory note for $264,000 payable to CP Resources LLC, a company controlled by
directors in common, which bears interest at a rate of 1% over the prime rate of Wells
Fargo Bank. The amount was unsecured and had no specific terms of repayment. During the
year ended December 31, 2004, the note and accrued interest of $8,824 was repaid and no
amounts remain outstanding.

# Note 8  Income
Taxes

In
Canada, the Company has available resource deductions of $2,090,464 and non-capital losses
of approximately $1,120,000 that may be carried forward to reduce taxable income in future
years. The non-capital losses expire as follows:

|     | 
|---- | 
|2009 | 
|2010 | 
|2014 | 
|     | 
|     | 
|     | 

The
Company has operating losses of approximately $1,400,000 in the United States. The
Companys net operating losses may be limited due to changes in ownership.

F-14

---

Significant
components of the Companys future tax assets and liabilities, after applying enacted
corporate income tax rates, are as follows:

|                                                 | 2005 | 2004             
|------------------------------------------------ | ---- | -----------------
|
|Future income tax assets                         |      |                  
|Net tax losses carried forward                   |      | $  1,062,000     
|Stock based compensation                         |      | 414,000          
|Exploration and development expenses             |      | 149,000          
|
|                                                 |      | 1,625,000        
|Valuation allowance for future income tax assets |      | (1,625,000       
|
|Future income tax assets, net                    |      | $               0
|

A
reconciliation of the provision (benefit) for income taxes computed at the statutory rate:

|                    | 2005 | 2004    | 2003
|------------------- | ---- | ------- | ----
|                    |      |         |     
|Federal             |      | 35.0%   |     
|State               |      | 4.5%    |     
|Other               |      |        |     
|Valuation Allowance |      | (39.5)% |     
|                    |      |         |     
|Net                 |      |        |     
|                    |      |         |     

# Note 9 
Supplemental Oil and Gas Reserve Information

For
the years presented, Sproule & Associates (Sproule) prepared the reserve
information for all of the PV-10 value. The Company engaged Sproule for the first time in
2005. The Company emphasizes that reserve estimates are inherently imprecise and that
estimates of new discoveries and undeveloped locations are more imprecise than estimates
of established proved producing oil and gas properties. Accordingly, these estimates are
expected to change as future information becomes available.

Proved
oil and gas reserves are the estimated quantities of crude oil, natural gas and natural
gas liquids that geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from know reservoirs under existing economic and operating
conditions. Proved developed oil and gas reserves are those expected to be recovered
through existing wells with existing equipment and operating methods. All of the
Companys proved reserves are located in the Continental United States.

Presented
below is a summary of the changes in estimated reserves of the Company:

|                           | For the Year Ended December 31, 2005
|-------------------------- | ------------------------------------
|                           |                                     
|
|                           |                                     
|
|Developed and undeveloped: |                                     
|Beginning of year          |                                     
|Discoveries and extensions |                                     
|Production                 |                                     
|                           |                                     
|End of year                |                                     
|                           |                                     

F-15

---

Standardized Measure of
Discounted Future Net Cash Flows (Unaudited):

SFAS
No. 69, Disclosures about Oil and Gas Producing Activities, prescribes
guidelines for computing a standardized measure of future net cash flows and changes
therein relating to estimated proved reserves. The Company has followed these guidelines,
which are briefly discussed below.

Future
cash inflows and future production and development costs are determined by applying
benchmark prices and costs, including transportation, quality and basis differentials, in
effect at year-end to the year-end estimated quantities of oil and gas to be produced in
the future. Each property the Company operates is also charges with field-level overhead
in the estimated reserve calculation. Estimated future income taxes are computed using
current statutory income tax rates, including consideration for estimated future statutory
depletion. The resulting future net cash flows are reduced to present value amounts by
applying a 10% annual discount factor.

Future
operating costs are determined based on estimates of expenditures to be incurred in
developing and producing the proved oil and gas reserves in place at the end of the
period, using year-end costs and assuming continuation of existing economic conditions,
plus Company overhead incurred attributable to operating activities.

The
assumptions used to compute the standardized measure are those prescribed by the FASB and
the Securities and Exchange Commission. These assumptions do not necessarily reflect the
Companys expectations of actual revenues to be derived from those reserves, nor
their present value. The limitations inherent in the reserve quantity estimation process,
as discussed previously, are equally applicable to the standardized measure computations
since these estimates are basis for the valuation process. The following prices, as
adjusted for transportation, quality and basis differentials, were used in the calculation
of the standardized measure: Gas (per Mcf) $7.88; Oil (per Bbl) $55.29.

The
following summary sets forth the Companys future net cash flows relating to proved
oil and gas reserves based on the standardized measure prescribed in SFAS No. 69:

|                                   | Year ended
December 31,
2005
|---------------------------------- | ----------------------------
|                                   |                             
|Future cash inflows                |                             
|Future production costs            |                             
|Future development costs           |                             
|Future income taxes                |                             
|                                   |                             
|Future net cash flows              |                             
|10% annual discount                |                             
|                                   |                             
|Standardized measure of discounted |                             
|future net cash flows              |                             
|                                   |                             

The
principle sources of change in the standardized measure of discounted future net cash
flows are:

|                                          | Year ended
December 31,
2005
|----------------------------------------- | ----------------------------
|                                          |                             
|Standardized measure, beginning of year   |                             
|Sales of oil and gas produced, net of     |                             
|Production costs                          |                             
|Extensions, discoveries and other, net of |                             
|Production costs                          |                             
|Net change in income taxes                |                             
|                                          |                             
|Standardized measure, end of year         |                             
|                                          |                             

F-16

---

# Note 10 
Subsequent Events

On
March 8, 2006, the Company issued 19 million common shares at US$2.05 (Cdn$2.33) per share
pursuant to a private placement. The Company paid a commissions and expenses of $2,865,800
for net proceeds to the Company of $37,138,452.

# Note 11  Quarterly
Financial Information (Unaudited)

The
Companys quarterly financial information for fiscal 2005 and 2004 is a follows:

|                                        | First
Quarter | Second
Quarter | Third
Quarter | Fourth
Quarter
|--------------------------------------- | ------------- | -------------- | ------------- | --------------
|                                        |               |                |               |               
|Year Ended December 31, 2005            |               |                |               |               
|                                        |               |                |              
|Total revenue                           |               |                | $             | 8,647         
|Net Revenue from oil and gas operations |               |                | $             |              
|Loss from Operations                    |               |                | $             | 327,083       
|Basic and diluted net loss per share    |               |                | $             | 0.01          

|                                        | First
Quarter | Second
Quarter | Third
Quarter | Fourth
Quarter
|--------------------------------------- | ------------- | -------------- | ------------- | --------------
|                                        |               |                |               |               
|Year Ended December 31, 2004            |               |                |               |               
|                                        |               |                |              
|Total revenue                           |               |                | $             |              
|Net Revenue from oil and gas operations |               |                | $             |              
|Loss from Operations                    |               |                | $             | 396,757       
|Basic and diluted net loss per share    |               |                | $             | 0.01          

# Note 12 
Differences Between Canadian and United States Accounting Principles

These
financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America which differ in certain respects with those
principles and practices that the Company would have followed had its financial statements
been prepared in accordance with accounting principles and practices generally accepted in
Canada.

The
Companys accounting principles generally accepted in the United States of American
differ from accounting principles generally accepted in Canada as follows:

| | a) |  | Stock-based
Compensation
| | -- |  | ------------------------

| | The
Company grants stock options at exercise prices equal to the fair market value of the
Companys stock at the date of the grant. Under Statement of Financial Accounting
Standards No. 123 the Company had accounted for its employee stock options under the fair
value method. The fair value is determined using an option pricing model that takes into
account the stock price at the grant date, the exercise price, the expected life of the
option, the volatility of the underlying stock and the expected dividends, and the
risk-free interest rate over the expected life of the option.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the new recommendations of the Canadian Institute of Chartered Accountants
regarding accounting for stock-based compensation, there is no difference between
Canadian GAAP and US GAAP for the years ended December 31, 2005 or 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-17

---

| | b) |  | Comprehensive
Loss
| | -- |  | ------------------

| | US
GAAP requires disclosure of comprehensive loss which, for the Company is net loss under
US GAAP plus the change in cumulative translation adjustment under US GAAP.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
concept of comprehensive loss does not come into effect until fiscal years beginning on
or after October 1, 2006 for Canadian GAAP. New Accounting Standards Management does not
believe that any recently issued, not yet effective, accounting standards if currently
adopted could have a material effect on the accompanying financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-18

---