UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-K
 
 [X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
fiscal year ended December 31, 2008
 
 OR
 
 [ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the
transition period from _________________ to__________________
 
 Commission
File number 333-38558
 
 KODIAK
      ENERGY, INC.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
                        
                        65-0967706(State
      or other jurisdiction of incorporation or organization)
                        
                        (I.R.S.
      Employer Identification No.)#405
      - 505 8th
      Avenue S.W. Calgary, AB
                        
                        T2P
      2G1(Address
      of principal executive offices)
                        
                        (Zip
      code)
 
 (403)
      262-8044
 (Registrant's
telephone number, including area code)
 
 Securities
registered under Section 12(b) of the Exchange Act: None
 
 Securities
registered under Section 12(g) of the Exchange Act: Common Stock, $0.001 par
value
 
 Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [ ] No [X]
 
 Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 Or 15(d) of the Act. Yes [ ] No [X]
 
 Indicate
by check mark whether the issuer (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.
 [X] Yes [
] No
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
 
 Large
      Accelerated Filer [ ]
                Accelerated
      Filer [X]
                Non-Accelerated
      Filer [ ]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act) [ ] Yes [X] No
 
 The
market value of the voting and non-voting common equity held by non-affiliates
as of the last day of the most recently completed second fiscal quarter was
$61,000,000.
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS
 
 State the
number of shares outstanding of each of the issuer's classes of common equity,
as of December 31, 2008: 110,023,998 Common Shares, $0.001 par
value.
 
 Documents
incorporated by reference: None.
  
 
 KODIAK
ENERGY INC.
 
 Form
10-K
 For the
Fiscal Year Ended December 31, 2008
 
 Table of
Contents
 
 PART
      I.ITEM
      1.
                                  DESCRIPTION
      OF BUSINESS
                                  3ITEM
      1A.
                                  RISK
      FACTORS
                                  8ITEM
      1B.
                                  UNRESOLVED
      STAFF COMMENTS
                                  12ITEM
      2.
                                  DESCRIPTION
      OF PROPERTY
                                  12ITEM
      3.
                                  LEGAL
      PROCEEDINGS
                                  13ITEM
      4.
                                  SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                  14PART
      IIITEM
      5.
                                  MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
                                  15ITEM 6.
                                  SELECTED
      FINANCIAL DATA
                                  16ITEM
      7.
                                  MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
                                  16ITEM 7A.
                                  QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                  20ITEM 8.
                                  FINANCIAL
      STATEMENTS
                                  21ITEM
      9.
                                  CONTROLS
      AND PROCEDURES
                                  42ITEM
      9B.
                                  OTHER
      INFORMATION
                                  43PART
      IIIITEM
      10.
                                  DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
      16(A) OF THE EXCHANGE ACT
                                  43ITEM 11.
                                  EXECUTIVE
      COMPENSATION
                                  45ITEM
      12.
                                  SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                                  46ITEM
      13.
                                  CERTAIN
      RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
                                  47ITEM
      14.
                                  PRINCIPAL
      ACCOUNTANTS FEES AND SERVICES
                                  48ITEM
      15.
                                  EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
                                  48
  2
 
 PART
I
 
 ITEM 1.
DESCRIPTION OF BUSINESS
 
 We were
incorporated in Delaware on December 15, 1999. On December 22, 1999 we merged
with Island Critical Care Corp., an inactive Florida corporation. The purpose of
this merger was to effect a change in the domicile of the Florida Corporation to
Delaware. Island Critical Care Corp. (a Florida corporation), was originally
incorporated on March 15, 1996 under the name 9974 Holdings Inc., and
subsequently changed its name from 9974 Holdings Inc. to Ontario Midwestern
Railway Co. Inc, and finally the Florida Corporation's name was changed to
Midwestern Railway Co. Inc. All three changes in name of the Florida Corporation
were completed prior to its merger with the Delaware Corporation. On January 13,
2000, we merged with Island Critical Care Corporation, an Ontario Corporation.
On December 27, 2004 we changed our name from Island Critical Care to Kodiak
Energy, Inc ("Kodiak").
 
 On
February 5, 2003 the Company filed a petition for bankruptcy in the District of
Prince Edward Island, Division No. 01-Prince Edward Island Court No. 1713,
Estate No. 51-104460. The Company emerged from Bankruptcy pursuant to a court
order on April 7, 2004 with no assets and no liabilities. Upon emergence from
bankruptcy the company adopted Fresh Start Accounting pursuant to SOP 90-7
"Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code."
 
 BUSINESS
 
 The
Company is an exploration stage oil and gas company that devotes most of its
efforts in exploring for natural resources and, since 2005, has been active in
Canada and the United States in acquiring properties that are prospective for
petroleum and natural gas and related hydrocarbons. The Company currently has no
oil and gas reserves or production.
 
 As at
December 31, 2008, the Company had four wholly-owned subsidiaries; Kodiak
Petroleum ULC (“KULC”), an inactive Alberta company; 1438821 Alberta
Ltd.(”1438821”), an Alberta company incorporated in November, 2008 and which
changed its name to Cougar Energy, Inc. (“Cougar”) in February, 2009; Kodiak
Petroleum (Montana), Inc. (“KPMI”), a Delaware company which operates Kodiak’s
projects in New Mexico and Montana and Kodiak Petroleum (Utah), Inc. (“KPUI”),
an inactive Delaware company. In January, 2009, The Company vended its Lucy,
B.C. and Cree Energy Alberta Lands projects into Cougar. See
Subsequent Event Note 20 to the consolidated financial statements included with
this Form 10-K.
 
 Following
are descriptions of the Company's current projects.
 
 Canada
 
 Lucy – Northern British
Columbia
 
 The
Corporation is the operator and 80% working interest owner of a 1,920 acre lease
located in Northeastern British Columbia. The Corporation believes the lease is
situated on the southeast edge of the Horn River Basin and the Muskwa Shale gas
prospect. Industry continues to show increased interest in this shale gas play
with several comparisons of the Muskwa Shale gas potential as an analogue of the
Barnett Shale gas potential.
 
 The
Corporation has been involved in two previous drilling operations on the lease.
In the fourth quarter of 2006, Kodiak farmed in as a non-operated partner,
paying 10% to earn 7.5%, on a drilling operation in the Lucy (Gunnell) area.
This first drilling operation, designed to target a Middle Devonian reef
prospect, had several operational problems and was unsuccessful.
 
 After
performing an internal review of seismic and drilling data, it was determined
there was a seismic anomaly on the southern half of the lease. This anomaly was
identified on several different seismic lines and a decision was made to drill a
well on that part of the lease to evaluate both the anomaly as the primary
target and the Muskwa Shale, seen in the first well but not evaluated by the
operator at that time.
  3
  In the
third quarter of 2007, the Corporation served partners with an independent
operations notice which resulted in the Corporation increasing its working
interest in the lease to 80%.
 
 In the
first quarter of 2008, a second drilling operation was completed and a vertical
well was cased. It was determined that the Middle Devonian seismic anomaly was
not a reef buildup and the wellbore was cased due to encountering significant
gas shows in the previously identified Muskwa Shale with a formation thickness
of approximately sixty meters.
 
 The
Corporation submitted an application to the British Columbia Oil & Gas
Commission (“OGC”) for an experimental scheme to test the Muskwa Shale gas
potential. On August 12, 2008, Kodiak received the final approval of the Lucy
experimental scheme application. The Corporation has prepared a multi-phase work
program designed to test the deliverability of the Muskwa Shale gas formation
using vertical and horizontal drilling and completion techniques. Kodiak’s
proposed work program would allow for early production into a pipeline in order
to monitor long-term deliverability rates and pressures of horizontal and
vertical test wells on the periphery of the Horn River Basin.
 
 These
results would be some of the first commercial production results for a Horn
River Basin shale gas project and would provide information that would help
define the effective exploration area of the Basin and assist in the validation
of adjoining properties in a divestiture process, should that
occur.
 
 Kodiak
contracted an industry-recognized shale gas assessment laboratory to prepare and
analyze the drill cuttings from the 2008 well in order to evaluate the Muskwa
Shale interval for gas potential. The shale gas assessment is conducted by
performing various tests on the rock cuttings that were obtained while drilling
the well in order to determine the type, quality and amount of both adsorbed and
free gas.
 
 The most
important conclusion from the drill cutting analysis is that the information
received continues to support the evaluation of Kodiak’s Muskwa (Evie) Shale gas
prospect. The laboratory data is consistent with other public industry and
government data on the Muskwa Shale. It should also be noted that the numbers
obtained on the laboratory analysis of drill cuttings may be conservative due to
the nature of sampling drill cuttings on a drilling rig. Another significant
point is that all three wells on the Kodiak lease, drilled deep enough to
penetrate the Muskwa Shale, had elevated gas detector readings while penetrating
the shales.
 
 The
prospect is still in the early stages of delineation and no assurance can be
given that its exploitation will be successful. However, based on well cuttings
and drilling data, Kodiak’s internal technical analysis has estimated the volume
of adsorbed and free gas in the Muskwa (Evie) shales to have potential net
reserves of 41 bcf per section or 123 bcf total. Based on estimated 25% recovery
factor on the three sections of land, we estimate a total of 30.75 bcf
recoverable contingent resources. In calculating this number, the Corporation
used all of the laboratory analysis findings and wellbore information obtained
during the drilling operation. For reference, this internally calculated volume
is between the “best” and “high” calculations listed in the Chapman report that
only had the TOC analysis and industry available data. Further appraisal work is
required before these estimates can be finalized and commerciality
assessed.
 The
current intention is to perform the following work commitments for the license
(target dates are subject to change as new information becomes
available):
 
 ·
              Second
      Quarter 2009 and Third Quarter 2009 - Perforate the Muskwa intervals,
      perform a vertical shale gas fracture treatment, test and evaluate
      pressures and production and, if economic, equip and tie in well to an
      existing pipeline approximately 1 Km from the
  wellhead.
 ·
              First
      Quarter 2010 and Second Quarter 2010 – Drill and case a 1000 meter
      horizontal leg from an existing cased vertical well on the lease, perform
      a horizontal staged fracture treatment, test and evaluate pressures and
      production and, if economic, equip and tie in well to
      pipeline.
  4
 
 CREEnergy Lands,
Alberta
 
 On
November 28, 2008, Kodiak entered into a binding letter agreement with CREEnergy
Oil and Gas Inc., a company which is the authorized agent of Peerless/Trout Lake
First Nation and Alberta Cree Nation, which are new First Nations in various
stages of ratification from the federal Government of Canada to satisfy
outstanding Treaty Land Entitlement claims. As part of the Treaty Land
Entitlement settlements it is expected these new First Nations will receive
approximately 15 townships or 540 sections of mineral rights for development in
Alberta.
 
 In
exchange for Kodiak advancing certain contracted funds and making work program
commitments, the Corporation will have an exclusive opportunity to develop
certain identified oil and gas properties within the Peerless/Trout Lake First
Nation and the Alberta Cree Nation. The joint venture is based on a confidential
letter of intent with a term sheet and a head agreement for developing the
relationship going forward. This arrangement is designed to be the stepping
stone for a larger scale oil and gas development project.
 
 Kodiak
will initially have the opportunity to select up to approximately two townships
(72 sections or 46,000 acres) of mineral rights from the combined Peerless/Trout
Lake First Nations identified lands and Alberta Cree Nation identified lands.
The leases will be for ten years, paid up with all rights. Kodiak will submit to
CREEnergy a development plan for the two selected townships on or before May 1,
2009 with a goal to begin exploration and development operations on or before
November 1, 2009. CREEnergy and Kodiak will discuss terms and conditions for the
development of other townships of land on or before May 1, 2010.
 
 Little Chicago – Northwest
Territories
 
 The
Company is the operator and largest working interest owner of the 201,160
acre Exploration Licence 413 (“EL 413”) in the Mackenzie River Valley
centered along the planned Mackenzie Valley Pipeline.
 
 In 2006,
the Company signed an exploration farm-in agreement with the two 50% working
interest owners of EL 413. The company reprocessed 50 km of existing
seismic data in Q4 of 2006 and during the 2006-07 winter work season, the
Company shot and acquired 84 km of high resolution proprietary 2D seismic and
gravity survey data on the farm-out lands, thus earning a 12.5% working interest
in the property. In September, 2007, the Company acquired Thunder River Energy,
Inc.’s (“Thunder”) remaining 43.75% in the property giving the Company a 56.25%
interest in EL 413. A letter of intent signed earlier in 2008 with the Company’s
remaining partner in the project, which would have allowed Kodiak to acquire the
balance of the working interest in EL 413 and become a 100% working interest
owner, recently expired.
 
 A 2007-08
43 km 2D high resolution proprietary seismic program and gravity survey was
completed on the property and the results were processed and interpreted and
used to support the Corporations planned drilling program. This project was
completed on budget and schedule. The seismic and gravity data from the two
projects show substantial structural closure and formation character and support
the planning for a future multiple well drilling program. That data was included
in an updated Chapman Prospective Resource report published in May,
2008.
 
 The
decision to acquire additional seismic and gravity data in the winter of 2007-08
was made to improve the potential to drill both the Devonian Bear Rock and the
Basal Cambrian Sand targets from a common drilling site. This would
substantially lower drilling costs on a per well basis and reduce the overall
project risk.
 
 Kodiak
has analyzed the 2007-08 seismic data and the various reservoir indicators/lands
and identified 11 drill locations. These drill locations have been selected to
evaluate three primary target formations on EL 413 including the Devonian Bear
Rock Oil Prospect, the Basal Cambrian Sand /Top Precambrian Oil and Gas Prospect
and the Canol Oil Prospect. These locations have been further high graded into a
two phase drilling program consisting of two wells with a planned total depth of
2400 meters each targeting both the Basal Cambrian/Precambrian and the Bear Rock
prospects and a multi-well shallow drilling program with a planned total depth
of 400m each targeting the Canol prospect. A scouting trip was completed in the
third quarter of 2008 which allowed the Corporation to review potential access
routes, well sites and camp locations.
  5
  The
Devonian Bear Rock Prospect (“Bear Rock”) is the first described target and is
located at a shallow depth of approximately 700 meters (2,300 ft.). This
reservoir was previously identified and preliminarily evaluated in the initial
Chapman Report prepared in 2005. The expected product from the reservoir is
light and medium oil, with no consideration to solution gas.
 
 The
combined seismic obtained during 2007 and 2008 acknowledged a series of pools
distributed throughout the project. The Chapman Report identified fifteen Bear
Rock leads located along the seismic lines with five of them being selected as
well defined high grade Bear Rock leads. This is an increase of 5 additional
leads from the initial 2007 work program. Indicators of these potentially
prolific reservoirs are present along several seismic lines that may imply these
Bear Rock occurrences to be present throughout EL 413.
 
 The
additional 2008 seismic further defined a hydrocarbon trap in the Basal Cambrian
Sand sitting on the top of the Precambrian. This interval, found at a depth of
approximately 2,300 meters (7,545 feet), has never been regionally penetrated
and tested; however, it has been proven as a productive reservoir in the
Colville Hills area approximately 125 kilometers (77 miles) east of EL
413.  With this additional data, the Chapman Report identified five
drilling locations that will allow the Basal Cambrian Sand and the top of the
Precambrian to be drilled and tested.
 
 Physical
evidence of hydrocarbons is present with a natural surface oil seep on the
northern edge of the license area on the banks of the Mackenzie River. This
natural occurrence is suggestive of a shallow oil pool, possibly in the Canol
formation, and warrants further investigation. While reviewing core samples and
well logs from previous regional drilling activity. Kodiak was able to map out
the Canol/Imperial formation and determine that it is the likely source of the
natural surface seeps. This prospect will be found on the Northwest quarter of
EL 413 and is at a very shallow depth of approximately 350 meters (1,148 feet).
The Corporation has identified 5 drilling locations which will be evaluated
during a planned future project drilling program.
 
 Kodiak is
preparing for the previously mentioned drilling program and has commenced work
on the necessary permits and applications. The Corporation is working with the
Sahtu and the Gwich’in, which are the beneficiaries of the land claims
containing the EL 413 licence. The Corporation does not believe there will be
any difficulty finishing the Access and Benefits Agreement prior to submitting
the final applications to the regulators for approval. The Corporation is
currently in discussions with other industry partners to share in the costs of
the drilling programs, thus reducing risk and capital commitments. Financing
plans will be finalized when overall partnerships are established. Kodiak
intends on retaining operatorship.
 
 In
addition, Kodiak has made application with regulators to extend the EL 413
license and has recently received written notification from Indian and Northern
Affairs Canada that a 1 year extension is available to the EL 413 licence. The
licence extension is subject to certain terms and conditions, which Kodiak is
presently reviewing for consideration.
 
 Province/Granlea – Southeast
Alberta
 
 The
Corporation purchased a 50% working interest in two sections (1280 acres gross -
640 net) of P&NG rights at a provincial land sale on September 22, 2005. In
2005, a 2D seismic program was completed on the property and in 2006, a well was
drilled and completed; surface facilities were installed and a pipeline tie-in
was completed. Production commenced in September, 2006. The well produced for a
short period until excess water rates occurred and in October, 2006 the well was
shut in. After the well bore was evaluated as having no current economic
production potential, the well was abandoned. An internal geological review of
the prospect will be done to determine if any further drilling is
warranted.
  6
 
 United
States
 
 New
Mexico
 
 Through
its acquisition of Thunder, the Corporation acquired a 100% interest in 55,000
acres of property located in northeast New Mexico. Additional land acquisitions
have increased the Corporation’s land position to approximately 79,000 acres.
These lands have potential for natural gas and CO2 and oil and helium resources
at shallow depths. In 2008, the Corporation purchased 19,000 stations of gravity
data and 37 miles of trade seismic data, completed a 35 mile 2D high resolution
proprietary seismic program and a three well drilling program.
 
 The three
wells were drilled with air to reduce formation damage and they were cased to
the base of the Yeso formation. Based on gas detector results, drill cutting
samples and open hole logs, all wells showed three potential shallow porous
sandstone formations capable of CO2 production with up to 200 feet of identified
net pay thickness. The Yeso, Glorieta and Santa Rosa formations were perforated
and flow tested to determine deliverability and pressure. There were multiple
gas samples analyzed at specialized independent laboratories from two separate
extended flow tests that identified CO2 concentration quality from 98.4% to
99.5%. Two of the wells were stimulated with a nitrified acid squeeze and were
able to sustain an extended flow rate of approximately 375mcf/d. The shallow
sands have been mapped using offset well control and the newly acquired seismic
data and the Corporation has determined there is a very high likelihood of
encountering the target formations throughout the leased project area; provided,
however, that no assurance can be given that this will be the case.
 
 The 35
mile 2D high resolution seismic program was completed on schedule and on budget
and after reviewing the seismic data, the Company was able to effectively map
out a probable long term development area which would result in CO2 production
from the previously identified formations. The seismic is currently being
evaluated to identify possible conventional oil and gas prospects on the leased
project area.
 
 A
preliminary project feasibility study was commissioned to identify capital
development costs and timelines as well as projected operating costs in order to
provide information to support a large scale long-term plan of
development.  This information will enable the definitions for pipeline
access planning and negotiation, transportation agreements, sales contracts for
the CO2, additional land acquisition terms and conditions, facility engineering
and construction and ultimately the parameters for financing the project
development.
 
 Several
companies have expressed interest in participating in the New Mexico properties
at several levels of involvement. There is also potential for the
integration of the CO2 production into Permian Basin enhanced oil recovery
projects.
 
 Montana
 
 During
2006, the Company, under a joint venture farmout agreement, participated in a
seismic acquisition program and a two well drilling program to earn a 50%
non-operating working interest in the wells and well spacing. This joint venture
project provides the company with the right to participate on a 50% basis
going forward on this prospect in the Hill County area of Montana. The
Operator of the project had 60,000 contiguous undeveloped acres of P&NG
rights in the area, as well as some excess capacity in facilities and pipelines.
Two wells were drilled in the third quarter of 2006; one is cased for subsequent
evaluation of the multiple zones found and one was abandoned. In order to
facilitate the efficient exploration of this prospect area, the company has
acquired from the original operator a 100% working interest of 12,000 acres of
P&NG rights while retaining the right to participate and initiate operations
on the remaining approximate 48,000 acres of prospect leases. After an internal
geological review of this prospect, and in light of current commodity prices,
consideration is being given to the divestiture of the property and the company
is working jointly with our partner to obtain the best value.
  7
 
 ITEM
1A.RISK
FACTORS
 
 Going Concern
Uncertainty
 
 There is
uncertainty that the Company will continue as a going concern, which presumes
the realization of assets and discharge of liabilities in the normal course of
business for the foreseeable future. The Company has not generated positive cash
flow since inception and has incurred operating losses and will need additional
working capital for its future planned activities. The June, 2008 financing and
the 2009 financings described in Note 21 to the consolidated financial
statements, will provide sufficient working capital to fund the Company’s
operations until mid 2009 when additional financing will be required. These
conditions raise doubt about the Company’s ability to continue as a going
concern. Continuation of the Company as a going concern is dependent upon
obtaining sufficient working capital to finance ongoing operations. The
Company’s strategy to address this uncertainty includes additional equity and
debt financing; however, there are no assurances that any such financings can be
obtained on favorable terms, if at all. These financial statements do not
reflect the adjustments or reclassification of assets and liabilities that would
be necessary if the Company were unable to continue its operations.
 
 Financial Markets
Instability and Uncertainty
 
 The
2008-09 worldwide financial and credit crisis has reduced the availability of
capital and credit to fund the continuation and expansion of industrial business
operations worldwide. The shortage of capital and credit combined with recent
substantial losses in worldwide equity markets has led to an extended worldwide
economic recession. The slowdown in economic activity caused by this recession
is reducing worldwide demand for energy and resulting in lower oil and natural
gas and other commodity prices. A prolonged reduction in oil and natural gas
prices will depress the immediate levels of exploration, development and
production activity. That is impacting negatively on our Company’s ability to
raise capital to finance our ongoing capital projects. The Company may be
required to consider divestiture of some properties or working interests to
raise funds. Until the financial market conditions improve, we will face
significant challenges in meeting our ongoing financial obligations. This global
financial crisis may have impacts on our business and financial condition that
we currently cannot predict.
 
 The Oil and Gas Industry Is
Highly Competitive
 
 The oil
& gas industry is highly competitive. We compete with oil and natural gas
companies and other individual producers and operators, many of which have
longer operating histories and substantially greater financial and other
resources than we do. We compete with companies in other industries supplying
energy, fuel and other needs to consumers. Many of these companies not only
explore for and produce crude oil and natural gas, but also carry on refining
operations and market petroleum and other products on a worldwide basis. Our
larger competitors, by reason of their size and relative financial strength, can
more easily access capital markets than we can and may enjoy a competitive
advantage in the recruitment of qualified personnel. They may be able to absorb
the burden of any changes in laws and regulation in the jurisdictions in which
we do business and handle longer periods of reduced prices of gas and oil more
easily than we can. Our competitors may be able to pay more for productive oil
and natural gas properties and may be able to define, evaluate, bid for and
purchase a greater number of properties and prospects than we can. Our ability
to acquire additional properties in the future will depend upon our ability to
conduct efficient operations, evaluate and select suitable properties, implement
advanced technologies and consummate transactions in a highly competitive
environment.
 
 Governmentand Environmental
Regulation
 
 Our
business is governed by numerous laws and regulations at various levels of
government. These laws and regulations govern the operation and maintenance of
our facilities, the discharge of materials into the environment and other
environmental protection issues. The laws and regulations may, among other
potential consequences, require that we acquire permits before commencing
drilling, restrict the substances that can be released into the environment with
drilling and production activities, limit or prohibit drilling activities on
protected areas such as wetlands or wilderness areas, require that reclamation
measures be taken to prevent pollution from former operations, require remedial
measures to mitigate pollution from former operations, such as plugging
abandoned wells and remediation of contaminated soil and groundwater, and
require remedial measures to be taken with respect to property designated as a
contaminated site.
  8
 
 Under
these laws and regulations, we could be liable for personal injury, clean-up
costs and other environmental and property damages, as well as administrative,
civil and criminal penalties. We maintain limited insurance coverage for sudden
and accidental environmental damages as well as environmental damage that occurs
over time. However, we do not believe that insurance coverage for the full
potential liability of environmental damages is available at a reasonable cost.
Accordingly, we could be liable, or could be required to cease production on
properties, if environmental damage occurs.
 
 The costs
of complying with environmental laws and regulations in the future may harm our
business. Furthermore, future changes in environmental laws and regulations
could occur that may result in stricter standards and enforcement, larger fines
and liability, and increased capital expenditures and operating costs, any of
which could have a material adverse effect on our financial condition or results
of operations.
 
 The Successful
Implementation Of Our Business Plan Is Subject To Risks Inherent In The Oil
& Gas Business.
 
 Our oil
and gas operations are subject to the economic risks typically associated with
exploration, development and production activities, including the necessity of
significant expenditures to locate and acquire properties and to drill
exploratory wells. In addition, the cost and timing of drilling, completing and
operating wells is often uncertain. In conducting exploration and development
activities, the presence of unanticipated pressure or irregularities in
formations, miscalculations or accidents may cause our exploration, development
and production activities to be unsuccessful. This could result in a total loss
of our investment in a particular property. If exploration efforts are
unsuccessful in establishing proved reserves and exploration activities cease,
the amounts accumulated as unproved costs will be charged against earnings as
impairments.
 
 We Expect Our Operating
Expenses To Increase Substantially In The Future And May Need To Raise
Additional Funds.
 
 We have a
history of net losses and expect that we expect to incur additional our
operating expenses over the next 12 months as we continue to implement our
business plan. In addition, we may experience a material decrease in liquidity
due to unforeseen expenses or other events and uncertainties. As a result, we
may need to raise additional funds, and such funds may not be available on
favourable terms, if at all. If we cannot raise funds on acceptable terms, we
may not be able to execute on our business plan, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
This may seriously harm our business, financial condition and results of
operations.
 
 We Are An Exploration Stage
Company Implementing A New Business Plan.
 
 We are an
exploration stage company with only a limited operating history upon which to
base an evaluation of our current business and future prospects, and we have
just begun to implement our business plan. Since our inception, we have suffered
recurring losses from operations and have been dependent on new investment to
sustain our operations. During the years ended December 31, 2008, 2007, 2006 and
2005, we reported losses of $2,074,649, $2,571,663 (Restated), 2,867,374 and
1,133,790 respectively. In addition, our consolidated financial statements for
the years ended December 31, 2008, 2007, 2006 and 2005 contained a going concern
qualification and we cannot give any assurances that we can achieve profits from
operations.
 
 Our Ability To Produce
Sufficient Quantities Of Oil & Gas From Our Properties May Be Adversely
Affected By A Number Of Factors Outside Of Our Control.
 
 The
business of exploring for and producing oil and gas involves a substantial risk
of investment loss. Drilling oil wells involves the risk that the wells may be
unproductive or that, although productive, that the wells may not produce oil or
gas in economic quantities. Other hazards, such as unusual or unexpected
geological formations, pressures, fires, blowouts, loss of circulation of
drilling fluids or other conditions may substantially delay or prevent
completion of any well. Adverse weather conditions can also hinder drilling
operations. A productive well may become uneconomic due to pressure depletion,
water encroachment, mechanical difficulties, etc, which impair or prevent the
production of oil and/or gas from the well.
  9
 
 There can
be no assurance that oil and gas will be produced from the properties in which
we have interests. In addition, the marketability of any oil and gas that we
acquire or discover may be influenced by numerous factors beyond our control.
These factors include the proximity and capacity of oil and gas pipelines and
processing equipment, market fluctuations of prices, taxes, royalties, land
tenure, allowable production and environmental protection. We cannot predict how
these factors may affect our business.
 
 In
addition, the success of our business is dependent upon the efforts of various
third parties that we do not control. We rely upon various companies to assist
us in identifying desirable oil and gas prospects to acquire and to provide us
with technical assistance and services. We also rely upon the services of
geologists, geophysicists, chemists, engineers and other scientists to explore
and analyze oil prospects to determine a method in which the oil prospects may
be developed in a cost-effective manner. In addition, we rely upon the owners
and operators of oil drilling equipment to drill and develop our prospects to
production. Although we have developed relationships with a number of
third-party service providers, we cannot assure that we will be able to continue
to rely on such persons. If any of these relationships with third-party service
providers are terminated or are unavailable on commercially acceptable terms, we
may not be able to execute our business plan.
 
 Market Fluctuations In The
Prices Of Oil & Gas Could Adversely Affect Our Business.
 
 Prices
for oil and natural gas tend to fluctuate significantly in response to factors
beyond our control. These factors include, but are not limited to actions of the
Organization of Petroleum Exporting Countries and its maintenance of production
constraints, the U.S. economic environment, weather conditions, the availability
of alternate fuel sources, transportation interruption, the impact of drilling
levels on crude oil and natural gas supply, and the environmental and access
issues that could limit future drilling activities for the
industry.
 
 Changes
in commodity prices may significantly affect our capital resources, liquidity
and expected operating results. Price changes directly affect revenues and can
indirectly impact expected production by changing the amount of funds available
to reinvest in exploration and development activities. Reductions in oil and gas
prices not only reduce revenues and profits, but could also reduce the
quantities of reserves that are commercially recoverable. Significant declines
in prices could result in charges to earnings due to impairment.
 
 Changes
in commodity prices may also significantly affect our ability to estimate the
value of producing properties for acquisition and divestiture and often cause
disruption in the market for oil producing properties, as buyers and sellers
have difficulty agreeing on the value of the properties. Price volatility also
makes it difficult to budget for and project the return on acquisitions and
development and exploitation of projects. We expect that commodity prices will
continue to fluctuate significantly in the future.
 
 Risks Of Penny Stock
Investing
 
 The
Company's common stock is considered to be a "penny stock" because it meets one
or more of the definitions in the Exchange Act Rule 3a51-1, a Rule made
effective on July 15, 1992. These include but are not limited to the
following:(i) the stock trades at a price less than five dollars ($5.00) per
share; (ii) it is NOT traded on a "recognized" national exchange; (iii) it is
NOT quoted on the NASD's automated quotation system (NASDAQ), or even if so, has
a price less than five dollars ($5.00) per share; OR (iv) is issued by a company
with net tangible assets less than $2,000,000, if in business more than three
years continuously, or $5,000,000, if in business less than a continuous three
years, or with average revenues of less than $6,000,000 for the past three
years. The principal result or effect of being designated a "penny stock" is
that securities broker-dealers cannot recommend the stock but must trade in it
on an unsolicited basis.
  10
 
 Risks Related To
Broker-Dealer Requirements Involving Penny Stocks / Risks Affecting Trading And
Liquidity
 
 Section
15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated there under by the Commission require broker-dealers dealing in
penny stocks to provide potential investors with a document disclosing the risks
of penny stocks and to obtain a manually signed and dated written receipt of the
document before effecting any transaction in a penny stock for the investor's
account. These rules may have the effect of reducing the level of trading
activity in the secondary market, if and when one develops.
 
 Potential
investors in the Company's common stock are urged to obtain and read such
disclosure carefully before purchasing any shares that are deemed to be "penny
stock." Moreover, Commission Rule 15g-9 requires broker-dealers in penny stocks
to approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Pursuant to the
Penny Stock Reform Act of 1990, broker-dealers are further obligated to provide
customers with monthly account statements. Compliance with the foregoing
requirements may make it more difficult for investors in the Company's stock to
resell their shares to third parties or to otherwise dispose of them in the
market or otherwise.
 
 Our controls and procedures
have not been effective and we have restated our financial
statements.
 
 In the
fiscal years 2007 and 2008, management has identified issues concerning the
effectiveness of our controls and procedures.  As a result, it has
been determined that they have not been effective.  One of the results
has been the need to restate the unaudited and audited financial statements for
certain periods in 2005 through 2008. The financial statements as originally
filed for those periods should not be relied upon.
 
 The
company will take measures to remediate the failures in effectiveness of the
controls and procedures.  Currently, the company has plans for certain
actions, but they will take time to implement because of their
cost.  There can be no assurance when remediation will be complete, if
at all.  Therefore, future reports may have statements indicating that
the Company’s controls and procedures are not effective. Additionally, future
financial statements may have to be restated if as a result of the
ineffectiveness of controls and procedures the statements are
inaccurate.
  11
 
 ITEM 1B.
UNRESOLVED STAFF COMMENTS
 
 On
November 13, 2007, the Company filed with the Commission an SB-2 registration
statement pertaining to the common shares of the Company issued in connection
with the private placement financings in September, October and November, 2007
and the September, 2007 Thunder property acquisition. The Commission responded
to the Company with certain comments and questions regarding the SB-2
registration statement and other comments and questions relating to the
Company’s December 31, 2006 Annual Form 10-KSB and Quarterly Forms 10-QSB for
the periods ended March 31, 2007 and June 30, 2007. Since that time and in an
effort to resolve all outstanding comments, the Company and Commission have
exchanged additional correspondence. During the process, the Company has
withdrawn its SB-2 registration statement and the Commission has had additional
comments and questions relating to the Company’s September 30, 2007 Quarterly
Report 10-QSB, December 31, 2007 Annual Report 10-K and its Quarterly Forms 10-Q
for March 31, June 30 and September 30, 2008. The Company believes that with the
restatements reflected in the amended Form 10-K report
for the year ended December 31, 2007, amended Form 10-Q/A report for the period
ended September 30, 2007 and the filing of the Form 10-K report for the year
ended December 31, 2008, it has resolved all staff comments except one matter
relating to certain 2006 shares issued for services.
 
 In
addition to the above correspondence, the Company has received a letter dated
March 23, 2009 from the Commission with certain comments and questions relating
to the Company’s March 17, 2009 Form 8-K. The Company is in process of drafting
responses to the Commission’s letters of March 13 and 23.
 
 At this
time, the Company cannot determine if there are any additional comments or if
the outstanding comments will be resolved.
 
 
 ITEM
2.  DESCRIPTION OF PROPERTY
 
 Office
Property
 
 During
December, 2008, Kodiak Energy, Inc. relocated its offices to 505 8th Avenue S.W.
Suite 405, Calgary, AB, T2P 2G1. We rent offices on a month by month basis.
The current monthly rent is approximately $7,000 CAD.
 
 Oil and Gas
Properties
 
 The
Corporation currently has four properties in Canada and two in the United States
comprising undeveloped land holdings on which it is carrying out exploration
activities. A description of each property and its current activities is
included under BUSINESS in PART I ITEM 1 DESCRIPTION OF BUSINESS.
 
 Land
Acreage
 
 Following
is a summary of the Corporation’s land holdings in gross and net hectares and
acres:
 
 OIL
      AND NATURAL GAS RIGHTS as of December 31, 2008Gross
                                                                                                          Hectares
                                                                                                        
                                                                                                        
                                                                                                        Net
                                                                                                          Hectares
                                                                                                        
                                                                                                        
                                                                                                        Gross
                                                                                                          Acres
                                                                                                        
                                                                                                        
                                                                                                        Net
                                                                                                          AcresDeveloped
      Acreage
                                                                                                        
                                                                                                        Nil
                                                                                                        
                                                                                                        
                                                                                                        Nil
                                                                                                        
                                                                                                        
                                                                                                        Nil
                                                                                                        
                                                                                                        
                                                                                                        NilUndeveloped
      AcreageSouth
      East Alberta – Granlea
                                                                                                        
                                                                                                        
                                                                                                        518
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        259
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        1,280
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        640Northeast
      British Columbia – Lucy
                                                                                                        
                                                                                                        
                                                                                                        777
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        622
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        1,920
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        1,536Northwest
      Territories – Little Chicago
                                                                                                        
                                                                                                        
                                                                                                        80,464
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        45,261
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        201,160
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        113,153Total
      Canada
                                                                                                        
                                                                                                        
                                                                                                        81,759
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        46,142
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        204,360
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        115,329Montana
                                                                                                        
                                                                                                        
                                                                                                        5,455
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        5,071
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        13,638
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        12,678New
      Mexico
                                                                                                        
                                                                                                        
                                                                                                        31,539
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        31,539
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        78,847
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        78,847Total
      United States
                                                                                                        
                                                                                                        
                                                                                                        36,994
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        36,610
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        92,485
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        91,525Grand
      Total
                                                                                                        
                                                                                                        
                                                                                                        118,753
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        82,752
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        296,845
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        206,853
 
 A
developed acre is considered to mean those acres spaced or assignable to
productive wells, a gross acre is an acre in which a working interest is owned,
and a net acre is the result that is obtained when fractional ownership working
interest is multiplied by gross acres. The number of net acres is the sum of the
factional working interests owned in gross acres expressed as whole numbers and
fractions thereof.
  12
 
 Undeveloped
acreage is considered to be those lease acres on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil or natural gas, regardless of whether or not that acreage
contains proved reserves, but does not include undrilled acreage held by
production under the terms of a lease. As is customary in the oil and gas
industry, we can generally retain our interest in undeveloped acreage by
drilling activity that establishes commercial production sufficient to maintain
the leases or by paying delay rentals during the remaining primary term of such
a lease. The oil and natural gas leases in which we have an interest are for
varying primary terms, and if production continues from our developed lease
acreage beyond the primary term, we are entitled to hold the lease for as long
as oil or natural gas is produced.
  Employees
 
 Up to
December 31, 2008, the Company has utilized a small number of full-time
employees and some full-time and part-time consultants as its personnel to
conduct its business and carry out its business plan. As at that date, three
full-time employees, two full time consultants and three part-time consultants
were engaged by the Company.
 
 
 ITEM
3.  LEGAL PROCEEDINGS.
 
 The
Company is not presently a party to any litigation.
 
 Brink
Litigation
 
 On or
about June 18, 2008, the Company entered into a letter agreement (the “Letter
Agreement”) with Brink Energy Ltd. (“Brink”), a private Alberta oil and gas
corporation, with respect to a proposed Plan of Arrangement (the “Arrangement”),
in accordance with the Alberta Business Corporations Act, which provided for the
Company to acquire all of the outstanding shares of Brink (the “Transaction”).
Under the Arrangement, the holders of common shares of Brink (“Brink Shares”)
would have received for each Brink Share, at the election of the Brink
shareholder, either: (i) 0.411 of a common share of the Company, or (ii) $0.575
plus 0.2055 of a Company share, subject to an aggregate maximum amount of cash
paid to Brink shareholders of Cdn. $7 million. Assuming Brink shareholders had
elected to receive the $7 million maximum cash consideration, the balance of the
consideration for the Brink Shares would have been paid in common shares of the
Company. The Letter Agreement provided that a non-completion fee would be
payable by Brink to Kodiak, as liquidated damages, by way of a transfer of
Brink’s interest in certain lands in the event there was a breach or
non-performance by Brink of a material provision of the Letter
Agreement.
 
 In
addition, in June, 2008, the Company loaned $980,681 (Cdn. $1 million) to Brink,
which loan bore interest at prime plus 2% and was convertible into common shares
of Brink under certain circumstances.
 
 In a
letter dated August 18, 2008, Brink’s counsel, on behalf of the Board of
Directors of Brink, advised the Company that it was not going to proceed with
the Transaction.  On September 12, 2008, the Company filed in the
Court of Queen’s Bench of Alberta, Judicial District of Calgary, a Statement of
Claim against Brink in which the Company claimed, among other things, repayment
of its loan, including accrued interest thereon, and the transfer to the Company
of certain lands of Brink in satisfaction of Brink’s Non-completion fee
obligation arising out of Brink’s termination of the Transaction. On September
29, 2008, Brink filed in the Court of Queen’s Bench of Alberta, Judicial
District of Calgary, a Statement of Defence in which Brink denied all of the
allegations in the Company’s Statement of Claim. At the same time, Brink filed a
Counterclaim in which Brink claimed, among other things, that Kodiak breached
covenants of the Letter Agreement and that Kodiak was obligated to Brink for a
Non-completion fee of $1 million.
  13
 
 On
October 7, 2008, the Company filed a Statement of Defence denying all of Brink’s
allegations in its Counterclaim.
 
 In
November, 2008, a settlement agreement was reached between the parties which
included the repayment by Brink of the Company’s loan, payment of accrued
interest on the loan of $25,547 and payment of $200,000 to the Company in
resolution of all other claims between the parties. These settlement amounts
were paid to the Company in November, 2008 and all claims by both parties have
been dismissed.
 
 ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 On
December 3, 2008, Kodiak Energy held its annual shareholders’ meeting. At the
meeting the shareholders voted in favor of four proposals put to them, listed
below.
 
 The
shareholders elected the following persons to serve as directors until the next
annual meeting of shareholders: William Tighe, Glenn Watt, Peter Schriber,
Marvin Jones and Les Owens. The result of the vote is listed below:
 
 For
                  Against
                  AbstainedWilliam
      S. Tighe
                  88,908,857
                  Nil
                  1,326,013Glenn
      Watt
                  88,911,319
                  Nil
                  1,323,551Peter
      Schriber
                  89,919,269
                  Nil
                  315,601Marvin
      Jones
                  88,925,739
                  Nil
                  1,309,131Les
      Owens
                  89,940,769
                  Nil
                  294,101
 
 The
shareholders approved the stock option plan of Kodiak Energy, Inc., including
certain amendments to the plan. The result of the vote was 72,025,036 votes For
(65.4%); 749,916 votes Against (.7%); 105,252 votes Abstain (.1%) and
17,,354,666 Non-votes (15.77%).
 
 The shareholders ratified the appointment of Meyers
Norris Penny LLP as the Company’s independent registered public accounting firm
for 2008. The result of the vote was 90,028,478 votes For (81.8%); 172,810 votes
Against (.2%); 33,582 votes Abstain (.03%) and Nil Non-votes
(0%).
 
 The
shareholders approved an amendment to the Company’s Certificate of Incorporation
for the authorization of 10,000,000 shares of preferred stock which may be
issued in one or more series, with such rights, preferences, privileges and
restrictions as shall be fixed by the Board of Directors from time to time. The
result of the vote was 71,146,435 votes For (64.7%); 1,654,804 votes Against
(1.5%); 78,965 votes Abstain (.07%) and 17,354,666 Non-votes
(15.77%).
  14
 
 PART
II
 
 ITEM
5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
 
 Market
Information
 
 The
Company's common shares are currently quoted on the Nasdaq Over the Counter
Bulletin Board under the symbol KDKN. On December 24, 2007, the Company's common
shares commenced trading on the Toronto Venture Stock Exchange in Canada under
the symbol KDK. Trading ranges of the Company’s common shares by quarter for
fiscal 2008, 2007, and 2006 were as follows:
 
 Nasdaq
                                  
                                  
                                  TorontoOver
      the Counter
                                  
                                  
                                  Venture
      Exchange(U.
      S. Dollars)
                                  
                                  
                                  (Canadian
      Dollars)High
                                  
                                  
                                  Low
                                  
                                  
                                  High
                                  
                                  
                                  LowYear
      ended December 31, 2008First
      Quarter
                                  
                                  $
                                  2.51
                                  
                                  
                                  $
                                  1.36
                                  
                                  
                                  $
                                  2.56
                                  
                                  
                                  $
                                  1.40Second
      Quarter
                                  
                                  $
                                  3.08
                                  
                                  
                                  $
                                  1.46
                                  
                                  
                                  $
                                  3.10
                                  
                                  
                                  $
                                  1.50Third
      Quarter
                                  
                                  $
                                  2.40
                                  
                                  
                                  $
                                  0.75
                                  
                                  
                                  $
                                  2.29
                                  
                                  
                                  $
                                  0.81Fourth
      Quarter
                                  
                                  $
                                  0.95
                                  
                                  
                                  $
                                  0.41
                                  
                                  
                                  $
                                  0.97
                                  
                                  
                                  $
                                  0.51Year
      ended December 31, 2007First
      Quarter
                                  
                                  $
                                  2.00
                                  
                                  
                                  $
                                  1.10
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Second
      Quarter
                                  
                                  $
                                  4.47
                                  
                                  
                                  $
                                  1.80
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Third
      Quarter
                                  
                                  $
                                  3.69
                                  
                                  
                                  $
                                  2.07
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Fourth
      Quarter
                                  
                                  $
                                  3.69
                                  
                                  
                                  $
                                  2.15
                                  
                                  
                                  $
                                  2.45
                                  
                                  
                                  $
                                  2.27Year
      ended December 31, 2006First
      Quarter
                                  
                                  $
                                  1.20
                                  
                                  
                                  $
                                  0.375
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Second
      Quarter
                                  
                                  $
                                  2.50
                                  
                                  
                                  $
                                  1.15
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Third
      Quarter
                                  
                                  $
                                  2.30
                                  
                                  
                                  $
                                  1.14
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Fourth
      Quarter
                                  
                                  $
                                  2.05
                                  
                                  
                                  $
                                  1.06
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
 
 The
Company has not paid cash dividends since inception. The Company intends to
retain all of its earnings, if any, for use in its business and does not
anticipate paying any cash dividends in the foreseeable future. The payment of
any future dividends will be at the discretion of the board of directors and
will depend upon a number of factors, including future earnings, the success of
the company's business activities, capital requirements, the general financial
condition and future prospects of the company, general business conditions and
such other factors as the board of directors may deem relevant.
 
 EQUITY
COMPENSATION PLAN INFORMATION
 
 On
January 4, 2006, our board of directors adopted a stock option plan. This plan
was approved by the shareholders of the Company at the annual meetings held on
July 18, 2006, August 14, 2007 and December 3, 2008 in Calgary, Alberta. The
plan originally authorized a total of 4,300,000 common shares to be granted as
stock option awards under the plan. At the 2007 annual meeting, shareholders
approved an increase in the authorized total to 8,000,000 common shares. At the
December 3, 2008 annual meeting, certain amendments were made which amendments
are set out in detail in the Company’s Proxy Statement as filed with the
Commission on October 27, 2008. As of December 31, 2008, no options had been
exercised. See Note 13 to the consolidated financial statements for certain
equity plan information.
 
 RECENT
SALES OF UNREGISTERED SECURITIES
 
 On June
18, 2008, the Company closed a private placement financing aggregating 1,204,000
units at a price of U.S.$2.50 per unit for gross proceeds of $3,010,000. The
units consist of one common share and one warrant, which warrant entitles the
holder to purchase, until June 18, 2010, one common share of the company at a
price per share of $3.50 . The units were issued pursuant to Regulation S
("Regulation S") under the Securities Act of 1933, as amended.
 
 As at
December 31, 2008 there were 110,023,998 shares of common stock issued and
outstanding and there were approximately 7,000 holders of record of our common
stock.
  15
 
 ITEM 6.
SELECTED FINANCIAL DATA
 
 The
following table sets forth certain selected consolidated financial data and
should be read in conjunction with the Company’s consolidated financial
statements and related notes thereto appearing elsewhere in this Form
10-K:
 
 For
      the years ended December 31
                                              
                                              2008
                                              
                                              
                                              2007
                                              
                                              
                                              2006
                                              
                                              
                                              2005
                                              
                                              
                                              2004Income
      during the evaluation period
                                              
                                              $
                                              1,065
                                              
                                              
                                              $
                                              225
                                              
                                              
                                              $
                                              27,134
                                              
                                              
                                              $
                                              Nil
                                              
                                              
                                              $
                                              NilOperating
      Expense
                                              
                                              $
                                              9,646
                                              
                                              
                                              
                                              20,543
                                              
                                              
                                              
                                              13,572
                                              
                                              
                                              
                                              Nil
                                              
                                              
                                              
                                              NilNet
      Loss
                                              
                                              $
                                              2,074,649
                                              
                                              
                                              
                                              2,571,663
                                              
                                              
                                              
                                              2,867,374
                                              
                                              
                                              
                                              1,133,790
                                              
                                              
                                              
                                              62,613Net
      Loss per shareBasic
                                              
                                              $
                                              0.02
                                              
                                              
                                              
                                              0.03
                                              
                                              
                                              
                                              0.04
                                              
                                              
                                              
                                              0.60
                                              
                                              
                                              
                                              0.03Diluted
                                              
                                              $
                                              0.02
                                              
                                              
                                              
                                              0.03
                                              
                                              
                                              
                                              0.04
                                              
                                              
                                              
                                              0.60
                                              
                                              
                                              
                                              0.03Cash
      Dividends
                                              
                                              $
                                              Nil
                                              
                                              
                                              
                                              Nil
                                              
                                              
                                              
                                              Nil
                                              
                                              
                                              
                                              Nil
                                              
                                              
                                              
                                              NilCapital
      ExpenditureCanada
                                              
                                              $
                                              11,159,779
                                              
                                              
                                              
                                              6,471,817
                                              
                                              
                                              
                                              2,002,915
                                              
                                              
                                              
                                              134,139
                                              
                                              
                                              NilUnited
      States
                                              
                                              $
                                              3,270,212
                                              
                                              
                                              
                                              6,458,511
                                              
                                              
                                              
                                              432,835
                                              
                                              
                                              
                                              132,000
                                              
                                              
                                              NilAs
      at December 31Total
      Assets
                                              
                                              $
                                              36,634,932
                                              
                                              
                                              
                                              38,190,768
                                              
                                              
                                              
                                              2,707,075
                                              
                                              
                                              
                                              556,330
                                              
                                              
                                              NilTotal
      Long term Liabilities
                                              
                                              $
                                              238,836
                                              
                                              
                                              
                                              262,769
                                              
                                              
                                              
                                              90,911
                                              
                                              
                                              Nil
                                              
                                              
                                              NilShare
      Capital
                                              
                                              $
                                              49,406,138
                                              
                                              
                                              
                                              41,624,249
                                              
                                              
                                              
                                              5,841,051
                                              
                                              
                                              
                                              1,536,672
                                              
                                              
                                              
                                              26,224Deficit
                                              
                                              $
                                              8,710,088
                                              
                                              
                                              
                                              6,635,439
                                              
                                              
                                              
                                              4,063,776
                                              
                                              
                                              
                                              1,196,402
                                              
                                              
                                              
                                              1,133,790Comprehensive
      Loss
                                              
                                              $
                                              4,903,762
                                              
                                              
                                              
                                              342,201
                                              
                                              
                                              
                                              20,214
                                              
                                              
                                              
                                              7,540
                                              
                                              
                                              
                                              324
 
 
 ITEM
7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
 
 Forward Looking
Statements
 
 From time
to time, we or our representatives have made or may make forward-looking
statements, orally or in writing. Such forward-looking statements may be
included in, but not limited to, press releases, oral statements made with the
approval of an authorized executive officer or in various filings made by us
with the Securities and Exchange Commission. Words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project or projected", or similar expressions are intended to identify
"forward-looking statements". Such statements are qualified in their entirety by
reference to and are accompanied by the above discussion of certain important
factors that could cause actual results to differ materially from such
forward-looking statements.
 
 Management
is currently unaware of any trends or conditions other than those mentioned
elsewhere in this management's discussion and analysis that could have a
material adverse effect on the Company's consolidated financial position, future
results of operations, or liquidity. However, investors should also be aware of
factors that could have a negative impact on the Company's prospects and the
consistency of progress in the areas of revenue generation, liquidity, and
generation of capital resources. These include: (i) variations in revenue, (ii)
possible inability to attract investors for its equity securities or otherwise
raise adequate funds from any source should the Company seek to do so, (iii)
increased governmental regulation, (iv) increased competition, (v) unfavorable
outcomes to litigation involving the Company or to which the Company may become
a party in the future and, (vi) a very competitive and rapidly changing
operating environment. The risks identified here are not all inclusive. New risk
factors emerge from time to time and it is not possible for management to
predict all of such risk factors, nor can it assess the impact of all such risk
factors on the Company's 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. Accordingly, forward-looking
statements should not be relied upon as a prediction of actual
results.
 
 The
financial information set forth in the following discussion should be read in
conjunction with the consolidated financial statements of Kodiak Energy, Inc.
included elsewhere herein.
  16
 
 Plan of
Operation
 
 During
2008, the Company has been active with substantial development on our Lucy, B.C.
and Little Chicago projects in Canada and our New Mexico project in the U.S. In
addition, the Company has initiated its CREEnergy Alberta Lands project in
Canada through its new subsidiary, Cougar Energy, Inc. (See Note 21). During the
next twelve months, the Company plans to continue the development of its asset
base as well as identify additional assets for addition to our overall land
base.
 
 All
projects to date have been managed on schedule and within budget as the Company
proves to be an effective operator in each jurisdiction in which it operates. In
late 2007, a $17.4 million private placement financing was completed under
difficult market conditions and in December 2007, the Company’s common shares
were listed on the Toronto Venture Exchange in Canada on an aggressive timeline.
In June, 2008, the Company completed an additional $3,010,000 private placement
financing. The Company expects to finance its future capital expenditure
programs with either debt or equity financings and divestitures or a combination
thereof. As of December 31, 2008, the Company has no secured debt. Current 2009
financing activities are described in Note 21 in the consolidated financial
statements. A description of the Company’s recent and planned activities for its
properties is included under BUSINESS in PART I ITEM 1 DESCRIPTION OF
BUSINESS.
 
 The
Corporation is a petroleum and natural gas exploration and development company
whose primary objective is to identify, acquire and develop working interests in
underdeveloped petroleum and natural gas prospects. We are focused on prospects
located in Canada and the United States. The prospects we hold are generally
under leases and include partial and full working interests. In some instances,
Kodiak is the operator and in others it is obligated to perform certain seismic
and exploratory well drilling for its interests. In some instances, additional
seismic and drilling activity will result in additional working interests or is
required to maintain the current percentage interests. The prospects are subject
to varying royalties due to the state, province or federal governments and, in
some instances, to the other royalty owners in the prospect.
 
 The
Corporation plans to engage in seismic data collection and well drilling
programs on a number of prospects in which it has an interest or right to
acquire percentage interests over the next two years. Drilling programs will be
conducted where the seismic data supports the effort and expense and further
drilling will be based on the results of initially drilled wells. A number of
the prospects are located in the vicinity of petroleum and natural gas
infrastructure, most importantly the ability to tie-in to existing or planned
pipelines. This will be important in lowering the overall cost of development
and selling any natural resources located in a prospect.
 
 The
Corporation currently has no petroleum or natural gas reserves or
production.
 
 Quarterly Financial
Information
  The
following table sets out certain selected quarterly consolidated financial
information of the Corporation for the two years 2008 and 2007. The financial
results are not necessarily indicative of the results that may be expected for
any other period.
  Quarter
                              (Unaudited)
                            
                            Net
      Sales or
                              Total
      Revenue
                              (US$)
                            
                            
                            Income
      (Loss) from
                              Continuing
      Operations
                              (US$)
                            
                            
                            Net
      Income
                              (Loss)
                              (US$)2008First
      Quarter
                            
                            
                            -
                            
                            
                            
                            468,652
                            
                            
                            
                            468,652Second
      Quarter
                            
                            
                            46
                            
                            
                            
                            (542,718
                            )
                            
                            
                            (542,718
                            )Third
      Quarter
                            
                            
                            -
                            
                            
                            
                            (531,056
                            )
                            
                            
                            (531,056
                            )Fourth
      Quarter
                            
                            
                            1,019
                            
                            
                            
                            (1,469,527
                            )
                            
                            
                            (1,469,527
                            )2007First
      Quarter
                            
                            
                            385
                            
                            
                            
                            (314,042
                            )
                            
                            
                            (314,042
                            )Second
      Quarter
                            
                            
                            42
                            
                            
                            
                            (647,052
                            )
                            
                            
                            (647,052
                            )Third
      Quarter
                            
                            
                            (202
                            )
                            
                            
                            (877,957
                            )
                            
                            
                            (877,957
                            )Fourth
      Quarter
                            
                            
                            -
                            
                            
                            
                            (1,083,612
                            )
                            
                            
                            (1,083,612
                            )
  17
  Financial
Condition and Changes in Financial Condition
 
 The
Corporation’s total assets have decreased to $37,171,397 as at December 31, 2008
from $38,190,768 at the end of 2007 but have significantly increased from
$2,707,075 at the end of 2006. This 2008 decrease is the net difference between
the reduction in the value of the Company’s Canadian assets due to a decline in
the value of the Canadian dollar of approximately 20% (approximately $ 5
million) from the end of 2007 to December 31, 2008 and its 2008 capital
expenditures as well as write-downs of its unproved properties of approximately
$780,000. Had this currency revaluation loss not occurred, total assets would
have increased by approximately $4 million resulting from increased capital
expenditure programs under taken by the Corporation, as well as the acquisition
described under “Property Acquisition” and the financings described under
“Liquidity and Capital Resources”. Total assets consist of cash and other
current assets of $245,562 (December 31, 2007 - $10,288,410); oil and gas
properties and equipment of $36,634,932 (December 31, 2007 - $27,543,005); and
other assets of $290,903 (December 31, 2007 - $359,353). Our total current
liabilities were $1,140,273 (December 31, 2007 - $3,281,390) and consisted of
accounts payable and accrued liabilities relating to capital activities and
general and administrative costs incurred. December 31, 2007 current liabilities
included $978,835 relating to flow-through share premium liability arising from
flow-through shares issued in 2007. Such liability was discharged in 2008 when
related flow-through eligible expenditures were incurred. We had long term
liabilities of $39,262 (December 31, 2007 - $110,955) and asset retirement
obligations of $199,574 (December 31, 2007 - $151,814). Shareholders’ equity
amounted to $35,792,288 (December 31, 2007 - $34,646,609), net of an accumulated
deficit of $8,710,088 (2007 - $6,635,439) and comprehensive loss of $4,903,762
(December 31, 2007 - $342,201).
 
 Overall
Operating Results (All dollar values are expressed in United States dollars
unless otherwise stated):
 
 In 2008,
the Company had income during the evaluation period of $1,065 (2007 - $225; 2006
- $27,134) and operating costs of $9,645 (2007 - $20,543; 2006 - $ 13,572)
relating to production from its Granlea, Alberta project. The well watered out
and was deemed uneconomic. Other than that production, the Company remains in
the exploratory and development stage.
 
 Net Loss
for the year ended December 31, 2008 totalled $2,074,649 (2007 - $2,571,663;
2006 - $2,867,374) These losses include general and administrative expenses of
$2,206,015 (2007 - $2,470,230; 2006 - $1,377,489) which includes stock-based
compensation expense amounting to $674,226 (2007 - $643,934; 2006 - $69,169);
interest expense of $1,417 (2007 - $94,083; 2006 - $Nil); depletion depreciation
and accretion including ceiling test impairment write-downs of $ 923,097 (2007 -
$218,841; 2006 - $1,507,021) and deferred income tax recoveries of $978,835 -
(2007 – $147,000; 2006 - $Nil.
 
 General
and administrative expenses include the cost of consulting personnel and
others who provided investor relations services, public company costs for SEC
reporting compliance, accounting, audit and legal fees and other general and
administrative office expenses. General and administrative expense also includes
stock-based compensation relating to the cost of stock options granted to
directors, officers and other personnel of $674,226 in 2007 (2007 - $643,934;
2006 - $69,169). General and administrative costs have been increasing as the
scope of the company’s activities have increased and we believe substantial
amounts will continue to be spent on such costs in the near term as we progress
with the  evaluation of our oil and gas prospects. A significant
increase in our shareholder base from 1,000 to approximately 7,000 shareholders
during the past two years has also contributed to our increased general and
administrative costs.
 
 Interest
expense for the year ended December 31, 2007 was $1,417 (2007 - $94,083; 2006 -
$ Nil). Most of the 2007 interest expense was incurred relative to the 9-1/2%
Notes Payable that were outstanding during the second and third
quarters.
 
 Depletion,
depreciation and accretion including ceiling test impairment write-downs
includes the cost of depletion and depreciation relating to production from
producing properties in 2006, ceiling test impairment write-downs and the cost
of depreciation relating to office furniture and equipment. At December 31, 2008
and 2007, the carrying values of the Company’s unproved properties in its
Canadian and United States cost centers were assessed by management. Costs
attributable to certain Canadian cost center properties were determined to be
unsupportable and as a result, ceiling test write-downs of $370,980 for 2008
(2007 - $174,380; 2006 - $1,419,946) relating to the Company’s Canadian cost
center were recorded and included in this expense. Costs attributable to certain
United States cost center properties were determined to be unsupportable and as
a result, ceiling test write-downs of $498,867 for 2008 (2007 and 2006 - $ nil)
relating to the Company’s United States cost center were recorded and included
in this expense. The remaining capitalized costs relating to Canadian and United
States unproven properties have been excluded from the depletable cost pools for
ceiling test purposes.
  18
 
 Deferred
income tax recoveries result from deferred tax credits related to Canadian
flow-through eligible expenditures incurred in 2007 and 2008 with funds received
as premiums on Canadian flow-through shares issued.
 
 Capital
Expenditures:
 
 Capital
Expenditures incurred by the Company during the years ended December 31, 2008,
2007 and 2006 are set out below.
 
 2008
                      
                      
                      2007
                      
                      
                      2006Land
      acquisition and carrying costs
                      
                      $
                      5,536,736
                      
                      
                      $
                      18,907,518
                      
                      
                      $
                      139,079Geological
      and geophysical
                      
                      
                      4,827,123
                      
                      
                      
                      6,390,003
                      
                      
                      
                      173,872Intangible
      drilling and completion
                      
                      
                      3,892,511
                      
                      
                      
                      998,556
                      
                      
                      
                      1,866,771Tangible
      completion and facilities
                      
                      
                      140,151
                      
                      
                      
                      23,002
                      
                      
                      
                      202,285Other
      fixed assets
                      
                      
                      33,470
                      
                      
                      
                      58,850
                      
                      
                      
                      53,744Total
      Capital Costs Incurred
                      
                      $
                      14,429,991
                      
                      
                      $
                      26,377,929
                      
                      
                      $
                      2,435,751
 
 2007 land
acquisition and carrying costs includes $11,163,205 relative to the acquisition
of Thunder’s interest in the EL 413 Little Chicago property in the Northwest
Territories of Canada and $7,400,000 relative to the acquisition of Thunder’s
New Mexico interests. See “Property Acquisition”. Geological and geophysical
costs include the 2007-08 and 2006-07 portions of the cost of the seismic
programs carried out in those years on the EL 413 Little Chicago
project.
 
 On
September 28, 2007 the Corporation purchased from Thunder and CIMA under the
terms of the Thunder Agreement, 100% of Thunder’s interest in EL 413 and 100% of
CIMA’s interest in the Sophia Prospect in consideration for $1 million cash and
7 million Kodiak Shares valued at $14,000,000 ($2.00 per Kodiak Share) and a
commitment to issue in the future an additional 11,000,000 Kodiak Shares upon
the achievement of certain milestones in connection with the acquired
properties. For accounting purposes, the 7 million common shares issued to
Thunder were recorded at a value of $17,500,000 or $2.50 per common share, being
the same price per share at which the September 28, 2007 private placement
financing of 2,756,000 non-flow-through common shares were issued. (See Notes 2
and 12). Of the cash consideration, $100,000 was paid as a deposit on July 11,
2007, and the balance of $900,000 was paid at closing on September 28, 2007. Of
the common share consideration, 7 million shares were issued to Thunder at
closing on September 28, 2007. An additional 6 million shares were committed to
be issued to Thunder if, as, and when certain performance milestones are
achieved, including 2 million shares upon completion of a 2007/08 seismic
program by June 30, 2008, which shares were issued during the year (See Note 12
to the consolidated financial statements); 1 million shares upon the spudding of
a shallow depth well (1,500 meters TD) by March 31, 2009; 1.5 million shares
upon the spudding of a medium depth well (2,500 meters TD) before lease expiry
in 2009; and 1.5 million shares upon conversion of any part of EL 413 to a
Significant Discovery Lease. If, as a result of the Corporation’s exploration
and development activities on the acquired properties, reserves in place exceed
100 million barrels, then, for each excess 10 million barrels in place, 100,000
additional shares could be issued, up to a maximum of 5 million additional
shares.
 
 Liquidity
and Capital Resources:
 
 Since
inception to December 31, 2008, the company’s operations have been financed from
the sale of securities and loans from shareholders. Working capital decreased
from $7,007,020 as at December 31, 2007 to a working capital deficiency of
$894,711 as at December 31, 2008.
  19
 
 During
2008, the Company raised $3,010,000 and in 2007 it raised $33,303,427, each net
of share issue costs, in private placement financing proceeds. These financings
enabled the Company to finance its on-going capital expenditures and general and
administrative expenses. The Corporation currently has no long term debt
obligations. The Company is in the process of raising additional financing in
its Cougar Energy, Inc. subsidiary that will provide financing to carry out its
business plan through 2009. See Subsequent Event Note 21 to the consolidated
financial statements. Such additional financing will be required for the
company’s 2009 planned activities. In the event that additional capital is
raised at some time in the future, existing shareholders will experience
dilution of their interest in the Company, or the Company’s interest in the
subsidiary.
 
 There is
uncertainty that the Company will continue as a going concern, which presumes
the realization of assets and discharge of liabilities in the normal course of
business for the foreseeable future. The Company has not generated positive cash
flow since inception and has incurred operating losses and will need additional
working capital for its future planned activities. The financings described
above, if completed, will provide sufficient working capital to fund the
Company’s operations until mid 2009 when additional financing will be required
until sufficient cash flow is being obtained from the Company’s properties that
comprise its near term capital programs. The success of these programs is yet to
be determined. These conditions raise doubt about the Company’s ability to
continue as a going concern. Continuation of the Company as a going concern is
dependent upon obtaining sufficient working capital to finance ongoing
operations. The Company’s strategy to address this uncertainty, includes
additional equity and debt financing; however, there are no assurances that any
such financings can be obtained on favorable terms, if at all. These financial
statements do not reflect the adjustments or reclassification of assets and
liabilities that would be necessary if the Company were unable to continue its
operations.
  
 ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 The
Company is exposed to market risk from changes petroleum and natural gas and
related hydrocarbon prices, foreign currency exchange rates and interest
rates.
 
 Petroleum
and Natural gas and Related Hydrocarbon Prices
 
 The
Corporation currently has no petroleum and natural gas and related hydrocarbon
reserves or production so the Corporation therefore has no current exposure
related to the instability of prices of such commodities. However; the prices of
these commodities are unstable and are subject to fluctuation, due to factors
outside of the Corporation’s control, including war, weather, the availability
of alternate fuel and transportation interruption and any material decline in
these commodity prices could have an adverse impact on the economic viability of
the Corporation’s exploration projects.
 
 Foreign
Currency Exchange Rates
 
 The
Corporation, operating in both the United States and Canada, faces exposure to
adverse movements in foreign currency exchange rates. These exposures may change
over time as business practices evolve and could materially impact the
Corporation’s financial results in the future. To the extent revenues and
expenditures denominated in other currencies vary from their U. S. dollar
equivalents, the Corporation is exposed to exchange rate risk. The Corporation
can also be exposed to the extent revenues in one currency do not equal
expenditures in the same currency. The Corporation is not currently using
exchange rate derivatives to manage exchange rate risks.
 
 Interest
Rates
 
 The
Corporation’s interest income and interest expense, in part, is sensitive to the
general level of interest rates in North America. The Corporation is not
currently using interest rate derivatives to manage interest rate
risks.
  20
  ITEM
8.  FINANCIAL STATEMENTS
 
 REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 OPINION
ON THE AUDIT OVER INTERNAL CONTROLS
  The Board
of Directors and Stockholders
   Kodiak
Energy Inc.:
  We have
audited Kodiak Energy Inc’s. (Kodiak) internal control over financial reporting
as of December 31, 2008, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  Kodiak’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management's Report on Internal Control over
Financial Reporting (Item 9Ac). Our responsibility is to express an opinion on
the company’s internal control over financial reporting 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
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit includes
performing such other procedures as we considered necessary in the
circumstances.  We believe that our audit provides a reasonable basis
for our opinion.
 
 A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
 
 A
material weakness is a deficiency or a combination of deficiencies in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the annual or interim financial statements will
not be prevented or detected on a timely basis.
  21
  The
following deficiency which we believe to be a material weakness has been
identified and included in management’s assessment:
  ·
                Kodiak
      did not maintain effective segregation of duties over automated and manual
      transactions leading to ineffective monitoring, supervision and reviews.
      This material weakness affects all significant
  accounts.
  Specific
areas affected by the deficiency mentioned above are as follows:
 
 ·
                The
      Company's policies and procedures did not provide for appropriate
      segregation of duties of certain employees in the accounting area.
      Also, the Company did not restrict access to financially
      significant systems and did not monitor access to those systems,
      which resulted in conflicting access and/or inappropriate segregation of
      duties.
 ·
                The
      Company did not maintain effective policies and procedures, or personnel
      with sufficient technical expertise, to ensure proper accounting and
      disclosure for income taxes. Specifically, the Company's policies and
      procedures did not provide for appropriate segregation of duties or
      supervisory review of deferred taxes to ensure that they were properly
      reflected and disclosed in the Company's financial statements. This
      deficiency results in a reasonable possibility that a material
      misstatement of the Company's annual or interim consolidated financial
      statements would not be prevented or detected on a timely
      basis.
 
 These
material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2008 financial statements, and
this report does not affect our report dated March 26, 2009 on those financial
statements.
 
 In our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, Kodiak has not maintained
effective internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
 
 We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets, statements of
operations, stockholder’s equity and cash flows of Kodiak and our report dated
March 26, 2009 expressed an unqualified opinion modified for going concern
uncertainties.
 
 Yours
truly,
 
 
 /s/ MEYERS NORRIS PENNY
LLP
 
 
 Chartered
Accountants
 Calgary,
Canada
 March 26,
2009   22
  REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 OPINION
ON THE AUDIT OF THE FINANCIAL STATEMENTS
 
 To the
Board of Directors and the Stockholders of
 Kodiak
Energy, Inc.
 
 We have
audited the accompanying consolidated balance sheets of Kodiak Energy, Inc. (The
“Company and subsidiaries”) as of December 31, 2008 and 2007 and the
consolidated statements of operations, stockholder’s equity and cash flows for
each of the three years in the period ended December 31, 2008.  These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance 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 evaluation of the overall
financial statement presentation. We believe that our audits provides a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company and subsidiaries as of
December 31, 2008 and 2007 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2008 in accordance
with accounting principles generally accepted in the United States of
America.
 
 As
discussed more fully in Note 2, the consolidated financial statements as of and
for the year ended December 31, 2007 have been restated to reflect changes
resulting from a correction of the treatment of flow through shares issued
during the year ended December 31, 2007 and a change to the value ascribed to
shares issued by the Company for the acquisition of certain petroleum and
natural gas assets of Thunder River Energy.
 
 As
discussed in Note 1 to the consolidated financial statements, the Company’s
ability to continue as a going concern is dependent on obtaining sufficient
working capital to fund future operations.  Management’s plan in
regard to these matters is also described in Note 1.  These financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
 
 /s/MEYERS NORRIS PENNYLLP
 
 Chartered
Accountants
 Calgary,
Canada
 March 26,
2009
  23
 
 KODIAK
ENERGY, INC.
 Consolidated
Balance Sheets
 (Exploration
Stage Company Going Concern Uncertainty – Note 1)
 December31,
                                                                                                                                2008
                                                                                                                              
                                                                                                                              
                                                                                                                              December31,
                                                                                                                                2007(Restated
                                                                                                                                –
      Note 2)AssetsCurrent
      Assets:Cash
      and Short Term Deposits
                                                                                                                              
                                                                                                                              $
                                                                                                                              75,175
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              8,983,682Accounts
      Receivable (Note 5)
                                                                                                                              
                                                                                                                              
                                                                                                                              64,325
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              1,214,253Prepaid
      Expenses and Deposits (Note 6)
                                                                                                                              
                                                                                                                              
                                                                                                                              106,062
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              90,475245,562
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              10,288,410Other
      Assets (Note 7)
                                                                                                                              
                                                                                                                              
                                                                                                                              290,903
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              359,353Capital
      Assets (Note 8):Unproved
      Oil & Gas Properties Excluded From Amortization – Based On Full Cost
      Accounting
                                                                                                                              
                                                                                                                              
                                                                                                                              36,559,367
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              27,467,351Furniture
      and Fixtures, net
                                                                                                                              
                                                                                                                              
                                                                                                                              75,565
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              75,65436,634,932
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              27,543,005Total
      Assets
                                                                                                                              
                                                                                                                              $
                                                                                                                              37,171,397
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              38,190,768Liabilities
      and Stockholders’ EquityCurrent
      Liabilities:Accounts
      Payable
                                                                                                                              
                                                                                                                              $
                                                                                                                              984,590
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              1,547,273Accrued
      Liabilities
                                                                                                                              
                                                                                                                              
                                                                                                                              122,842
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              755,282Note
      Payable to Related Party (Note 9)
                                                                                                                              
                                                                                                                              
                                                                                                                              32,841
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -Premium
      on Flow- through Shares Issued (Note 12)
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              978,8351,140,273
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              3,281,390Long-term
      Liabilities (Note 10)
                                                                                                                              
                                                                                                                              
                                                                                                                              39,262
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              110,955Asset
      Retirement Obligations (Note 11)
                                                                                                                              
                                                                                                                              
                                                                                                                              199,574
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              151,814Commitments
      and Contingencies (Note 16)
                                                                                                                              
                                                                                                                              
                                                                                                                              1,379,109
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              3,544,159Stockholders'
      EquityShare
      Capital (Note 13):Authorized
      300,000,000 Common Shares Par Value $.001 Each; 10,000,000 (2007 – Nil)
      Preferred SharesIssued
      and Outstanding 110,023,998 (2007 –106,692,498) Common
    Shares
                                                                                                                              
                                                                                                                              
                                                                                                                              110,024
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              106,692Additional
      Paid in Capital
                                                                                                                              
                                                                                                                              
                                                                                                                              49,296,114
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              41,517,557Other
      Comprehensive Loss
                                                                                                                              
                                                                                                                              
                                                                                                                              (4,903,762
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (342,201
                                                                                                                              )Deficit
      Accumulated During The Exploration Stage
                                                                                                                              
                                                                                                                              
                                                                                                                              (8,710,088
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (6,635,439
                                                                                                                              )35,792,288
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              34,646,609Total
      Liabilities and Equity
                                                                                                                              
                                                                                                                              $
                                                                                                                              37,171,397
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              38,190,768
 
 Subsequent
Event (Note 21)
 
 (See
accompanying notes to the consolidated financial statements)
  24
  Consolidated
Statements of Stockholders’ Equity (Deficiency)
 For the
Period From Date of Inception, April 7, 2004 to December 31, 2008
 (Exploration
Stage Company Going Concern Uncertainty – Note 1)


Number
      of
                                                                                                                                                                                          Common
                                                                                                                                                                                          Shares
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        Amount
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        AdditionalPaid
      inCapital
      (Restated – Note 2)
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        Deficit
      Accumulated
                                                                                                                                                                                          During
      the
                                                                                                                                                                                          Development
      Stage
                                                                                                                                                                                          (Restated
      – Note 2)
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        Accumulated
                                                                                                                                                                                          Other
                                                                                                                                                                                          Comprehensive
                                                                                                                                                                                          Loss(Restated
      –
                                                                                                                                                                                          Note
      2)
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        Shares
                                                                                                                                                                                          Issuable
      (Restated –
                                                                                                                                                                                          Note
      2)
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        Total
                                                                                                                                                                                          Shareholders’
                                                                                                                                                                                          Equity(Deficit)
                                                                                                                                                                                          (Restated
      --
                                                                                                                                                                                          Note
      2)Pre
      Bankruptcy
                                                                                                                                                                                        
                                                                                                                                                                                        324,028
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        324
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        1,813,853
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        (1,814,176
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        -Fresh
      Start Adjustments
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (1,813,853
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        1,814,176
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (324
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -Balance
      at April 7, 2004
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        324,028
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        324
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (324
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -Issuance
      of common stock
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        150,000
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        150
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        24,850
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        25,000Contributions
      to capital
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        900
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        900Net
      Loss
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (62,613
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (62,613
                                                                                                                                                                                        )Balance
      at December 31, 2004
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        474,028
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        474
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        25,750
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        (62,613
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        (324
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        (36,713
                                                                                                                                                                                        )Net
      Loss
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (1,133,790
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (1,133,790
                                                                                                                                                                                        )Foreign
      currency translation
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (7,216
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (7,216
                                                                                                                                                                                        )Total
      comprehensive loss
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (1,133,790
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (7,216
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (1,141,006
                                                                                                                                                                                        )Beneficial
      Debt Conversion
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        808,811
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        808,811Shares
      to be Issued
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        1
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        773,637
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        773,637Share
      Subscriptions Receivable
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (72,000
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (72,000
                                                                                                                                                                                        )Balance
      at December 31, 2005
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        474,028
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        474
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        834,561
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        (1,196,402
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        (7,540
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        701,637
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        332,729Net
      Loss
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (2,867,374
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (2,867,374
                                                                                                                                                                                        )Foreign
      currency translation
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (12,675
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (12,675
                                                                                                                                                                                        )Total
      comprehensive loss
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (2,867,374
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (12,675
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (2,880,049
                                                                                                                                                                                        )Beneficial
      Debt Conversion
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        808,811
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        808,811Issuance
      of common stock
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        89,472,440
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        89,472
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        4,309,047
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (701,637
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        3,696,882Shares
      to be Issued
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        538,328
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        538,328Stock-based
      Compensation
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        69,169
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        69,169Balance
      at December 31, 2006
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        89,946,468
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        89,946
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        5,212,777
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        (4,063,776
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        (20,214
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        538,328
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        1,757,061Net
      Loss
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (2,571,663
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (2,571,663
                                                                                                                                                                                        )Foreign
      currency translation
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (321,987
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (321,987
                                                                                                                                                                                        )Total
      comprehensive loss
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (2,571,663
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (321,987
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (2,893,650
                                                                                                                                                                                        )Issuance
      of common stock
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        16,746,030
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        16,746
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        35,660,846
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (538,328
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        35,139,264Stock-based
      Compensation
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        643,934
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        643,934Balance
      at December 31, 2007
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        106,692,498
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        106,692
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        41,517,557
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        (6,635,439
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        (342,201
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        34,646,609Net
      Loss
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (2,074,649
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (2,074,649
                                                                                                                                                                                        )Foreign
      currency translation
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (4,561,561
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (4,561,561
                                                                                                                                                                                        )Total
      comprehensive loss
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (2,074,649
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (4,561,561
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        (6,636,210
                                                                                                                                                                                        )Issuance
      of common stock
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        13,331,500
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        3,332
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        7,104,331
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        7,107,663Stock-based
      Compensation
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        674,226
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        674,226Balance
      at December 31, 2008
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        110,023,998
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        110,024
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        49,296,114
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        (8,710,088
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        (4,903,762
                                                                                                                                                                                        )
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        -
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        35,792,288




(See
accompanying notes to the consolidated financial statements)






25





KODIAK
ENERGY, INC.


Consolidated
Statements of Operations


(Exploration
Stage Company Going Concern Uncertainty – Note 1)


Year
      Ended
                                                  December
                                                  31,2008
                                                
                                                
                                                Year
      Ended
                                                  December
      31,
                                                  2007
                                                  (Restated
      –
                                                  Note
      2)
                                                
                                                
                                                Year
      Ended
                                                  December
                                                  31,2006
                                                
                                                
                                                Cumulative
                                                  Since
                                                  Inception
                                                  Apr.
      7, 2004
                                                  to
                                                  December
                                                  31,2008INCOME
      DURING THE EVALUATION PERIOD
                                                
                                                $
                                                1,065
                                                
                                                
                                                $
                                                225
                                                
                                                
                                                
                                                27,134
                                                
                                                
                                                $
                                                28,424EXPENSESOperating
                                                
                                                
                                                9,646
                                                
                                                
                                                
                                                20,543
                                                
                                                
                                                
                                                13,572
                                                
                                                
                                                
                                                43,761General
      and Administrative
                                                
                                                
                                                2,206,015
                                                
                                                
                                                
                                                2,470,230
                                                
                                                
                                                
                                                1,377,489
                                                
                                                
                                                
                                                6,077,590Stock-based
      Investor Relations
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                337,500Depletion,
      Depreciation andAccretion
      including CeilingTest
      Impairment Write-downs
                                                
                                                
                                                923,097
                                                
                                                
                                                
                                                218,841
                                                
                                                
                                                
                                                1,507,021
                                                
                                                
                                                
                                                2,650,194Interest
                                                
                                                
                                                1,417
                                                
                                                
                                                
                                                94,083
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                904,3113,140,175
                                                
                                                
                                                
                                                2,803,697
                                                
                                                
                                                
                                                2,898,082
                                                
                                                
                                                
                                                10,013,356Loss
      Before Other Expenses (Income)
                                                
                                                
                                                3,139,110
                                                
                                                
                                                
                                                2,803,472
                                                
                                                
                                                
                                                2,870,948
                                                
                                                
                                                
                                                9,984,932Other
      Expenses (Income)Loss
      from valuation adjustment
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                25,000Loss
      on disposition of assets
                                                
                                                
                                                4,145
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                4,145Interest
      Income
                                                
                                                
                                                (89,771
                                                )
                                                
                                                
                                                (84,809
                                                )
                                                
                                                
                                                (3,574
                                                )
                                                
                                                
                                                (178,154
                                                )(85,626
                                                )
                                                
                                                
                                                (84,809
                                                )
                                                
                                                
                                                (3,574
                                                )
                                                
                                                
                                                (149,009
                                                )Loss
      before income taxes
                                                
                                                
                                                3,053,484
                                                
                                                
                                                
                                                2,718,663
                                                
                                                
                                                
                                                2,867,374
                                                
                                                
                                                
                                                9,835,923Recovery
      of Deferred Income Taxes
                                                
                                                
                                                (978,835
                                                )
                                                
                                                
                                                (147,000
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,125,835
                                                )NET
      LOSS
                                                
                                                $
                                                2,074,649
                                                
                                                
                                                $
                                                2,571,663
                                                
                                                
                                                $
                                                2,867,374
                                                
                                                
                                                $
                                                8,710,088Basic
      and diluted loss per share (Note 15)
                                                
                                                $
                                                0.02
                                                
                                                
                                                $
                                                0.03
                                                
                                                
                                                $
                                                0.04





(See
accompanying notes to the consolidated financial statements)


26




KODIAK
ENERGY, INC.


Consolidated
Statements of Cash Flows


(Exploration
Stage Company Going Concern Uncertainty – Note 1)


Year
                                                                                                                                                                Ended
                                                                                                                                                                December
                                                                                                                                                                31,
      2008
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              Year
      Ended
                                                                                                                                                                December
                                                                                                                                                                31,
      2007
                                                                                                                                                                (Restated
      –
                                                                                                                                                                Note
      2)
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              Year
      Ended
                                                                                                                                                                December
                                                                                                                                                                31,
      2006
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              Cumulative
      Since
                                                                                                                                                                Inception
      April
                                                                                                                                                                7,
      2004 to
                                                                                                                                                                December
                                                                                                                                                                31,
      2008Operating
      Activities:NET
      LOSS
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              (2,074,649
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              (2,571,663
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              (2,867,374
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              (8,710,088
                                                                                                                                                              )Adjustments
      to reconcile net loss to net
      cash used in operating activities:Depletion,
      Depreciation and Accretion includingCeiling
      Test Impairment Write-downs
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              923,097
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              218,841
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              1,507,021
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              2,650,194Interest
      Expense
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              808,811Stock-Based
      Investor Relations Expense
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              337,500
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              337,500Stock-Based
      Compensation
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              674,226
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              643,934
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              69,169
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              1,387,329Recovery
      of Deferred Income Taxes
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (978,835
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (147,000
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (1,125,835
                                                                                                                                                              )Bad
      Debts Written off
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              11,908
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              11,908Contributions
      to Capital
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              900Non-Cash
      Working Capital Changes (Note 20)
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              772,037
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (660,101
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              44,929
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              242,714Net
      Cash Used In Operating Activities
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (684,124
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (2,504,081
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (908,755
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (4,396,567
                                                                                                                                                              )Investment
      Activities:Additions
      to Capital Assets
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (6,427,666
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (7,508,553
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (2,636,668
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (16,787,666
                                                                                                                                                              )Decrease
      (Increase) in Other Assets
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              68,450
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (309,493
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (29,611
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (290,903
                                                                                                                                                              )Net
      Cash Used In Investment Activities
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (6,359,216
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (7,818,046
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (2,666,279
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (17,078,569
                                                                                                                                                              )Financing
      Activities:Shares
      Issued and Issuable
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              2,768,087
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              16,500,995
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              3,845,404
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              23,847,312Proceeds
      from note payable
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              3,300,000
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              3,300,000Repayment
      of note payable
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (732,500
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (732,500
                                                                                                                                                              )(Decrease)
      Increase in Long Term Liabilities
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (71,693
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              110,955
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              39,262Cash
      Provided By Financing Activities
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              2,696,394
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              19,179,450
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              3,845,404
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              26,454,074Foreign
      Currency Translation
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (4,561,561
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              321,987
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (12,675
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (4,903,762
                                                                                                                                                              )Net
      Cash (Decrease) Increase
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (8,908,507
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              8,535,336
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              257,695
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              75,175Cash
      beginning of year
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              8,983,682
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              448,346
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              190,651
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -Cash
      end of year
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              75,175
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              8,983,682
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              448,346
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              75,175Cash
      is comprised of:Balances
      with banks
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              75,175
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              1,238,796
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              448,346
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              75,175Short
      term deposits
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              7,744,886
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -$
                                                                                                                                                              75,175
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              8,983,682
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              448,346
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              75,175
  (See
accompanying notes to the consolidated financial
statements)


27





KODIAK
ENERGY, INC.


NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS


For the
Years Ended December 31, 2008, 2007 and 2006


Stated in
US dollars





1. ORGANIZATION,
BASIS OF PRESENTATION AND GOING CONCERN UNCERTAINTY





The
accompanying consolidated financial statements include the accounts of Kodiak
Energy Inc. and subsidiaries (collectively “Kodiak”, the “Company”, “we”, “us”
or “our”) as at December 31, 2008 and December 31, 2007 and for the cumulative
period from April 7, 2004 (inception) until December 31, 2008, and are presented
in accordance with generally accepted accounting principles in the United States
of America (“U. S. GAAP”).





The
Company was incorporated under the laws of the state of Delaware on December 15,
1999 under the name “Island Critical Care, Corp.” with authorized common stock
of 50,000,000 shares with a par value of $0.001. On December 30, 2004 the name
was changed to “Kodiak Energy, Inc.” and the authorized common stock was
increased to 100,000,000 shares with the same par value. On January 17, 2005 the
Company affected a reverse split of 100 outstanding shares for one share. These
consolidated financial statements have been prepared showing post split shares
from inception. The Company was engaged in the development of the manufacture
and distribution of medical instrumentation and it became inactive after the
bankruptcy outlined below. During 2006, the Company increased its authorized
capital to 300,000,000 common shares. During 2008, the Company increased its
authorized capital to include 10,000,000 preferred shares.





The
Company is in the exploration stage and its efforts have been principally
devoted to the raising of capital, organizational infrastructure development and
the acquisition of oil and gas properties for the purpose of future extraction
of resources.





Bankruptcy





On
February 5, 2003 the Company filed a petition for bankruptcy in the District of
Prince Edward Island, Division No. 01-Prince Edward Island Court No. 1713,
Estate No. 51-104460, titled “Island Critical Care Corp.”. The Company emerged
from bankruptcy pursuant to a Bankruptcy Court Order entered on April 7, 2004
with no remaining assets or liabilities and adopted Fresh Start
Accounting.





The terms
of the bankruptcy settlement included the authorization for the issuance of
150,000 post split restricted common shares in exchange for $25,000, which was
paid into the bankruptcy court by the recipient of the shares.





The
Company emerged from bankruptcy as an exploration stage company.





Going Concern
Uncertainty





These
consolidated financial statements have been prepared assuming the Company will
continue as a going concern, which presumes the realization of assets and
discharge of liabilities in the normal course of business for the foreseeable
future. The Company has not generated positive cash flow since inception and has
incurred operating losses and will need additional working capital for its
future planned activities. The financing described in Note 20 will provide
sufficient working capital to fund the Company’s operations until mid 2009 when
additional financing will be required unless sufficient cash flow is being
obtained from the Company’s properties that comprise its near term capital
programs. The success of these programs is yet to be determined. These
conditions raise doubt about the Company’s ability to continue as a going
concern. Continuation of the Company as a going concern is dependent upon
obtaining sufficient working capital to finance ongoing operations. The
Company’s strategy to address this uncertainty, includes additional equity and
debt financing; however, there are no assurances that any such financings can be
obtained on favorable terms, if at all. These financial statements do not
reflect the adjustments or reclassification of assets and liabilities that would
be necessary if the Company were unable to continue its operations.





2.
RESTATEMENT





In March,
2009, we determined that it was necessary to restate our financial statements as
at December 31, 2007. The purpose of the restatement is to correct an error in
measurement and an error in the application of US GAAP in the course of
recording the following 2007 transactions:




Issue of common shares of
the Company in consideration for the acquisition of
properties.


On
September 28, 2007, the Company issued to Thunder River Energy, Inc. (“Thunder”)
7,000,000 common shares of the Company as partial consideration for the
acquisition of properties. The shares issued were recorded at a negotiated price
per share of US$2.00 or $14,000,000. In the course of a review by the Securities
and Exchange Commission (“SEC”) of the Company’s Form 10-Q for the Fiscal
Quarter Ended September 30, 2007 and Form 10-K for the Fiscal Year Ended
December 31, 2007, the SEC questioned the measurement date and the $2.00 per
share value at which the transaction was recorded. Following an exchange of
correspondence and discussions between the Company and the SEC during 2008 and
2009 regarding this issue, the Company has determined that the acquisition
should have been recorded at a value per share of $2.50 or $17,500,000, which
represents the fair value of exactly comparable common shares issued at the same
$2.50 price per share as a private placement financing for 2,756,000 common
shares which closed on September 28, 2007, the same date that the Thunder
transaction closed. Management believes that the $2.50 Kodiak share price to be
the most reliable measurement for the fair value of the shares issued and that
September 28, 2008 to be the appropriate measurement date because that was the
date when the parties’ closing conditions were satisfied and Thunder’s (the
counterparty’s) performance was complete. The result of the restatement
adjustment was an increase of $3,500,000 in the recorded acquisition cost and
related issuance of common shares.





Issue of flow-through common
shares of the Company at a premium.


On
September 28, 2007, October 3, 2007 and October 30, 2007, the Company issued on
a Canadian flow-through share basis 2,251,670 common shares of the Company at
US$3.00 per share or $6,755,010, which amount represented a premium of $.50 per
share or $1,125,835 when compared to other non-flow through shares issued at the
same time at $2.50 per share. At the time of the transactions, the issues of the
flow through common shares were recorded as appropriate credits to par value of
common shares and additional paid in capital. Following recent discussions with
the Company’s tax consultant, the Company has determined that the $1,125,835
premium on flow-through common shares issued should have, in accordance with US
GAAP, been recorded as a liability at the time the shares were issued rather
than as additional paid in capital. A $147,000 portion of the premium liability
discharged during the period October 1, 2007 to December 31, 2007, when
flow-through eligible expenditures amounting to $879,922 were incurred by the
Company, was recognized as a reduction of deferred tax expense.


28




Effects
of the restatement by line item follow:





Consolidated Balance
Sheets


December31,
      2007
                        
                        
                        
                        
                        
                        DecemberAs
      Previously
                        
                        
                        Impact
                        
                        
                        
                        31,
      2007Reported
                        
                        
                        of Changes
                        
                        
                        RestatedCash
      and Short Term Deposits
                        
                        $
                        8,983,682
                        
                        
                        
                        -
                        
                        
                        $
                        8,983,682Accounts
      Receivable
                        
                        
                        1,214,253
                        
                        
                        
                        -
                        
                        
                        
                        1,214,253Prepaid
      Expenses and Deposits
                        
                        
                        90,475
                        
                        
                        
                        -
                        
                        
                        
                        90,475Total
      current assets
                        
                        
                        10,288,410
                        
                        
                        
                        -
                        
                        
                        
                        10,288,410Other
      Assets
                        
                        
                        359,353
                        
                        
                        
                        -
                        
                        
                        
                        359,353Unproved
      Oil and Gas Properties
                        
                        
                        23,967,351
                        
                        
                        
                        3,500,000
                        
                        
                        
                        27,467,351Furniture
      and Fixtures
                        
                        
                        75,654
                        
                        
                        
                        -
                        
                        
                        
                        75,654Total
      Property, Plant and Equipment
                        
                        
                        24,043,005
                        
                        
                        
                        3,500,000
                        
                        
                        
                        27,543,005Total
      Assets
                        
                        $
                        34,690,768
                        
                        
                        
                        3,500,000
                        
                        
                        
                        38,190,768Accounts
      Payable
                        
                        $
                        1,547,273
                        
                        
                        
                        -
                        
                        
                        
                        1,547,273Accrued
      Liabilities
                        
                        
                        755,282
                        
                        
                        
                        -
                        
                        
                        
                        755,282Premium
      on Flow-through Shares Issued
                        
                        
                        -
                        
                        
                        
                        978,835
                        
                        
                        
                        978,835Total
      current liabilities
                        
                        
                        2,302,555
                        
                        
                        
                        978,835
                        
                        
                        
                        3,281,390Long
      Term Liabilities (Note 9)
                        
                        
                        110,955
                        
                        
                        
                        -
                        
                        
                        
                        110,955Asset
      Retirement Obligations
                        
                        
                        151,814
                        
                        
                        
                        -
                        
                        
                        
                        151,814Deferred
      Income Taxes (Note 11)
                        
                        
                        57,000
                        
                        
                        
                        (57,000
                        )
                        
                        
                        -Share
      Capital
                        
                        
                        106,692
                        
                        
                        
                        -
                        
                        
                        
                        106,692Additional
      Paid in Capital
                        
                        
                        39,143,392
                        
                        
                        
                        2,374,165
                        
                        
                        
                        41,517,557Other
      Comprehensive Loss
                        
                        
                        (342,201
                        )
                        
                        
                        -
                        
                        
                        
                        (342,201
                        )Deficit
      Accumulated during the Exploration Stage
                        
                        
                        (6,839,439
                        )
                        
                        
                        204,000
                        
                        
                        
                        (6,635,439
                        )Total
      Shareholders’ Equity
                        
                        
                        32,068,444
                        
                        
                        
                        2,578,165
                        
                        
                        
                        34,646,609Total
      Liabilities and Shareholders’ Equity
                        
                        $
                        34,690,768
                        
                        
                        
                        3,500,000
                        
                        
                        
                        38,190,768





Consolidated Statement of
Operations





Year
      Ended
                                                              December
                                                              31, 2007
      As
                                                              Previously
                                                              Reported
                                                            
                                                            
                                                            Impact
                                                              of
      Changes
                                                            
                                                            
                                                            Year
      Ended
                                                              December
                                                              31,
      2007 As
                                                              RestatedIncome
      During the Evaluation Period
                                                            
                                                            $
                                                            225
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            225Expenses:Operating
                                                            
                                                            
                                                            20,543
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            20,543General
      and Administrative
                                                            
                                                            
                                                            2,470,230
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            2,470,230Stock-based
      Investor Relations
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            -Depletion,
      Depreciation and Accretion including Ceiling Test Impairment
      Writedowns
                                                            
                                                            
                                                            218,841
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            218,841Interest
                                                            
                                                            
                                                            94,083
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            94,0832,803,697
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            2,803,697Loss
      Before Other Income
                                                            
                                                            
                                                            2,803,472
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            2,803,472Interest
      Income
                                                            
                                                            
                                                            (84,809
                                                            )
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (84,809
                                                            )Loss
      before Income Taxes
                                                            
                                                            
                                                            (2,718,663
                                                            )
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (2,718,663
                                                            )Provision
      (Recovery) of Deferred Taxes
                                                            
                                                            
                                                            57,000
                                                            
                                                            
                                                            
                                                            (204,000
                                                            )
                                                            
                                                            
                                                            (147,000
                                                            )Net
      Loss
                                                            
                                                            $
                                                            (2,775,663
                                                            )
                                                            
                                                            $
                                                            (204,000
                                                            )
                                                            
                                                            $
                                                            (2,571,663
                                                            )Basic
      & Diluted Loss per Share
                                                            
                                                            $
                                                            (0.03
                                                            )
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            (0.03
                                                            )







Consolidated Statement of
Shareholders' Equity Period April 7, 2004 (Date of Inception) to December 31,
2007




Par
      Value
                                
                                
                                Additional
                                  Paid
      in
                                  Capital
                                Deficit
                                  Accumulated
                                  during
      the
                                  Development
                                  Stage
                                
                                
                                Accumulated
                                    Other
                                    Comprehensive
                                    Loss
                                Total
                                  Shareholders'
                                  EquityBalance
      December 31, 2007 as Previously Reported
                                
                                
                                106,692
                                
                                
                                
                                39,143,392
                                
                                
                                $
                                (6,839,439
                                )
                                
                                $
                                (342,201
                                )
                                
                                $
                                32,068,444Impact
      of Changes
                                
                                
                                -
                                
                                
                                
                                2,374,165
                                
                                
                                
                                204,000
                                
                                
                                
                                -
                                
                                
                                
                                2,578,165Balance
      December 31, 2007 as Restated
                                
                                
                                106,692
                                
                                
                                
                                41,517,560
                                
                                
                                $
                                (6,635,439
                                )
                                
                                $
                                (342,201
                                )
                                
                                $
                                34,646,609




29




Consolidated Statement of
Cash Flow





Year
      Ended
                                    December
      31,
                                    2007
      As
                                    Previously
                                    Reported
                                  
                                  
                                  Impact
                                    ofChanges
                                  
                                  
                                  Year
      Ended
                                    December
                                    31,2007 As
                                    RestatedOperating
      ActivitiesNet
      Loss
                                  
                                  $
                                  (2,775,663
                                  )
                                  
                                  $
                                  204,000
                                  
                                  
                                  $
                                  (2,571,663
                                  )Depletion,
      Depreciation and Accretion including Ceiling Test Impairment
      Write-downs
                                  
                                  
                                  218,841
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  218,841Stock-Based
      Compensation
                                  
                                  
                                  643,994
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  643,994Provision
      for Deferred Income Taxes
                                  
                                  
                                  57,000
                                  
                                  
                                  
                                  (204,000
                                  )
                                  
                                  
                                  (147,000
                                  )Bad
      Debts Written Off
                                  
                                  
                                  11,908
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Non-Cash
      Working Capital Changes
                                  
                                  
                                  (660,101
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (660,101
                                  )Net
      Cash Used in Operating Activities
                                  
                                  
                                  (2,504,081
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (2,504,081
                                  )Investing
      ActivitiesAdditions
      to Capital Assets
                                  
                                  
                                  (7,508,553
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (7,508,553
                                  )Additions
      to Other Assets
                                  
                                  
                                  (309,493
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (309,493
                                  )Cash
      Used in Investing Activities
                                  
                                  
                                  (7,818,046
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (7,818,046
                                  )Financing
      ActivitiesShares
      Issued and Issuable
                                  
                                  
                                  19,068,495
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  19,068,495Long
      Term Liabilities
                                  
                                  
                                  110,955
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  110,955Cash
      Provided by Financing Activities
                                  
                                  
                                  19,179,450
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  19,179,450Foreign
      Currency Translation
                                  
                                  
                                  (321,987
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (321,987
                                  )Net
      Cash Increase
                                  
                                  
                                  8,535,336
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  8,535,336Cash
      Beginning of Year
                                  
                                  
                                  448,346
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  448,346Cash
      End of Year
                                  
                                  $
                                  8,983,
      682
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  8,983,682





3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Basis of
Presentation





These
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, 1438821 Alberta Ltd., Kodiak Petroleum ULC, Kodiak
Petroleum (Montana), Inc., and Kodiak Petroleum (Utah), Inc. In British
Columbia, Canada, the Company operates under the assumed name of Kodiak Bear
Energy, Inc. All intercompany accounts and transactions have been
eliminated.





Use of Estimates in the
Preparation of Financial Statements





The
preparation of financial statements in conformity with U. S. GAAP requires
management to make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Although these
estimates are based on the knowledge of current events and actions the Company
may undertake in the future, they may ultimately differ from actual results.
Included in these estimates are assumptions about allowances for valuation of
deferred tax assets. Accounts receivable are stated after evaluation as to their
collectability and an appropriate allowance for doubtful accounts is provided
where considered necessary. The provision for asset retirement obligation,
depletion, as well as management’s impairment assessment on its oil and gas
properties and other long lived assets are based on estimates and by their
nature, these estimates are subject to measurement uncertainty and the effect on
the financial statements of changes in these estimates, in future periods, could
be significant. These estimates and assumptions are reviewed periodically and,
as adjustments become necessary, they are reported in earnings in the periods in
which they become known. The current economic environment has increased the
degree of uncertainty inherent in those estimates and assumptions.





Joint Venture
Operations





In
instances where the Company’s oil and gas activities are conducted jointly with
others, the Company’s accounts reflect only its proportionate interest in such
activities.





Cash and Short-term
Deposits





Cash
consists of balances with financial institutions and investments in money market
instruments, which have terms to maturity of three months or less at time of
purchase.





Oil and Gas
Properties





Under the
full cost method of accounting for oil and gas operations all costs associated
with the exploration for and development of oil and gas reserves are capitalized
on a country-by-country basis. Such costs include land acquisition costs,
geological and geophysical expenses, carrying charges on non-producing
properties, costs of drilling both productive and non-productive wells,
production equipment and overhead charges directly related to acquisition,
exploration and development activities. Proceeds from the sale of oil and gas
properties are applied against capitalized costs with no gain or loss
recognized, unless such a sale would significantly alter the rate of depletion
and depreciation in a particular country, in which case a gain or loss on
disposal is recorded.


30




Capitalized
costs within each country are depleted and depreciated on the unit-of-production
method based on the estimated gross proved reserves as determined by independent
petroleum engineers. Oil and gas reserves and production are converted into
equivalent units on the basis of 6,000 cubic feet of natural gas to one barrel
of oil. Depletion and depreciation is calculated using the capitalized costs,
including estimated asset retirement costs, plus the estimated future costs to
be incurred in developing proved reserves, net of estimated salvage
value.





An
impairment loss is recognized in net earnings if the carrying amount of a cost
center exceeds the “cost center ceiling”. The carrying amount of the cost center
includes the capitalized costs of proved oil and natural gas properties, net of
accumulated depletion and deferred income taxes and the cost center ceiling is
the present value of the estimated future net cash flows, using yearend
unescalated prices, from proved oil and natural gas reserves discounted at ten
percent (net of related tax effects) plus the lower of cost or fair value of
unproved properties included in the costs being amortized (and/or the costs of
unproved properties that have been subject to a separate impairment test and
contain no probable reserves).





Costs of
acquiring and evaluating unproved properties and major development projects are
initially excluded from the depletion and depreciation calculation until it is
determined whether or not proved reserves can be assigned to such properties.
Costs of unproved properties and major development projects are transferred to
depletable costs based on the percentage of reserves assigned to each project
over the expected total reserves when the project was initiated. These costs are
assessed periodically to ascertain whether impairment has occurred.





Property and
Equipment





Property
and equipment is recorded at cost. Depreciation of assets is provided by use of
a declining balance method over the estimated useful lives of the related
assets. Expenditures for replacements, renewals, and betterments are
capitalized. Maintenance and repairs are charged to operations as
incurred.





Asset Retirement
Obligations





The
Company recognizes a liability for asset retirement obligations in the period in
which they are incurred and in which a reasonable estimate of such costs can be
made. Asset retirement obligations include those legal obligations where the
Company will be required to retire tangible long-lived assets such as producing
well sites. The asset retirement obligation is measured at fair value and
recorded as a liability and capitalized as part of the cost of the related
long-lived asset as an asset retirement cost. The asset retirement obligation
accretes until the time the asset retirement obligation is expected to settle
while the asset retirement costs included in oil and gas properties are
amortized using the unit-of-production method.





Amortization
of asset retirement costs and accretion of the asset retirement obligation are
included in depletion, depreciation and accretion. Actual asset retirement costs
are recorded against the obligation when incurred. Any difference between the
recorded asset retirement obligations and the actual retirement costs incurred
is recorded in depletion, depreciation and accretion.





Environmental





Oil and
gas activities are subject to extensive federal, provincial, state and local
environmental laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may require the
Company to remove or mitigate the environmental effects of the disposal or
release of petroleum or chemical substances at various sites.





Environmental
expenditures are expensed or capitalized depending on their future economic
benefit. Expenditures that relate to an existing condition caused by past
operations and that have no future economic benefits are expensed. Liabilities
for expenditures of a non-capital nature are recorded when environmental
assessment and/or remediation is probable, and the costs can be reasonably
estimated. To date, the Company has not recognized any environmental obligations
as production has been insignificant and we have not actively produced since
October, 2006.





Income
Taxes





Income
taxes are determined using assets and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date. In addition, a valuation allowance is established to reduce any deferred
tax asset for which it is determined that it is more likely than not that some
portion of the deferred tax asset will not be realized.





Per FASB
Interpretation (FIN 48) under the liability method, it is the Company’s policy
to provide for uncertain tax positions and the related interest and penalties
based upon management’s assessment of whether a tax benefit is more likely than
not to be sustained upon examination by tax authorities. At December 31, 2008,
the Company believes it has appropriately accounted for any unrecognized tax
benefits. To the extent the Company prevails in matters for which a liability
for an unrecognized benefit is established or is required to pay amounts in
excess of the liability, the Company’s effective tax rate in a given financial
statement period may be affected. Interest and penalties associated with the
Company’s tax positions are recorded as Interest Expense.





Flow-through
Shares





The
Company finances a portion of its canadian exploration programs with
flow-through common shares issued pursuant to certain provisions of the Income
Tax Act (Canada) (the “Act”). Under the Act, where the proceeds are used for
eligible expenditures, the related income tax deductions may be renounced to
subscribers. Accordingly, the tax credits associated with the renunciation of
such expenditures are recorded as an increase to deferred income tax
liabilities. Any premium received from subscribers on the sale of such
flow-through common shares is recorded initially as a current liability and then
discharged and recognized as a reduction of deferred income taxes when the
flow-through eligible expenditures relating to the flow-through premium are
incurred by the Company.


31




Stock-Based
Compensation





The
Company records compensation expense for share based payments using the fair
value method pursuant to Financial Accounting Standards Board Statement (“FASB”)
No. 123R. The fair value of share-based compensation to employees will be
determined using an option pricing model at the time of grant. Fair value for
common shares issued for goods or services rendered by non-employees are
measured based on the fair value of the goods or services received. Stock-based
compensation expense is included in general and administrative expense with a
corresponding increase to Additional Paid in Capital. Upon the exercise of the
stock options, consideration paid together with the previously recognized
Additional Paid in Capital is recorded as an increase in share
capital.





Foreign Currency
Translation





The
functional currency for the Company’s foreign operations is the Canadian dollar.
The translation from the applicable foreign currencies to U.S. dollars is
performed for asset and liability accounts using current exchange rates in
effect at the balance sheet date, while income, expenses and cash flows are
translated at the average exchange rates for the period. The resulting
translation adjustments are recorded as a component of other comprehensive loss.
Gains or losses resulting from foreign currency transactions are included in
other income/expenses.





Revenue
Recognition





Revenues
from the sale of petroleum and natural gas are recorded when title passes from
the Company to its petroleum and/or natural gas purchaser and collectability is
reasonably assured. The Company will begin recording revenue once it is
determined there are proved reserves resulting in production.





Loss Per Common
Share





Basic
loss per common share is computed by dividing net loss by the weighted average
number of common shares outstanding for the period. Diluted loss per common
share is computed after giving effect to all dilutive potential common shares
that were outstanding during the period. Dilutive potential common shares
consist of incremental shares issuable upon exercise of stock options and
warrants, contingent stock, conversion of debentures and preferred stock
outstanding. The dilutive effect of potential common shares is not considered in
the EPS calculations for these periods if the impact would have been
anti-dilutive.






4.  RECENT
ACCOUNTING PRONOUNCEMENTS





FASB
Interpretation (FIN) 48, “Accounting for Uncertainty in Income taxes – an
interpretation of FASB Statement No. 109 (FIN 48). In July 2006, the FASB issued
FIN 48, which provides guidance on accounting for income tax positions about
which the Company has concluded there is a level of uncertainty with respect to
the recognition of a tax benefit in the Company’s financial statements. FIN 48
describes the minimum recognition threshold a tax position is required to meet.
Tax positions are defined very broadly and include not only tax deductions and
credits but also decisions not to file in a particular jurisdiction, as well as
the taxability of certain transactions.





Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and a
measurement attribute for the financial statement recognition and measurement of
tax positions taken or expected to be taken in a tax return. For those benefits
to be recognized, a tax position must be more-likely-than-not to be sustained
upon examination by taxing authorities. There was not a material impact on the
Company’s consolidated financial position and results of operations as a result
of the adoption of the provisions of FIN 48. At December 31, 2008, the Company
had no significant unrecognized tax positions and the Company does not believe
there will be any material changes in its unrecognized tax positions over the
next twelve months.





The
Company’s tax positions are subject to examination by tax authorities. As at
December 31, 2008, the Company’s tax year 2008 is open for United States –
Federal and State jurisdictions and Canada – Federal and Provincial
jurisdictions.





Statement
of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements”
(SFAS No. 157). In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157, which defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS No 157 does not require
any new fair value measurements. However, in some cases, the application of SFAS
No. 157 may change the Company’s current practice for measuring and disclosing
fair values under other accounting pronouncements that require or permit fair
value measurements. For the Company, SFAS No. 157 will be effective as of
January 1, 2008 and must be applied prospectively except in certain cases. The
Company has determined there was no significant impact on its consolidated
results of operations, cash flows or financial position on adopting SFAS
157.





SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS No. 159). In February 2007, the FSAB issued SFAS No. 159, which permits
entities to choose to measure many new financial instruments and certain other
items at fair value. For the Company, SFAS No. 159 will be effective as of
January 1, 2008 and will have no impact on amounts presented for periods prior
to the effective date. The Company has chosen not to measure items subject to
SFAS No. 159 at fair value.





The
following new accounting standards have been issued, but have not yet been
adopted by the Company:





In
November, 2007, FASB issued SFAS No. 141(R), “Business Combination”. FAS 141(R)
will change how business acquisitions are accounted for and will impact
financial statements both on the acquisition date and in subsequent periods. FAS
141(R) is effective for both public and private companies for fiscal years
beginning on or after December 15, 2008. FAS 141(R) will be applied
prospectively. Early adoption is prohibited. The Company has not yet determined
this pronouncement’s potential impact.


32





In
December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51”(SFAS 160). This
statement requires the recognition of a noncontrolling interest (minority
interest) as equity in the consolidated financial statements and separate from
the parent’s equity. The amount of net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement. Changes in a parent’s ownership interest that
result in deconsolidation of a subsidiary will result in the recognition of a
gain or loss in net income when the subsidiary is deconsolidated. SFAS 160
also includes expanded disclosure requirements regarding the interests of the
parent and its noncontrolling interests. The statement is effective for
fiscals years, and interim periods within those fiscal years, beginning on or
after December 15, 2008.  This statement will not have a material
effect on our consolidated financial statements.





In
September 2008, the EITF reached a consensus for exposure on Issue
No. 08-6, “Equity Method Investment Accounting Considerations”. This
issue addresses the accounting for equity method investments as a result of the
accounting changes prescribed by SFAS 141(R) and SFAS 160. The issue
includes clarification on the following: (a) transaction costs should be
included in the initial carrying value of the equity method investment,
(b) an impairment assessment of an underlying indefinite-lived intangible
asset of an equity method investment need only be performed as part of any
other-than-temporary impairment evaluation of the equity method investment as a
whole and does not need to be performed annually, (c) the equity method
investee’s issuance of shares should be accounted for as the sale of a
proportionate share of the investment, which may result in a gain or loss in
income, and (d) a gain or loss should not be recognized when changing the
method of accounting for an investment from the equity method to the cost
method. This issue will be effective for fiscal years beginning on
January 1, 2009. The impact of this issue will not have a material
effect on our consolidated financial statements.





In May
2008, FASB issued SFAS No. 162 (“SFAS No. 162”), “The Hierarchy of Generally
Accepted Accounting Principles”. SFAS No. 162 identifies the sources of account
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States. SFAS No. 162 is effective 60 days following the SEC approval
of the Public Company Accounting Oversight Board amendments to AU Section 411,
“The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.” Adoption of SFAS 162 will not be a change in the Company’s current
accounting practices; therefore, it will not have a material impact on the
Company’s consolidated financial condition or results of
operations.





On
December 31, 2008, the SEC adopted a final rule that amends its oil and gas
reporting requirements. The revised rules change the way oil and gas companies
report their reserves in the financial statements. The rules are intended to
reflect changes in the oil and gas industry since the original disclosures were
adopted in 1978. Definitions were updated to be consistent with Petroleum
Resource Management System (PRMS). Other key revisions include a change in
pricing used to prepare reserve estimates, the inclusion of non-traditional
resources in reserves, the allowance for use of new
technologies in determining reserves, optional disclosure of probable and
possible reserves and significant new disclosures. The revised rules will be
effective for our annual report on Form 10-K for the fiscal year ending
December 31, 2009. The SEC is precluding application of the new rules in
quarterly reports prior to the first annual report in which the revised
disclosures are required and early adoption is not permitted. We are currently
evaluating the effect the new rules will have on our financial reporting and
anticipate that the following rule changes could have a significant impact on
our results of operations as follows:





•
            
            The
      price used in calculating reserves will change from a single-day closing
      price measured on the last day of the company’s fiscal year to a 12-month
      average price, and will affect our depletion and ceiling test
      calculations.•
            
            Several
      reserve definitions have changed that could revise the types of reserves
      that will be included in our year-end reserve report.•
            
            Many
      of our financial reporting disclosures could change as a result of the new
      rules.








5.
ACCOUNTS RECEIVABLE





Accounts
receivable consist of the following:


December
                        
                        
                        December31, 2008
                        
                        
                        31, 2007Non-operating
      Partner joint venture accounts
                        
                        $
                        1,193
                        
                        
                        $
                        454,179Operator
      cash call advances
                        
                        
                        -
                        
                        
                        
                        76,388Government
      of Canada Goods and Services Tax Claims
                        
                        
                        16,733
                        
                        
                        
                        621,254Accrued
      interest receivable
                        
                        
                        -
                        
                        
                        
                        57,096Other
                        
                        
                        46,399
                        
                        
                        
                        5,336$
                        64,325
                        
                        
                        $
                        1,214,253








6.
PREPAID EXPENSES AND DEPOSITS





Prepaid
expenses and deposits consist primarily of unexpired insurance premiums and
software license user fees.








7. OTHER
ASSETS





Other
assets represent long term deposits required by governmental regulatory
authorities for environmental obligations relating to well abandonment and site
restoration activities.





December
                        
                        
                        December31, 2008
                        
                        
                        31, 2007Alberta
      Energy and Utility Board Drilling Deposit
                        
                        $
                        73,507
                        
                        
                        $
                        87,618Alberta
      Energy Royalty Deposit
                        
                        
                        -
                        
                        
                        
                        4,723British
      Columbia Oil and Gas Commission Deposit
                        
                        
                        217,396
                        
                        
                        
                        267,112$
                        290,903
                        
                        
                        $
                        359,353




33





8.
CAPITAL ASSETS


Net
      BookAccumulated
                                          
                                          
                                          ValueDepreciation
                                          
                                          
                                          DecemberCost
                                          
                                          
                                          and Depletion
                                          
                                          
                                          
                                          31, 2008Oil
      and Gas Properties:Canada
                                          
                                          $
                                          27,244,206
                                          
                                          
                                          $
                                          1,935,428
                                          
                                          
                                          $
                                          25,062,473United
      States
                                          
                                          
                                          11,749,456
                                          
                                          
                                          
                                          498,867
                                          
                                          
                                          
                                          11,250,58938,993,662
                                          
                                          
                                          
                                          2,434,295
                                          
                                          
                                          
                                          36,559,367Furniture
      and Fixtures
                                          
                                          
                                          148,025
                                          
                                          
                                          
                                          72,460
                                          
                                          
                                          
                                          75,565Total
                                          
                                          $
                                          39,141,687
                                          
                                          
                                          $
                                          2,506,755
                                          
                                          
                                          $
                                          36,634,932Net
      BookValueAccumulated
                                          
                                          
                                          DecemberDepreciation
                                          
                                          
                                          
                                          31,
      2007Cost
                                          
                                          
                                          and Depletion
                                          
                                          
                                          (Restated)Oil
      and gas Properties:Canada
                                          
                                          $
                                          20,695,042
                                          
                                          
                                          $
                                          1,651,037
                                          
                                          
                                          $
                                          19,044,005United
      States
                                          
                                          
                                          8,423,346
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          8,423,34629,118,388
                                          
                                          
                                          
                                          1,651,037
                                          
                                          
                                          
                                          27,467,351Furniture
      and Fixtures
                                          
                                          
                                          128,415
                                          
                                          
                                          
                                          52,761
                                          
                                          
                                          
                                          75,654Total
                                          
                                          $
                                          29,246,803
                                          
                                          
                                          $
                                          1,703,798
                                          
                                          
                                          $
                                          27,543,005





During
the year ended December 31, 2008, the Company capitalized $292,824 (2007 -
$193,173) of general and administrative personnel costs attributable to
acquisition, exploration and development activities.





Unproved
Properties





Included
in oil and gas properties are the following costs related to Canadian and United
States unproved properties, valued at cost, that have been excluded from costs
subject to depletion:


DecemberDecember
                              
                              
                              31,
      200731, 2008
                              
                              
                              (Restated)CanadaLand
      acquisition and retention
                              
                              $
                              13,319,909
                              
                              
                              $
                              11,384,017Geological
      and geophysical costs
                              
                              
                              9,330,180
                              
                              
                              
                              6,371,954Exploratory
      drilling
                              
                              
                              619,409
                              
                              
                              
                              1,114,763Tangible
      Equipment and Facilities
                              
                              
                              244,450
                              
                              
                              
                              127,217Other
                              
                              
                              75,132
                              
                              
                              
                              46,054$
                              23,589,080
                              
                              
                              $
                              19,044,005United
      StatesLand
      acquisition and retention
                              
                              $
                              6,758,899
                              
                              
                              $
                              7,606,389Geological
      and geophysical costs
                              
                              
                              941,836
                              
                              
                              
                              383,800Exploratory
      drilling
                              
                              
                              1,974,346
                              
                              
                              
                              409,246Tangible
      Equipment and Facilities
                              
                              
                              95,699
                              
                              
                              
                              -Other
                              
                              
                              79,809
                              
                              
                              
                              23,911$
                              9,850,589
                              
                              
                              $
                              8,423,346$
                              37,171,397
                              
                              
                              $
                              27,467,351





Drilling
programs are being planned for 2009 for our Alberta and British Columbia
properties in Canada. It is estimated by management that the unproved property
costs associated with these properties, which in the aggregate constitute
approximately $3,000,000 of our total unproved property costs as at December 31,
2008, will be included in our costs subject to depletion when production
commences.





Ceiling
Test





The
Company has performed ceiling tests for its Canadian and United States
geographical cost centers. As at December 31, 2008 and 2007, the carrying values
of the Company’s unproved properties in its Canadian and United States cost
centers were assessed by management. Costs attributable to certain Canadian cost
center properties were determined to be unsupportable and consequently, ceiling
test impairment write-downs of $284,391 (2007 - $174,380) were recorded and
included in depletion, depreciation and accretion. In addition, costs
attributable to certain United States cost center properties were determined to
be unsupportable and ceiling test impairment write-downs of $498,867 (2007 - $
nil) were recorded and included in depletion, depreciation and accretion. It was
determined that no impairment existed in its United States cost center as at
December 31, 2007.


34





Property
Acquisition





On September 28, 2007 the Company
purchased from Thunder Energy, Inc. (“Thunder”)and CIMA Holdings, Inc.(“CIMA”),
a subsidiary of Thunder, 100% of Thunder’s interest in its EL 413 Exploration
License in the Northwest Territories and 100% of CIMA’s interest in their New
Mexico properties in consideration for $1 million cash and 7 million common
shares of the Company valued at $14,000,000 ($2.00 per common share) and a
commitment to issue in the future an additional 11,000,000 common shares of the
Company upon the achievement of certain milestones in connection with the
acquired properties. All acquired properties are unproved. Of this committed
amount, 2 million shares were issued during the year (Note 12). For accounting
purposes, the 7 million common shares issued to Thunder were recorded at a value
of $17,500,000 or $2.50 per common share, being the same price per share at
which the September 28, 2007 private placement financing of 2,756,000
non-flow-through common shares were issued (Note 13(s)).





Of the
cash consideration, $100,000 was paid as a deposit on July 11, 2007, and the
balance of $900,000 was paid at closing on September 28, 2007. Of the common
shares consideration, 7 million shares were issued to Thunder at closing on
September 28, 2007. An additional 6 million shares will be issued to Thunder if,
as, and when certain performance milestones are achieved, including 2 million
shares upon completion of a 2007/08 seismic program by June 30, 2008 (Note 12);
1 million shares upon the spudding of a shallow depth well (1,500 meters TD) by
March 31, 2009; 1.5 million shares upon the spudding of a medium depth well
(2,500 meters TD) before lease expiry in 2009 and 1.5 million shares upon
conversion of any part of EL 413 to a Significant Discovery Lease. If, as a
result of the Company’s exploration and development activities on the acquired
properties, reserves in place exceed 100 million barrels, then, for each excess
10 million barrels in place, 100,000 additional shares could be issued, up to a
maximum of 5 million additional shares.








9. NOTE
PAYABLE TO RELATED PARTY





On
November 24, 2008, the Company borrowed $32,841 (Cdn. $40,000) from Sicamous Oil
& Gas Consultants Ltd., a company controlled by William S. Tighe, CEO,
President and COO of the Company, under the terms of a demand promissory note
bearing interest at the Royal Bank of Canada prime rate plus 1% per annum. On
January 27, 2009, an amount of $15,981 (Cdn. $20,000) was repaid.








10. LONG
TERM LIABILITIES





Funds Advanced by
Partners





As at
December 31, 2008, the Company held $39,262 (2007 - $110,955) in funds advanced
by partners for their share of a drilling deposit required to be lodged by the
Company with the British Columbia Oil and Gas Commission (see Note 7) as
security for future well abandonment and site restoration
activities.





Notes
Payable





During
the second and third quarters of 2007, the Company received $3,300,000 in
advances from a European lender which bore interest at 91⁄2% per annum and were
unsecured. On September 28, 2007, the lender was repaid $2,567,500 in 1,027,000
common shares issued as part of the financing described in Note 12. On October
1, 2007, the balance of $732,500 was repaid in full in cash with accrued
interest of $94,055.








11. ASSET
RETIREMENT OBLIGATIONS





Changes
in the carrying amounts of the asset retirement obligations associated with the
Company’s oil and natural gas properties since December 31, 2006 are as
follows:


Asset
      Retirement Obligations, December 31, 2006
                                
                                $
                                90,911Obligations
      incurred
                                
                                
                                106,721Accretion
                                
                                
                                8,503Retirements
                                
                                
                                (54,321
                                )Asset
      retirement obligations, December 31, 2007
                                
                                
                                151,814Obligations
      incurred
                                
                                
                                62,642Accretion
                                
                                
                                14,044Retirements
                                
                                
                                (28,926
                                )Asset
      retirement obligations, December 31, 2008
                                
                                $
                                199,574
  At
December 31, 2008, the estimated total undiscounted amount required to settle
the asset retirement obligations was $ 302,273 (2007 - $213,880). These
obligations will be settled at the end of the useful lives of the underlying
assets, which currently extends up to 8 years into the future. This amount has
been discounted using a credit adjusted risk-free interest rate of 7.5% and a
rate of inflation of 2.5%.


35





12.
INCOME TAXES




As at
December 31, 2008, the Company's deferred tax asset is attributable to its net
operating loss carry forward of approximately $2,802,000 (2007 - $2,000,000;
2006 - $647,000), which will expire if not utilized in the years 2024, 2025,
2026, 2027 and 2028. As reflected below, this benefit has been fully offset by a
valuation allowance based on management's determination that it is not more
likely than not that some or all of this benefit will be realized.




For the
years ended December 31, 2008, 2007, 2006 and for the period from date of
inception, April 7, 2004 to December 31, 2008, a reconciliation of income tax
benefit at the U.S. federal statutory rate to income tax benefit at the
Company's effective tax rates is as follows.


20072008
                                
                                
                                (Restated)
                                
                                
                                2006
                                
                                
                                CumulativeIncome
      tax benefit at statutory rate
                                
                                $
                                1,156,000
                                
                                
                                $
                                944,000
                                
                                
                                $
                                1,080,000
                                
                                
                                $
                                3,907,000Permanent
      Differences
                                
                                
                                (4,000
                                )
                                
                                
                                2,000
                                
                                
                                
                                (132,000
                                )
                                
                                
                                (414,000
                                )State
      tax benefit, net of federal taxes
                                
                                
                                -
                                
                                
                                
                                48,000
                                
                                
                                
                                1,000
                                
                                
                                
                                60,000Foreign
      taxes, net of federal benefit
                                
                                
                                (2,224,000
                                )
                                
                                
                                (323,000
                                )
                                
                                
                                12,000
                                
                                
                                
                                (2,532,000
                                )Revision
      to tax account estimates
                                
                                
                                (177,000
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (177,000
                                )Previously
      unrecognized tax asset
                                
                                
                                -
                                
                                
                                
                                308,000
                                
                                
                                
                                -
                                
                                
                                
                                308,000Other
                                
                                
                                (2,000
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (2,000
                                )Change
      in valuation allowance
                                
                                
                                1,251,000
                                
                                
                                
                                (979,000
                                )
                                
                                
                                (961,000
                                )
                                
                                
                                (842,000
                                )Deferred
      tax asset before the following
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Deferred
      tax credit arising from flow-through share premiums
                                
                                
                                978,835
                                
                                
                                
                                147,000
                                
                                
                                
                                -
                                
                                
                                
                                1,125,835Deferred
      Tax Recovery
                                
                                
                                978,835
                                
                                
                                
                                147,000
                                
                                
                                
                                -
                                
                                
                                
                                1,125,835





Deferred
tax assets (liabilities) at December 31, 2008, 2007 and 2006 are comprised of
the following:





20072008
                      
                      
                      (Restated)
                      
                      
                      2006Deferred
      tax assetsDeferred
      costs
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      443,000Net
      operating loss carryover
                      
                      
                      2,802,000
                      
                      
                      
                      2,000,000
                      
                      
                      
                      647,000Revision
      to tax account estimates
                      
                      
                      -
                      
                      
                      
                      177,000
                      
                      
                      
                      -Other
                      
                      
                      75,000
                      
                      
                      
                      59,000
                      
                      
                      
                      24,000Total
      deferred tax asset
                      
                      
                      2,877,000
                      
                      
                      
                      2,236,000
                      
                      
                      
                      1,114,000Deferred
      Tax liabilitiesExcess
      of other U.S. tax deductions over book amounts written off
                      
                      
                      345,000
                      
                      
                      
                      143,000
                      
                      
                      
                      -Net
      deferred tax asset before valuation allowance
                      
                      
                      2,532,000
                      
                      
                      
                      2,093,000
                      
                      
                      
                      1,114,000Less
      valuation allowance
                      
                      
                      (2,532,000
                      )
                      
                      
                      (2,093,000
                      )
                      
                      
                      (1,114,000
                      )Net
      deferred tax asset
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -





The 2008
valuation allowance of $2,532,000 includes $1,690,000 relating to a December 31,
2008 currency revaluation


adjustment
that has not been charged to expense but is included in comprehensive loss in
shareholders’ equity.








13. SHARE
CAPITAL





Authorized:


Common
shares at par value of $.001 per share as at December 31, 2008 and 2007 –
300,000,000; Preferred shares as at December 31, 2008 – 10,000,000 (December 31,
2007 – Nil).





The
following share capital transactions occurred during the periods:


Shares
      Issued
                  
                  Number
                  
                  
                  Par
      Value
                  
                  
                  Additional
      Paid
                    in
      CapitalBalance
      December 31, 2005
                  
                  
                  474,028
                  
                  
                  
                  474
                  
                  
                  
                  834,561Private
      Placement, net of costs(a)
                  
                  
                  16,000,000
                  
                  
                  
                  16,000
                  
                  
                  
                  756,655Private
      Placement, net of costs(b)
                  
                  
                  933,324
                  
                  
                  
                  933
                  
                  
                  
                  1,259,067Issued
      for service(c)
                  
                  
                  1,000,000
                  
                  
                  
                  1,000
                  
                  
                  
                  40,1892:1
      Stock split(d)
                  
                  
                  18,407,352
                  
                  
                  
                  18,407
                  
                  
                  
                  (18,407
                  )Issued
      for service, net of costs(e)
                  
                  
                  7,500,000
                  
                  
                  
                  7,500
                  
                  
                  
                  314,4742:1
      Stock split(f)
                  
                  
                  44,314,714
                  
                  
                  
                  44,315
                  
                  
                  
                  (44,315
                  )Private
      Placement, net of costs(g)
                  
                  
                  1,130,000
                  
                  
                  
                  1,130
                  
                  
                  
                  1,766,130Private
      Placement, net of costs(h)
                  
                  
                  187,050
                  
                  
                  
                  187
                  
                  
                  
                  235,254Stock-based
      compensation (note 13)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  69,169Balance
      December 31, 2006
                  
                  
                  89,946,468
                  
                  
                  
                  89,946
                  
                  
                  
                  5,212,777Corrections
      to previous years’ numbers
                  
                  
                  460
                  
                  
                  
                  -
                  
                  
                  
                  -Private
      Placement, net of costs (h)
                  
                  
                  30,000
                  
                  
                  
                  30
                  
                  
                  
                  38,298Private
      Placement, net of costs (i)
                  
                  
                  440,000
                  
                  
                  
                  440
                  
                  
                  
                  499,560Private
      Placement, net of costs (j)
                  
                  
                  420,000
                  
                  
                  
                  420
                  
                  
                  
                  474,580Private
      Placement, net of costs (k)
                  
                  
                  2,447,900
                  
                  
                  
                  2,448
                  
                  
                  
                  2,777,427Private
      Placement, net of costs (l)
                  
                  
                  2,756,000
                  
                  
                  
                  2,756
                  
                  
                  
                  6,218,489Private
      Placement, net of costs (l)
                  
                  
                  1,866,670
                  
                  
                  
                  1,867
                  
                  
                  
                  4,216,808Private
      Placement (m)
                  
                  
                  7,000,000
                  
                  
                  
                  7,000
                  
                  
                  
                  17,493,000Private
      Placement, net of costs (n)
                  
                  
                  335,000
                  
                  
                  
                  335
                  
                  
                  
                  756,765Private
      Placement, net of costs (o)
                  
                  
                  1,450,000
                  
                  
                  
                  1,450
                  
                  
                  
                  3,185,919Stock-based
      compensation (note 13)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  643,934Balance
      December 31, 2007
                  
                  
                  106,692,498
                  
                  
                  
                  106,692
                  
                  
                  
                  41,517,557Share
      Issue Costs (p)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (9,595
                  )Private
      Placement, net of costs (q)
                  
                  
                  1,204,000
                  
                  
                  
                  1,204
                  
                  
                  
                  2,844,804Warrants
      converted to common shares (r)
                  
                  
                  127,500
                  
                  
                  
                  128
                  
                  
                  
                  191,122Issue
      of Shares to Thunder (s)
                  
                  
                  2,000,000
                  
                  
                  
                  2,000
                  
                  
                  
                  4,078,000Stock-based
      compensation (Note 14)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  674,226Balance
      December 31, 2008
                  
                  
                  110,023,998
                  
                  
                  $
                  110,024
                  
                  
                  $
                  49,296,114


36





Shares
      Issuable
                          
                          2008
                          
                          
                          2007
                          
                          
                          2006Number
                          
                          
                          Value
                          
                          
                          Number
                          
                          
                          Value
                          
                          
                          Number
                          
                          
                          ValueOpening
      Balance
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          
                          470,000
                          
                          
                          $
                          538,328
                          
                          
                          
                          16,000,000
                          
                          
                          $
                          773,637Issued
      during the period
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (470,000
                          )
                          
                          
                          (538,328
                          )
                          
                          
                          (16,000,000
                          )
                          
                          
                          (773,637
                          )Private
      Placement, net of costs (h)
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          30,000
                          
                          
                          
                          38,768Private
      Placement, net of costs (i)
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          440,000
                          
                          
                          
                          499,560Closing
      Balance
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          
                          470,000
                          
                          
                          $
                          773,637





(a)
            On
      January 13, 2006, 16,000,000 shares of common stock were issued pursuant
      to two private placements that closed December 22, 2005 (13,650,000 shares
      for gross proceeds of $300,000) and December 30, 2005 (910,000 shares, for
      gross proceeds of $500,000) respectively, recorded as Shares Issuable at
      December 31, 2005 in the amount of $773,637 (net of share issue costs of
      $26,363) as the share certificates were not issued until January 13,
      2006.





(b)
            In
      January, 2006, the Company closed a private placement for 933,324 common
      shares at a price of $1.50 per share for gross proceeds of $1,400,000.
      Share issue costs associated with this private placement totaled
      $140,000.





(c)
            In
      January, 2006, the Company issued 1,000,000 shares to settle debt of
      $41,189 pursuant to the stock for services compensation plan. A beneficial
      conversion feature of $808,811 was calculated on the debt for the year
      ended December 31, 2005 representing the difference between the conversion
      price and the fair value of the common stock at the commitment date. This
      amount was recorded as interest expense and an increase in additional paid
      in capital for the year ended December 31,
2005.





(d)
            On
      February 20, 2006 the Company’s stock split forward by paying a stock
      dividend to our existing shareholders. All shareholders of record on
      February 14, 2006 received 1 dividend share for every share they owned
      amounting to 18,407,352 shares of common stock
  issued.





(e)
            During
      2006, the Company issued 7,500,000 (2005 – Nil) common shares, pursuant to
      an S8 registration, for services provided to the Company that have been
      recorded under the provisions of SFAS No. 123R relating to transactions
      with non-employees where the fair value of the investor relations services
      rendered has been recorded as General & Administrative Expense and an
      increase in Additional Paid In Capital (less share issue costs of $15,526.
      The recorded value of the transaction was $337,500 and was based on the
      value of the invoices rendered for the services provided and an allowance
      for the lack of liquidity in the market for the Company’s common shares.
      These transactions were in the normal course of business and agreed to by
      the non-employees and the Company based on negotiation and accordingly had
      been measured at the exchange
amounts.





(f)
            On
      May 1, 2006 the Company’s stock split forward by paying a stock dividend
      to our existing shareholders. All shareholders of record on April 28, 2006
      received 1 dividend share for every share they owned amounting to
      44,314,714 shares of common stock
issued.





(g)
            In
      June 2006 the Company closed a private placement for 1,130,000 units at a
      price of $1.70 per unit for gross proceeds of $1,921,000. Each unit
      entitled the subscriber to one common share of the Company and one
      warrant. Share issue costs associated with this private placement totaled
      $153,740. Each warrant entitles the warrant holder to exchange one warrant
      for one common share at a price of $2.70 until June 30, 2008 and for $3.50
      until June 30, 2009.





(h)
            In
      December 2006, the Company closed private placements for 54,375 units
      (217,450) common shares) at a price per unit of $6.40 Cdn. ($1.60 Cdn. per
      share) for aggregate proceeds of $348,000. Each unit entitles the
      subscriber to three flow-through common shares and one common share. The
      flow-through shares entitle the holder to a Canadian Exploration Expense
      deduction under the Canada Income Tax Act. Of these shares, 30,000 were
      classified, net of share issue costs of $38,768, as Shares Issuable as at
      December 31, 2006 as the share certificates were not issued until
      February, 2007.





(i)
            On
      December 22, 2006, the Company received proceeds for a private placement
      of 440,000 units at a price of $1.25 per unit that closed on February 20,
      2007 for gross proceeds of $550,000. Each unit entitled the subscriber to
      one common share of the Company and one warrant. These common shares were
      classified, net of share issue costs of $50,000, as Shares Issuable as at
      December 31, 2006 as the share certificates were not issued until January,
      2007. Each warrant entitles the warrant holder to exchange one warrant for
      one common share at a price at a price of $1.50 until December 22,
      2008.





(j)
            On
      February 20, 2007, the Company closed a private placement for 420,000
      units at a price of $1.25 per unit for gross proceeds of $525,000. Each
      unit entitled the subscriber to one common share of the Company and one
      warrant. Each warrant entitles the warrant holder to exchange one warrant
      for one common share at a price at a price of $1.50 until February 20,
      2009. Share issue costs associated with this private placement totaled
      $50,000.





(k)
            On
      May 10, 2007, the Company closed a private placement for 2,447,900 units
      at a price of $1.25 per unit for gross proceeds of $3,059,875. Each unit
      entitled the subscriber to one common share of the Company and one
      warrant. Each warrant entitles the warrant holder to exchange one warrant
      for one common share at a price at a price of $1.50 until May 10, 2009.
      Share issue costs associated with this private placement totaled
      $280,000.





(l)
            On
      September 28, 2007, the Company closed a brokered private placement
      offering for an aggregate of 4,622,670 common shares for aggregate gross
      proceeds of $12,490,010. Of the total number of shares, 2,756,000 were
      sold at a purchase price of $2.50 per share for gross proceeds of
      $6,890,000 and 1,866,670 were sold on a Canadian flow through share basis
      at a purchase price of $3.00 for gross proceeds of $5,600,010. The
      $933,335 premium portion of the flow-through shares proceeds was credited
      to Flow-through Share Premium Liability. Share issue costs associated with
      this offering totaled $1,116,755. In connection with the offering, the
      broker was granted warrants to purchase, until March 28, 2009, (i) 220,480
      common shares of the Company at a price of $2.50 per share and (ii)
      149,334 common shares of the Company at a price of $3.00 per share. The
      broker was also granted a right of first refusal for future securities
      offerings in Canada and investment banking and advisory rights for a
      period of 18 months. As a condition of the agency agreement, the Company
      committed to seek a listing on the Toronto Venture Stock Exchange for its
      common shares. Such listing was approved on December 21, 2007 and the
      Company’s common shares commenced trading on the Exchange December 24,
      2007.


37





(m)
            On
      September 28, 2007, the Company issued 7 million common shares valued at a
      price of $2.00 per share for gross proceeds of $14,000,000 as partial
      consideration for the acquisition of certain unproved oil and gas
      properties in Canada and the United States. For accounting purposes, the 7
      million common shares issued to Thunder were recorded at a value of
      $17,500,000 or $2.50 per common share, being the same price per share at
      which the September 28, 2007 private placement financing of 2,756,000
      non-flow-through common shares were issued. See (l). The Company also
      committed to issue up to an additional 11,000,000 common shares of the
      Company upon the achievement of certain milestones in connection with the
      acquired properties as set out in Note
8.





(n)
            On
      October 3, 2007, the Company closed a second portion of the brokered
      private placement (“the Offering”) of common shares and flow through
      common shares that closed on September 28, 2007. Pursuant to the Offering,
      the Company issued an additional 335,000 flow through common shares at a
      purchase price of $3.00 per share for total gross proceeds of $1,005,000
      and granted a warrant to the broker to purchase, until April 3, 2009,
      26,800 common shares at a purchase price of $3.00 per share. The $167,500
      premium portion of the flow-through shares proceeds was credited to
      Flow-through Share Premium Liability. Share issue costs associated with
      this portion of the Offering amounted to approximately
      $80,400.





(o)
            On
      October 30, 2007 and November 1, 2007, the Company closed additional
      brokered private placement financings aggregating 1,450,000 common shares
      and flow through common shares for aggregate gross proceeds of $3,650,000.
      Pursuant to those private placements, the Company issued 1,400,000 common
      shares at a purchase price of $2.50 per common share for proceeds of
      $3,500,000 and 50,000 flow through common shares at a purchase price of
      $3.00 per share for proceeds of $150,000 and granted warrants to the
      broker to purchase, until April 30, 2009, 80,000 common shares at a
      purchase price of $2.50 per share and 4,000 common shares at a purchase
      price of $3.00 per share and, until May 1, 2009, 32,000 common share at a
      purchase price of $2.50 per share. The $25,000 premium portion of the
      flow-through shares proceeds was credited to Flow-through Share Premium
      Liability. Share issue costs associated with this private placement
      amounted to approximately $437,631.





(p)
            During
      the year ended December 31, 2008, the Company paid $9,595 in share issue
      costs which related to common shares issued in
  2007.





(q)
            On
      June 18, 2008, the Company closed a private placement for an aggregate of
      1,204,000 units at a price of US$2.50 per unit, for gross proceeds of
      $3,010,000 less share issue costs of $163,992 for net proceeds of
      $2,846,008. Each unit consisted of one common share and one warrant which
      entitles the holder to purchase, until June 18, 2010, one common share of
      the Company at a price per share of $3.50. In connection with 1,200,000
      shares of this private placement, an agent was granted warrants to
      purchase, until June 18, 2010, 96,000 common shares of the Company at
      $3.50 per share.





(r)
            In
      June, 2008, warrant holders converted 127,500 warrants into 127,500 common
      shares at $1.50 per share for total proceeds of
  $191,250.





(s)
            In
      July, 2008, the Company issued 2,000,000 common shares to Thunder River
      Energy Inc. (“Thunder”) pursuant to the Company’s commitment to issue to
      Thunder common shares upon the achievement of certain milestones in
      connection with properties acquired from Thunder in September, 2007. (See
      Note 14). Such shares were valued and issued at market value of $2.04 per
      share in July, 2008 and the value was added to the Company’s Canadian
      unproved properties.





The
following common shares were reserved for issuance:


WeightedEquivalent
                      
                      
                      Average
                      
                      
                      OptionExercise
                      
                      
                      Shares
                      
                      
                      Years
      to
                      
                      
                      SharesPrice ($)
                      
                      
                      Outstanding
                      
                      
                      Expiry
                      
                      
                      VestedStock
      Options (see summary below)
                      
                      $
                      1.28-$2.58
                      
                      
                      
                      1,796,666
                      
                      
                      
                      4.03
                      
                      
                      NilWarrants
      (see summary below)
                      
                      $
                      1.50-$3.50
                      
                      
                      
                      6,123,014
                      
                      
                      
                      1.80
                      
                      
                      
                      -Thunder
      Acquisition (Note 8)
                      
                      
                      
                      
                      
                      
                      9,000,000
                      
                      
                      
                      
                      
                      
                      
                      -Total
      Shares Reserved
                      
                      
                      
                      
                      
                      
                      16,919,680
                      
                      
                      
                      
                      
                      
                      
                      -





Stock Option
Plan





The
Company has a stock option plan under which it may grant options to its
directors, officers, employees and consultants for up an authorized maximum of
8,000,000 common shares at market price at the date of grant for up to a maximum
term of five years. Five year term options are exercisable equally over the
first three years of the term of the option; three year term options are
exercisable after one year. To date, no options have been
exercised.





A summary
of outstanding options under the plan is as follows:


WeightedNumber
                  
                  
                  AverageExpiry
                  
                  of
      Option
                  
                  
                  Exercise
                  
                  
                  TotalDate
                  
                  Shares
                  
                  
                  Price
                  
                  
                  ValueGranted
      to five directors and one officer October 23, 2006
                  Oct
      23/11
                  
                  
                  1,280,000
                  
                  
                  $
                  1.50
                  
                  
                  $
                  1,920,000Cancellation
      of one officer’s option
                  
                  
                  
                  (280,000
                  )
                  
                  $
                  1.50
                  
                  
                  
                  (420,000
                  )Granted
      to an employee December 1, 2006
                  Dec
      1/11
                  
                  
                  125,000
                  
                  
                  $
                  1.28
                  
                  
                  
                  160,000Granted
      to an officer January 3, 2007
                  Jan
      3/12
                  
                  
                  280,000
                  
                  
                  $
                  1.29
                  
                  
                  
                  361,200Granted
      to three senior advisors April 2, 2007
                  Apr
      2/12
                  
                  
                  300,000
                  
                  
                  $
                  1.75
                  
                  
                  
                  525,000Granted
      to a consultant December 1, 2007
                  Dec
      1/12
                  
                  
                  100,000
                  
                  
                  $
                  2.58
                  
                  
                  
                  258,000Granted
      to an employee March 24, 2008
                  Mar
      24/11
                  
                  
                  25,000
                  
                  
                  $
                  1.86
                  
                  
                  
                  46,500Cancellation
      of two senior advisors’ options
                  
                  
                  
                  (133,334
                  )
                  
                  $
                  1.75
                  
                  
                  
                  (233,333
                  )Granted
      to two consultants and two employees October 16, 2008
                  Oct
      16/11
                  
                  
                  100,000
                  
                  
                  $
                  0.69
                  
                  
                  
                  69,000Balance
      December 31, 2008
                  
                  
                  
                  1,796,666
                  
                  
                  $
                  1.50
                  
                  
                  $
                  2,686,367




38


Warrants





During
2006, 2007 and 2008, the Company, as part of certain private placement
financings, issued warrants that are exercisable in common shares of the
Company. A summary of such outstanding warrants follows:





WeightedEquivalent
                            
                            
                            AverageExercise
                            
                            Expiry
                            
                            Shares
                            
                            
                            Years
      toPrice
                            
                            Date
                            
                            Outstanding
                            
                            
                            ExpiryBalance
      December 31, 2006
                            
                            
                            $2.70-3.50
                            
                            June
      30/11
                            
                            
                            1,130,000
                            
                            
                            
                            2.50Issued
      February 20, 2007(i)
                            
                            
                            $1.50
                            
                            Feb.
      20/09
                            
                            
                            860,000
                            
                            
                            
                            .14Issued
      May 10, 2007(k)
                            
                            
                            $1.50
                            
                            May
      10/09
                            
                            
                            2,447,900
                            
                            
                            
                            .36Issued
      September 28, 2007(l)
                            
                            
                            $2.50
                            
                            Mar.
      28/09
                            
                            
                            220,480
                            
                            
                            
                            .24Issued
      September 28, 2007(l)
                            
                            
                            $3.00
                            
                            Mar.
      28/09
                            
                            
                            149,334
                            
                            
                            
                            .24Issued
      October 3, 2007(n)
                            
                            
                            $3.00
                            
                            Apr.
      3/09
                            
                            
                            26,800
                            
                            
                            
                            .25Issued
      October 30, 2007(o)
                            
                            
                            $2.50
                            
                            Apr.
      30/09
                            
                            
                            80,000
                            
                            
                            
                            .33Issued
      October 30, 2007(o)
                            
                            
                            $3.00
                            
                            Apr.
      30/09
                            
                            
                            4,000
                            
                            
                            
                            .33Issued
      November 1, 2007(o)
                            
                            
                            $2.50
                            
                            May
      1/09
                            
                            
                            32,000
                            
                            
                            
                            .33Total
      Issued in 2007
                            
                            
                            
                            
                            
                            
                            
                            3,820,514Balance
      December 31, 2007
                            
                            
                            
                            
                            
                            
                            
                            4,950,514Issued
      June 18, 2008(q)
                            
                            
                            $3.50
                            
                            Jun.
      18/10
                            
                            
                            1,300,000
                            
                            
                            
                            1.45Converted
      upon exercise (r)
                            
                            
                            $1.50
                            
                            May
      10/09
                            
                            
                            (127,500
                            )Balance
      December 31, 2008
                            
                            
                            
                            
                            
                            
                            
                            6,123,014
                            
                            
                            
                            .95








14.
STOCK-BASED COMPENSATION





Stock
Options





In
accordance with Financial Accounting Standards Board Statement (“FASB”) No.
123R, the Company uses the Black-Scholes option pricing method to determine the
fair value of each option granted and the amount is recognized as additional
expense in the statement of earnings over the vesting period of the option. The
fair value of each option granted has been estimated using the following average
assumptions:





2008
                                          
                                          
                                          2007
                                          
                                          
                                          2006Risk
      free interest rate
                                          2.96-3.05%
                                          
                                          
                                          3.65-4.57%
                                          
                                          
                                          3.74-4.11%Expected
      holding period
                                          3
      years
                                          
                                          
                                          3
      years
                                          
                                          
                                          3
      yearsShare
      price volatility
                                          75%
                                          
                                          
                                          75%
                                          
                                          
                                          75%Estimated
      annual common share dividend
                                          $
      nil
                                          
                                          
                                          $
      nil
                                          
                                          
                                          $
      nil





The fair
value of options granted during the year ended December 31, 2008 totaled $60,600
(2007 - $ 1,166,060; 2006 $ 1,082,000). The amount of share-based compensation
expense recorded during the year ended December 31, 2008 is $ 674,226 (2007 – $
643,934; 2006 - $ 69,169) and has been included in General and Administrative
Expense with a corresponding credit to additional paid in capital. The unvested
value of options expiring during the year was $349,127 (2007 and 2006 - $ Nil)
leaving a balance of the fair value of the options to be expensed in future
periods of $574,203 (2007 - $1,536,957; 2006 - $ 1,012,831) over a vesting
period of three years.








15. LOSS
PER SHARE





A
reconciliation of the numerator and denominator of basic and diluted loss per
share is provided as follows:





Year
                      
                      
                      Year
                      
                      
                      YearEnded
                      
                      
                      Ended
                      
                      
                      EndedDecember
                      
                      
                      December
                      
                      
                      December31, 2008
                      
                      
                      
                      31, 2007
                      
                      
                      
                      31, 2006Numerator:Numerator
      for basic and diluted loss per shareNet
      Loss
                      
                      $
                      2,074,649
                      
                      
                      $
                      2,571,663
                      
                      
                      $
                      2,867,374Denominator:Denominator
      for basic loss per shareWeighted
      average shares outstanding
                      
                      
                      108,323,376
                      
                      
                      
                      95,850,148
                      
                      
                      
                      81,193,240In
      the money stock options
                      
                      
                      215,813
                      
                      
                      
                      841,415
                      
                      
                      
                      -In
      the money warrants
                      
                      
                      373,584
                      
                      
                      
                      1,218,576
                      
                      
                      
                      -Contingent
      Thunder shares
                      
                      
                      2,500,000
                      
                      
                      
                      1,171,233
                      
                      
                      
                      -Denominator
      for diluted loss per shareWeighted
      average shares outstanding
                      
                      
                      111,412,772
                      
                      
                      
                      99,081,371
                      
                      
                      
                      81,193,240Basic
      and diluted loss per share
                      
                      $
                      0.02
                      
                      
                      $
                      0.03
                      
                      
                      $
                      0.04


The
weighted average number of shares outstanding for 2006 has been adjusted
retroactively for the two 2:1 stock splits that occurred in that
year.
 
 Of the
contingent shares related to the property acquisition described in note 8, only
2.5 million shares of the 9 million total contingent shares are assumed to be
issued for purposes of the 2007 diluted loss per share calculation. The 7.5
million shares relating to the significant discovery and production milestones
have been excluded because their inclusion would be
anti-dilutive.


39


16.
COMMITMENTS AND CONTINGENCIES
 
 Thunder Acquisition
Commitments
 
 On
September 28, 2007 the Company purchased from Thunder certain unproved
properties in Canada (Exploration License 413 – “EL 413”)and the United States
(New Mexico) in consideration for cash and common shares of the Company as set
out more fully in Note 7. Under the terms of the purchase agreement and an
amendment dated October 22, 2008 to the purchase agreement, the Company is
committed to issue in the future up to 9 million additional common shares of the
Company upon the achievement of certain milestones in connection with the
acquired properties, including 4 million shares to be issued as follows: 1
million shares upon the spudding of a shallow depth well (1,500 meters TD) by
June 30, 2010; 1.5 million shares upon the spudding of a medium depth well
(2,500 meters TD) before lease expiry in 2009 and 1.5 million shares upon
conversion of any part of EL 413 to a Significant Discovery Lease. If, as a
result of the Company’s exploration and development activities on the acquired
properties, reserves in place exceed 100 million barrels, then, for each excess
10 million barrels in place, 100,000 additional shares could be issued, up to a
maximum of 5 million additional shares. The purchase agreement also included a
commitment of the Company to issue 2 million shares to Thunder upon the
completion of a seismic program on the property by June 30, 2008. Such seismic
program was completed and in July, 2008, 2 million shares were issued to Thunder
(Note 13).
 
 CREEnergy Alberta Lands
Commitment
 
 As at
December 31, 2008, the Company’s, on behalf of its wholly-owned subsidiary
1438821 Alberta Ltd. (now Cougar Energy, Inc. “Cougar”), had entered into an
agreement with CREEnergy Oil & Gas Inc. under which agreement the Company
has committed to exclusivity rights payments aggregating Cdn. $1,000,000, of
which $300,000 had been paid as at December 31, 2008 and $225,000 subsequent to
December 31, 2008. See Note 21.
 
 Canadian Flow-through Share
Commitments
 
 In
September and October, 2007, 2,251,670 flow-through common shares were sold at a
purchase price of $3.00 for gross proceeds of $6,755,010 and on the basis that
the Company would provide the investors a Canadian tax flow through deduction.
In order to provide such flow through share tax deduction benefits to the
investors, the Company committed to expend the proceeds on eligible capital
expenditures in Canada prior to December 31, 2008 and renounce such expenditures
to the flow through share investors. In January, 2008, these expenditures were
renounced effective December 31, 2007 and expenditures of $5,875,088 (2007 -
$879,922) were incurred during the year.
 
 Vehicle Lease
Commitments
 
 As of
December 31, 2008 and 2007, the Company had the following vehicle lease
commitments for the years shown:


December
                        
                        
                        
                        December31, 2008
                        
                        
                        
                        31, 2007Amounts
      payable in:2008
                        
                        $
                        -
                        
                        
                        $
                        34,5092009
                        
                        
                        26,099
                        
                        
                        
                        13,4112010
                        
                        
                        23,856
                        
                        
                        
                        11,1672011
                        
                        
                        3,172
                        
                        
                        
                        -






17.
FINANCIAL INSTRUMENTS





The
Company, as part of its operations, carries a number of financial instruments.
It is management’s opinion that the Company is not exposed to significant
interest, credit or currency risks arising from these financial instruments
except as otherwise disclosed.





The
Company’s financial instruments, including cash and short term deposits,
accounts receivable, accounts payable and accrued liabilities are carried at
values that approximate their fair values due to their relatively short maturity
periods.








18.
RELATED PARTY TRANSACTIONS





During
the year ended December 31, 2006, the Company paid $61,087 (2005 - $131,156) to
companies which, at that time, beneficially owned 9.3% (2005 – 9.1%) of the
Company for investor relations services. Of this amount, investor relations
services in the amount of $61,087 are included in Administrative
Expenses.





During
the year ended December 31, 2006, the Company issued 2,000,000 common shares of
the Company in consideration for corporate development services rendered to the
Company by an individual, who beneficially owned 9.3% of the Company. The shares
were valued at market price of $.05 per share and were recorded as General and
Administrative Expense and an addition to Additional Paid in
Capital.





For the
year ended December 31, 2008, the Company paid $ Nil (2007 - $108,624; 2006 -
$83,259) to Sicamous Oil & Gas Consultants Ltd. (“Sicamous”), a company
owned by the current Chief Executive Officer, President & Chief Operating
Officer of the Company for consulting services rendered to the Company. These
amounts were charged to General and Administrative Expense. As at December 31,
2008, there was a note payable to Sicamous for $32,841 (2007 - $Nil). See Note
9.





For the
year ended December 31, 2008, the Company paid $ Nil (2007 - $51,125; 2006 -
$53,247) to MHC Corp., a company owned by the former Chief Executive Officer of
the Company for consulting services rendered to the Company. These amounts were
charged to General and Administrative Expense. As of December 1, 2007, this
individual resigned as Chief Executive Officer.


40


For the
year ended December 31, 2008, the Company paid $113,481 (2007 - $86,550; 2006 -
$ nil) to Harbour Oilfield Consulting Ltd., a company owned by the Vice
President – Operations of the Company for consulting services rendered to the
Company, of which amount $8,621 was payable as at December 31, 2008 (December
31, 2007 - $Nil). Of these amounts $49,118 (2007 - $27,378; 2006 - $ nil) was
capitalized to Unproved Oil and Gas Properties and $64,363 (2007 - $59,172; 2006
- $ nil) was charged to General and Administrative Expense





For the
year ended December 31, 2008, the Company paid $171,376 (2007 - $128,711; 2006 -
$ nil) to the current Chief Financial Officer of the Company for services
rendered to the Company, of which amount $6,524 was payable as at December 31,
2008 (December 31, 2007 - $Nil). These amounts were charged to General and
Administrative Expense.





For the
year ended December 31, 2006, the Company paid $29,508 to the prior Chief
Financial Officer of the Company for services rendered by her.





These
related party transactions were in the normal course of business and agreed to
by the related parties and the Company based on negotiations and Board approval
and accordingly have been measured at the exchange amounts.





As at
December 31, 2008, 2007 and 2006, no other amounts were owing to any related
parties for services rendered.





19.
SEGMENTED INFORMATION





The
Company’s two geographical segments are the United States and Canada. Both
segments use accounting policies that are
identical to those used in the consolidated financial statements. The Company’s
geographical segmented  information
is as follows:


Year Ended December 31,
2008U. S.
                                  
                                  
                                  Canada
                                  
                                  
                                  TotalIncome
      during the Evaluation Period
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  1,065
                                  
                                  
                                  
                                  1,065Net
      Loss
                                  
                                  
                                  (490,044
                                  )
                                  
                                  
                                  (1,584,605
                                  )
                                  
                                  
                                  (2,074,649
                                  )Capital
      Assets
                                  
                                  
                                  11,250,589
                                  
                                  
                                  
                                  25,384,344
                                  
                                  
                                  
                                  36,634,932Total
      Assets
                                  
                                  
                                  9,861,161
                                  
                                  
                                  
                                  24,190,538
                                  
                                  
                                  
                                  37,171,397Capital
      Expenditures
                                  
                                  
                                  3,270,212
                                  
                                  
                                  
                                  11,159,779
                                  
                                  
                                  
                                  14,429,991Year Ended December 31,
2007U. S.
                                  
                                  
                                  Canada
                                  
                                  
                                  TotalIncome
      during the Evaluation Period
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  225
                                  
                                  
                                  
                                  225Net
      Loss
                                  
                                  
                                  (57,193
                                  )
                                  
                                  
                                  (2,514,470
                                  )
                                  
                                  
                                  (2,571,663
                                  )Capital
      Assets
                                  
                                  
                                  8,423,346
                                  
                                  
                                  
                                  19,119,659
                                  
                                  
                                  
                                  27,543,005Total
      Assets
                                  
                                  
                                  8,949,538
                                  
                                  
                                  
                                  29,241,230
                                  
                                  
                                  
                                  38,190,768Capital
      Expenditures
                                  
                                  
                                  7,858,511
                                  
                                  
                                  
                                  18,519,418
                                  
                                  
                                  
                                  26,377,929Year Ended December 31,
2006U. S.
                                  
                                  
                                  Canada
                                  
                                  
                                  TotalIncome
      during the Evaluation Period
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  27,134
                                  
                                  
                                  
                                  27,134Net
      Loss
                                  
                                  
                                  (20,668
                                  )
                                  
                                  
                                  (2,846,706
                                  )
                                  
                                  
                                  (2,867,374
                                  )Capital
      Assets
                                  
                                  
                                  564,835
                                  
                                  
                                  
                                  761,221
                                  
                                  
                                  
                                  1,326,056Total
      Assets
                                  
                                  
                                  650,953
                                  
                                  
                                  
                                  2,056,122
                                  
                                  
                                  
                                  2,707,075Capital
      Expenditures
                                  
                                  
                                  432,835
                                  
                                  
                                  
                                  2,002,915
                                  
                                  
                                  
                                  2,435,750








20.
CHANGES IN NON-CASH WORKING CAPITAL


CumulativeSinceInceptionYear
                                                    
                                                    
                                                    Year
                                                    
                                                    
                                                    Year
                                                    
                                                    
                                                    April
      7,Ended
                                                    
                                                    
                                                    Ended
                                                    
                                                    
                                                    Ended
                                                    
                                                    
                                                    2004
      toDec.
      31,
                                                    
                                                    
                                                    Dec.
      31,
                                                    
                                                    
                                                    Dec.
      31,
                                                    
                                                    
                                                    Dec.
      31,2008
                                                    
                                                    
                                                    2007
                                                    
                                                    
                                                    2006
                                                    
                                                    
                                                    2008Operating
      Activities:Accounts
      Receivable
                                                    
                                                    $
                                                    620,554
                                                    
                                                    
                                                    
                                                    (650,850
                                                    )
                                                    
                                                    
                                                    (20,483
                                                    )
                                                    
                                                    
                                                    (63,132
                                                    )Prepaid
      Expenses and Deposits
                                                    
                                                    
                                                    (17,251
                                                    )
                                                    
                                                    
                                                    (49,613
                                                    )
                                                    
                                                    
                                                    9,955
                                                    
                                                    
                                                    
                                                    (114,759
                                                    )Accounts
      Payable
                                                    
                                                    
                                                    147,886
                                                    
                                                    
                                                    
                                                    11,471
                                                    
                                                    
                                                    
                                                    91,852
                                                    
                                                    
                                                    
                                                    272,762Accrued
      Liabilities
                                                    
                                                    
                                                    20,848
                                                    
                                                    
                                                    
                                                    28,891
                                                    
                                                    
                                                    
                                                    (36,395
                                                    )
                                                    
                                                    
                                                    122,843Other
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    25,000Total
                                                    
                                                    $
                                                    772,037
                                                    
                                                    
                                                    
                                                    (660,101
                                                    )
                                                    
                                                    
                                                    44,929
                                                    
                                                    
                                                    
                                                    242,714Investing
      Activities:The
      total changes in investing activities non-cash working capital accounts,
      which is detailed below, pertains to capital asset additions and has been
      included in that caption in the Statement of Cash Flow:Accounts
      Receivable
                                                    
                                                    $
                                                    529,374
                                                    
                                                    
                                                    
                                                    122,572
                                                    
                                                    
                                                    
                                                    (653,129
                                                    )
                                                    
                                                    
                                                    (1,193
                                                    )Prepaid
      Expenses and Deposits
                                                    
                                                    
                                                    1,664
                                                    
                                                    
                                                    
                                                    155,976
                                                    
                                                    
                                                    
                                                    (138,943
                                                    )
                                                    
                                                    
                                                    18,697Accounts
      Payable
                                                    
                                                    
                                                    (638,152
                                                    )
                                                    
                                                    
                                                    867,152
                                                    
                                                    
                                                    
                                                    441,778
                                                    
                                                    
                                                    
                                                    670,778Accrued
      Liabilities
                                                    
                                                    
                                                    (433,288
                                                    )
                                                    
                                                    
                                                    232,542
                                                    
                                                    
                                                    
                                                    200,746
                                                    
                                                    
                                                    
                                                    -Total
                                                    
                                                    
                                                    (540,402
                                                    )
                                                    
                                                    
                                                    1,378,242
                                                    
                                                    
                                                    
                                                    (149,558
                                                    )
                                                    
                                                    
                                                    688,282Financing
      Activities:The
      total changes in financing activities non-cash working capital accounts,
      which is detailed below, pertains to shares issued and issuable and has
      been included in that caption in the Statement of Cash
    Flow:Prepaid
      Expenses and Deposits
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (10,000
                                                    )Accounts
      Payable
                                                    
                                                    
                                                    (72,417
                                                    )
                                                    
                                                    
                                                    83,396
                                                    
                                                    
                                                    
                                                    30,072
                                                    
                                                    
                                                    
                                                    41,051Accrued
      Liabilities
                                                    
                                                    
                                                    (220,000
                                                    )
                                                    
                                                    
                                                    220,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Note
      Payable to Related Party
                                                    
                                                    
                                                    32,841
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    32,841Flow-through
      Share Premium Liability
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    1,125,835
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    1,125,835Convertible
      Debt
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (41,189
                                                    )
                                                    
                                                    
                                                    -Total
                                                    
                                                    $
                                                    (259,576
                                                    )
                                                    
                                                    
                                                    1,429,231
                                                    
                                                    
                                                    
                                                    (11,117
                                                    )
                                                    
                                                    
                                                    1,449,303


41





21.
SUBSEQUENT EVENT





Cougar Energy,
Inc.





In
November, 2008, the Company incorporated, under the laws of the Province of
Alberta, a new wholly-owned subsidiary, 1438821 Alberta Ltd. In February, 2009,
1438821 Alberta Ltd. changed its name to Cougar Energy, Inc. (“Cougar”). In
January, 2009, the Company vended its interests in its
CREEnergy Alberta Lands and its Lucy, B.C. property into Cougar (the
“Cougar Properties”) for common shares of Cougar. At the same time, Cougar
initiated private placement financing activities to raise funds to carry out
planned work programs on the Cougar Properties. As of March 23, 2009, Cougar has
raised approximately $500,000. As a result of these Cougar financings, the
Company’s interest in Cougar has been reduced to approximately 94%.








ITEM 9.
CONTROLS AND PROCEDURES





Our Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report.
They concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were not adequate and effective in ensuring
that material information relating to the Company would be made known to them by
others within those entities, particularly during the period in which this
report was being prepared.




Management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and in reaching a reasonable level of assurance, management
necessarily is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.





MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f)).
Under the supervision and with the participation of our management, including
our principal executive officer (CEO) and principal financial officer (CFO), we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. A material
weakness is a control deficiency, or combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement of the
financial statements will not be prevented or detected. Management identified
the following material weaknesses during its assessment of our internal control
over financial reporting as at December 31, 2008 and December 31,
2007.





Segregation
of Duties and Access to Critical Accounting Systems





As at
December 31, 2008 and December 31, 2007, management believes the Company’s
Internal Control over Financial Reporting did not meet the definition of
adequate control, based on criteria established by Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Management identified a material weakness relating the
segregation of duties among certain personnel who had incompatible
responsibilities within all significant processes affecting financial reporting.
We also had a material weakness resulting from our failure to implement controls
to restrict access to financially significant systems or to monitor access to
those systems, which resulted in conflicting access and/or inappropriate
segregation of duties. These material weaknesses affect all significant
accounts. In addition, the 2007 restatement issues discussed below demonstrated
a need to engage additional personnel or outside consulting assistance to ensure
the proper accounting for non-routine accounting transactions and adherence to
US GAAP, to assist in income tax planning and compliance and a review of our
Canadian and U. S. income tax provisions. As a result of these material
weaknesses, management has concluded that internal control over financial
reporting was not effective as at December 31, 2008 and December 31,
2007.





2007
Restatement





During
the process of preparing this Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 2008, it was determined that it may be necessary to restate
our consolidated financial statements for the Fiscal Quarter Ended September 30,
2007 and the Fiscal Year Ended December 31, 2007. The restatements would be
required to correct for an error in measurement and an error in the application
of U.S. generally accepted accounting principles (“US GAAP”) in recording two
September, 2007 transactions as described in Note 2 to our unaudited
consolidated financial statements.




After
discussing these matters with other management, the CFO recommended to the Audit
Committee that previously reported financial results be restated to reflect
correction of these errors. The Audit Committee agreed with this recommendation.
Pursuant to the recommendation of the Audit Committee, the Board of Directors
determined at its meeting on March 13, 2009, that previously reported results
for the Company be restated. On March 27, 2009, amended consolidated financial
statements for the above noted periods were filed.


42





These
errors resulted from the Company not seeking appropriate external advice
regarding the recording of certain transactions that were complex and not
subject to routine accounting principles. One error was in measuring the
appropriate date at which common shares of the Company were issued in
consideration for the acquisition of unproved oil and gas properties, an arm’s
length transaction that was negotiated over a period of several months during
2007 but not finally closed until September 28, 2007, at which date the common
shares were issued. The second error was in the application of US GAAP in the
accounting for the complexities involved relating to premium proceeds received
on the issue of Canadian flow-through shares, a Canadian income tax concept not
in practice in the United States. These errors demonstrated a material weakness
relating to the segregation of duties among financial and accounting personnel
and a need to engage additional personnel or seek outside advice where
appropriate to strengthen internal controls over financial
reporting.





Our
management has discussed the material weaknesses described above and other
deficiencies with our Audit Committee and we have documented this assessment and
made this assessment available to our independent registered Chartered
Accountants. We recognize that all internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.





Our
management’s assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2008, has been audited by Meyers Norris
Penny LLP, independent registered Chartered Accountants, as stated in their
report which is on page 21 of this Form 10-K. Meyers Norris Penny LLP also
audited our Financial Statements as stated in their report which is on
page 23 of this Form 10-K.





Remediation
of Material Weakness in Internal Control





During
December, 2006 and the first half of 2007, the company hired a Controller, a new
CFO and a Vice-President Operations and additional qualified personnel. The new
staff and existing management have implemented new procedures and controls for
many areas of the Company’s activities. During 2007, the Company initiated a
review of its corporate policies and procedures with the assistance of an
outside consulting firm, with a goal of having the Company become fully SOX
compliant by year end 2007. Additional policies and procedures have been
implemented and others strengthened. Testing of such policies and procedures was
completed in late 2007 and early 2008. In addition, the Company will endeavor to
engage outside consulting assistance to ensure the proper accounting for
non-routine accounting transactions and adherence to US GAAP. Beginning in 2008,
the Company engaged an outside consulting firm to assist in income tax planning
and compliance and beginning with our fiscal year ended December 31, 2008, to
review our Canadian and U.S. income tax provisions.





As at
December 31, 2008, the Company continues to have a material weakness relating to
the segregation of duties among certain personnel and as of that date,
management believes that without engaging additional personnel, estimated to
cost a minimum of approximately $150,000 per annum, we cannot remedy such
material weakness. Management believes such expenditures cannot be justified at
this time when the Company is still in the exploratory stage of operations and
has no proved reserves, production or cash flow. When sufficient cash flow is
being generated, management will review its position. Management believes its
controls and procedures related to its financial and corporate information
systems are appropriate for a company of its size and mandate and due to its
internal expertise, it is not dependent upon the inherent risks in external
third party management of such systems.




CHANGES
IN INTERNAL CONTROLS




During
2007, the Company initiated a review of its corporate policies and procedures
with the assistance of an outside consulting firm, with a goal of having the
Company become fully SOX compliant by year end 2007. Additional policies and
procedures have been implemented and others strengthened. Testing of such
policies and procedures was completed in late 2007 and early 2008. Management
believes these improvements in our overall internal control, when combined with
the remediation discussed above, will strengthen the Company’s internal controls
over financial reporting.






ITEM 9B.
OTHER INFORMATION





None.








PART
III





ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;


COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT





B.      Directors
and Executive Officers





Name
                        
                        Age
                        
                        TitleWilliam
      Tighe
                        
                        57
                        
                        Chairman
      of the Board, CEO, COO and PresidentPeter
      Schriber
                        
                        66
                        
                        DirectorGlenn
      Watt
                        
                        33
                        
                        Vice
      President Operations and DirectorLeslie
      Owens
                        
                        44
                        
                        DirectorGordon
      Taylor
                        
                        60
                        
                        DirectorGreg
      Juneau
                        
                        41
                        
                        DirectorWilliam
      Brimacombe
                        
                        65
                        
                        Chief
      Financial
Officer


43





Mr.
William Tighe has held the positions of Chief Operating Officer, President and
Director of the Company since September, 2005 and Chief Executive Officer of the
Company since December, 2007. Mr. Tighe has also been Chairman of the Board
since December 3, 2008. Since 2005, Mr. Tighe has focused on developing Kodiak’s
business interests. His past experience includes approximately thirty years in
management, operations, maintenance, and more recently major/minor projects for
both canadian and other international energy companies. These positions were in
a variety of field settings from the heavy oil industry, sour gas/liquids plants
in Alberta and British Columbia and the sub-arctic in Canada, to design offices,
construction, C&SU and operation of large gas/liquids processing operations
in southeast Asia. Since 2004, Mr. Tighe has worked for Suncor Energy Ltd. as a
Business Services Manager, Growth Planning and Development. From 2000 until 2004
Mr. Tighe worked for Petro China International as Operations Development and
Commissioning Manager. Prior to that, Mr. Tighe had extensive experience both in
Alberta and internationally in the oil and gas industry. Mr. Tighe attended the
University of Calgary where he studied general science and computer science. He
holds an Interprovincial Power Engineering Certification II Class.


Mr. Peter
Schriber has been a director of the company since November 28, 2005. Mr.
Schriber is currently an independent financial consultant. Mr. Schriber is
active in mergers and acquisitions as well as debt and equity financing for
private and public companies. Prior to 1999, Mr. Schriber was a director and
partner of a Vancouver based brokerage firm. Prior to that Mr. Schriber was a
Vice President and Manager of Corporate Lending with the canadian division of a
Swiss Bank. Mr. Schriber has a degree in Commerce from a Swiss Institution
and he graduated as a Fellow of the Institute of Canadian Bankers. Mr.
Schriber is also a member of the Canadian Bankers Association.


Mr. Glenn
Watt has been a director of the company since November 28, 2005 and Vice
President Operations of the Company since April, 2007. Prior to joining Kodiak,
Mr Watt has worked primarily in the
Western Canadian Sedimentary Basin and from May, 2003 to March,
2007, was drilling and completions superintendent for a large canadian oil and
gas royalty trust. Prior to that, he worked for a major oil & gas company as
a completions superintendent. He has additional field experience working on
drilling rigs in Alberta and British Columbia. Mr. Watt has an honors diploma in
Petroleum Engineering Technology from the Northern Alberta Institute of
Technology and a Bachelor of Applied Petroleum Engineering Technology Degree
from the Southern Alberta Institute of Technology.




Mr.
Leslie Owens has been a director of the Company since December 3, 2008 and has
more than twenty-five years of oil and gas experience primarily in completions
and production services. He is currently General Manager at Canadian Sub-Surface
Energy Services, a provider of cased-hole completion, production and evaluation
services. From October 2001 to April 2008, Mr. Owens was in management positions
with Ultraline Services Corp., a provider of wireline services and from October
1999 to October 2001, he was in sales with Plains Perforating Ltd., a provider
of perforating services. Prior to then, his experience was with various oil and
gas service companies, in positions progressing from sales to senior
management.




Mr.
Gordon Taylor has been a director of the Company since February 27, 2009. 
Mr. Taylor is a Calgary-based businessman with over 16 years of financial
experience in mortgages, investments, real estate acquisition, and
development.  He is the founder and president of Liberty Mortgage Services
Ltd. and since 1996 to present has specialized in syndicated mortgages. 
From 1992 to present, he is also founder and president of Tach Investments Ltd.,
a private investment company.  Prior to 1992, Mr. Taylor was with Alberta
Opportunity Company for over 18 years, with 15 years as Branch Manager,
financing small to medium sized businesses in the province of
Alberta.




Mr. Greg
Juneau has been a director of the Company since February 27, 2009.  Mr.
Juneau is a Calgary-based professional engineer with over 19 years of oil and
gas experience as a project engineer and manager.  His areas of expertise
include engineering, procurement and construction management of surface
facilities.  From 2000 to present, Mr. Juneau is the president and
engineering manager at Segment Engineering Ltd.  He coordinates full
discipline engineering, procurement, construction and management (EPCM) projects
consisting of oil and gas well sites, gathering systems, transmission pipelines,
pump stations, satellites, batteries, compression and gas plants within British
Columbia, Alberta and Saskatchewan.  Mr. Juneau graduated from the
University of Alberta in 1990 with a Bachelor of Science Degree in Mechanical
Engineering and is a member of the Association of Professional Engineers,
Geologists and Geophysicists of Alberta (APEGGA), and Association of
Professional Engineers and Geoscientists of BC (APEGofBC).


Mr.
William E. Brimacombe is a canadian Chartered Accountant and since January, 2007
has been Chief Financial Officer of the Company. From 2000 to 2006, Mr.
Brimacombe was Vice-President Finance of AltaCanada Energy Corp., a publicly
traded Canadian oil and gas company. Prior thereto, Mr. Brimacombe has over
thirty years financial experience working for a number of public and private oil
and gas companies with operations in Canada, the United States and other
countries, including experience as an independent financial consultant during
the years 1988 to 2000. During 2009, Mr. Brimacombe will become a Life member of
the Institute of Chartered Accountants of Alberta with forty years membership in
that organization.




During
the last five years, no officer or director of the Company has been involved in
any legal, bankruptcy or criminal proceedings or violated any federal, state or
provincial securities or commodities laws or engaged in any activity that would
limit their involvement in any type of business, including securities or banking
activities.





COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT





Section
16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who own more than 10% of the outstanding shares of the
Company's Common Stock, to file initial reports of beneficial ownership and
reports of changes in beneficial ownership of shares of Common Stock with the
Commission. Such persons are required by Commission regulations to furnish the
Company with copies of all Section 16(a) forms they file.





Based
solely upon a review of Forms 3 and 4 and amendments thereto furnished to the
Company during the year ended December 31, 2008, and upon a review of Forms 5
and amendments thereto furnished to the Company with respect to the year ended
December 31, 2008, or upon written representations received by the Company from
certain reporting persons that no Forms 5 were required for those
persons.





AUDIT
COMMITTEE AND FINANCIAL EXPERT





During
the year end December 31, 2008, the audit committee met five times. The audit
committee’s role is financial oversight. Our management is responsible for the
preparation of our financial statements and our independent registered public
accounting firm is responsible for auditing those financial statements. The
audit committee is not providing any special assurance as to our financial
statements or any professional certification as to the registered independent
accounting firm’s work





The audit
committee is directly responsible for the appointment, compensation, retention
and oversight of Kodiak’s independent registered accounting firm. The committee,
among other things, also reviews and discusses Kodiak’s audited financial
statements with management.





Our audit
committee is comprised of three directors: Peter Schriber and Gordon Taylor, who
are independent and Glenn Watt. Our board has determined Peter Schriber, our
Audit Committee Chairman, qualifies as an “audit committee financial expert”
within the definition established by the SEC and he is an independent
director.


44





CODE OF
ETHICS





A code of
ethics relates to written standards that are reasonably designed to deter
wrongdoing and to promote:


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


2)   Full,
fair, accurate, timely and understandable disclosure in reports and documents
that are filed with, or submitted to the Securities and Exchange Commission and
in other public communications made by the Company.


3)   Compliance
with applicable government laws, rules and regulations


4)   The
prompt internal reporting of violations of the code to an appropriate person or
persons identified in the code; and


5)   Accountability
for adherence to the code.





In
October, 2007, the Company adopted a formal code of business conduct. The board
of directors evaluated the business of the Company and its personnel and has
determined that its business operations are operated by a growing number of
persons, some of who are also officers, directors and employees of the Company
and others who are independent contractors. Although general rules of fiduciary
duty and federal, state and provincial criminal, business conduct and securities
laws are adequate ethical guidelines, a formal written code of business conduct
would provide additional ethical standards of conduct to which the Company’s
personnel should comply.








ITEM 11.
EXECUTIVE COMPENSATION.





COMPENSATION
OF EXECUTIVE OFFICERS




The
following table summarizes compensation of our Chief Executive Officer &
President, Chief Financial Officer, and Vice President Operations for the fiscal
year ended December 31, 2008.




Summary
Compensation Table


Change
      inPensionValue
      andNonqualifiedNon-Equity
                            
                            
                            DeferredStock
                            
                            
                            Option
                            
                            
                            Incentive
      Plan
                            
                            
                            Compensation
                            
                            
                            All
      OtherName and Principal Position
                            
                            Year
                            
                            
                            Salary
                            
                            
                            Awards
                            
                            
                            Awards(4)
                            
                            
                            Compensation
                            
                            
                            Earnings
                            
                            
                            Compensation
                            
                            
                            TotalF .William
      S. Tighe, CEO, President and COO (1)
                            
                            
                            2008
                            
                            
                            $
                            113,495
                            
                            
                            $
                            0
                            
                            
                            $
                            72,464
                            
                            
                            $
                            0
                            
                            
                            $
                            0
                            
                            
                            $
                            0
                            
                            
                            $
                            185,959R.William
      E. Brimacombe , CFO (2)
                            
                            
                            2008
                            
                            
                            $
                            171,376
                            
                            
                            $
                            0
                            
                            
                            $
                            67,666
                            
                            
                            $
                            0
                            
                            
                            $
                            0
                            
                            
                            $
                            0
                            
                            
                            $
                            239,042Glenn
      Watt, Vice President Operations (3)
                            
                            
                            2008
                            
                            
                            $
                            113,481
                            
                            
                            $
                            0
                            
                            
                            $
                            72,464
                            
                            
                            $
                            0
                            
                            
                            $
                            0
                            
                            
                            $
                            0
                            
                            
                            $
                            185,945





1)
            Mr
      Tighe’s compensation was directly to him as a salaried employee for
      2008.


2)
            Mr.
      Brimacombe’s compensation was paid directly to him for services rendered
      by him as Chief Financial Officer of the Company for
  2008.


3)
            Mr.
      Watt’s compensation was paid to Harbour Oilfield Consulting Ltd., a
      company owned by Mr. Watt for services rendered by him as Vice President
      Operations of the Company, for
2008.


4)
            This
      is the estimated 2008 cost of stock options granted based on the
      Black-Scholes valuation method.





Outstanding
Equity Awards at Fiscal Year-End




Option
      Awards
                        
                        Stock
      AwardsEquityIncentiveEquity
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        Equity
                        
                        
                        Plan
      Awards:Incentive
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        Incentive
                        
                        
                        MarketPlan
      Awards:
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        Plan
      Awards:
                        
                        
                        or
      PayoutNumber
      of
                        
                        
                        Number
      of
                        
                        
                        Number
                        
                        
                        
                        
                        
                        
                        
                        Number
      of
                        
                        
                        
                        
                        Number
                        
                        
                        Value
      ofSecurities
                        
                        
                        Securities
                        
                        
                        of
      Securities
                        
                        
                        
                        
                        
                        
                        
                        Shares
      or
                        
                        
                        
                        
                        of
      Unearned
                        
                        
                        Unearned
      Shares,Underlying
                        
                        
                        Underlying
                        
                        
                        Underlying
                        
                        
                        
                        
                        
                        
                        
                        Units
      of
                        
                        Market
      Value of
                        
                        
                        Shares,
                        
                        
                        Units
      or OtherUnexercised
                        
                        
                        Unexercised
                        
                        
                        Unexercised
                        
                        
                        Option
                        
                        
                        Option
                        
                        Stock
      that
                        
                        Shares
      or Units of
                        
                        
                        Units
      or other
                        
                        
                        Rights
      thatOptions
                        
                        
                        Options
                        
                        
                        Unearned
                        
                        
                        Exercise
                        
                        
                        Expiration
                        
                        have
                        
                        Stock
      that have not
                        
                        
                        Rights
      that have
                        
                        
                        HaveName
                        
                        Exercisable
                        
                        
                        Unexercisable
                        
                        
                        Options
                        
                        
                        Price
                        
                        
                        Date
                        
                        not
      Vested
                        
                        Vested(1)
                        
                        
                        not
      Vested
                        
                        
                        not
      VestedF.
      William S. Tighe
                        
                        
                        133,333
                        
                        
                        
                        66,667
                        (1)
                        
                        
                        -
                        
                        
                        $
                        1.50
                        
                        
                        
                        10/23/11
                        
                        0
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0Glenn
      Watt
                        
                        
                        133,333
                        
                        
                        
                        66,667
                        (1)
                        
                        
                        -
                        
                        
                        $
                        1.50
                        
                        
                        
                        10/23/11
                        
                        0
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0William
      E. Brimacombe
                        
                        
                        93,333
                        
                        
                        
                        186,667
                        (2)
                        
                        
                        -
                        
                        
                        $
                        1.29
                        
                        
                        
                        1/3/12
                        
                        0
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0


1)
            Unexercised
      options vest 66,667 on Oct 23/09.


2)
            Unexercised
      options vest 93,333 on Jan 03/09 and 93,334 on Jan
  3/10.




45


COMPENSATION
DISCUSSION AND ANALYSIS





Overview of Compensation
Program and Philosophy





The
Company has three executive officers, two of whom are the Company’s directors.
 The Board of Directors serves as the Company’s compensation committee,
initiates and approves most compensation decisions.  Annual bonuses for
executives are determined by the Board of Directors.





The goal
of the compensation program is to adequately reward the efforts and achievements
of executive officers for the management of the Company.  The Company has
no pension plan and no deferred compensation arrangements. The Company has not
used a compensation consultant in any capacity.





We have a
formal employment contract with Mr. William Tighe and formal consulting
contracts with Mr. Glenn Watt and Mr. William Brimacombe or their consulting
companies. During 2008, Mr. William Tighe was paid Cdn $10,000 per month. During
2008, Harbour Oilfield Consulting Ltd., a company owned by Mr. Watt, was paid
$Cdn $10,000 per month. During 2008, Mr. William Brimacombe was paid Cdn. $110
per hour, a monthly vehicle allowance of Cdn. $800 and a bonus of Cdn. $15,000.
No options were granted to executive officers during 2008.





Compensation of
Directors





Directors
of the corporation are not paid any cash compensation. We reimburse each of our
directors for reasonable out-of-pocket expenses that they incur in connection
with attending board or committee meetings.





On
January 4, 2006, the Company adopted a stock-based compensation plan, under
which each director of Kodiak would receive 120,000 options upon becoming a
director and an additional 80,000 options in the second year and 200,000 options
in the third year for each year or part of a year served as a director. On July
19, 2006 the stock option plan was approved by the shareholders of the Company.
On October 23, 2006, options granted to directors were adjusted to 200,000
shares per director. The exercise price of such options is the market price per
share on the date of grant.





No stock
options were granted to any directors during 2008. No named directors or
executive officers exercised any stock options during fiscal 2008, 2007 or
2006.





DIRECTOR
COMPENSATION TABLE




The table
below summarizes the compensation paid by us to our non-employee directors
during the year ended December 31, 2008.




Changein
      PensionValue
      andNonqualifiedNon-Equity
                  
                  
                  DeferredFees
      Earned or
                  
                  
                  Stock
                  
                  
                  Option
                  
                  
                  Incentive
      Plan
                  
                  
                  Compensation
                  
                  
                  All
      OtherName
                  
                  Paid
      in Cash
                  
                  
                  Awards(1)
                  
                  
                  Awards(2)
                  
                  
                  Compensation
                  
                  
                  Earnings
                  
                  
                  Compensation
                  
                  
                  TotalMarvin
      Jones(3)
                  
                  $
                  0
                  
                  
                  $
                  N/A
                  
                  
                  $
                  72,464
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  $
                  0
                  
                  
                  $
                  72,464Peter
      Schriber
                  
                  $
                  0
                  
                  
                  $
                  N/A
                  
                  
                  $
                  72,464
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  $
                  0
                  
                  
                  $
                  72,464





(1)
            No
      stock awards were made during 2007, 2006 or
  2005.


(2)
              This
      is the estimated 2008 cost of stock options granted October 23, 2006 based
      on the Black-Scholes valuation method.(3)
              Mr.
      Jones resigned as a director effective February 27,
  2009.








ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





The
following table sets forth, as of the date of this report, information relating
to the beneficial ownership of our common stock by those persons known to us to
beneficially own more than 5% of our capital stock, by each of our directors,
proposed directors and executive officers, and by all of our directors, proposed
directors and executive officers as a group. The address of each person is set
out in the footnotes to the table.





Name
      of Beneficial Owner
                  
                  Number
      of
                  
                  
                  Percent
      ofor Director
                  
                  Shares of Class
                  
                  
                  Class (1)Mark
      Hlady, (2)
                  
                  
                  1,785,000
                  
                  
                  
                  1.62
                  %William
      Tighe (3)
                  
                  
                  12,644,000
                  
                  
                  
                  11.49
                  %Glenn
      Watt (4)
                  
                  
                  9,012,000
                  
                  
                  
                  8.19
                  %Peter
      Schriber (5)
                  
                  
                  3,000,000
                  
                  
                  
                  2.7381Marvin
      Jones (6)
                  
                  
                  180,000
                  
                  
                  
                  *William
      Brimacombe (7)
                  
                  
                  200,000
                  
                  
                  
                  *All
      directors and executive officers as a group (six persons)
                  
                  
                  26,821,000
                  
                  
                  
                  24.38
                  %





* Less
than 1%


(1) Based
on 110,023,998 common shares outstanding as at December 31, 2008 and as at the
date of this report.


(2)
Shares held directly by Mr. Hlady, a director of the Company, whose address is
1420 9th St.
N.W., Calgary, AB. T2M 3L2.  Mr. Hlady resigned as Chairman and director
effective December 3, 2008.


(3)
Including 19,000 shares held directly by Mr. Tighe and 12,625,000 shares held by
Sicamous Oil and Gas Consultants Ltd. (‘Sicamous”), a company owned by Mr.
Tighe, a director and CEO, COO and President of the Company and his wife Dianne
Tighe. The address for Mr. Tighe and Sicamous Oil and Gas Consultants Ltd. is
245 Citadel Way N.W., Calgary, AB, T3G 4W8.


(4)
Including 6,012,000 shares held directly by Mr. Watt, a director and Vice
President-Operations of the Company and 3,000,000 shares held by 697580 Alberta
Ltd., a company wholly-owned by Kathleen, Jana and Ryan Tighe and of which Mr.
Watt is the sole officer and director. The address for Mr. Watt and 697580
Alberta Ltd. is 3405 15th St.
S.W., Calgary, AB, T2T 5X3.


(5)
Shares held directly by Peter Schriber, a director of the Company, whose address
is Gotthardstrase 38, ch-8002 Zurich, Switzerland.


(6)
Shares held directly by Marvin Jones, a director of the Company, whose address
is #4, 1901 Varsity Estates Drive N. W., Calgary, AB T3B 4T7.  Mr. Jones
resigned as a director effective February 27, 2009.


(7)
Shares held directly by William Brimacombe, CFO of the Company, whose address is
68 Arbour Wood Close N.W., Calgary, AB T3G 4A8.


46





ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.





A former
officer-director acquired 150,000 shares, post split, of the common share
capital issued at the emergence from bankruptcy on April 7, 2004, for
$25,000.





Officers
and Directors of the Company purchased 10,200,000 common shares of the Company
on December 22, 2005 at $0.02 per share for $204,000. These shares were not
issued by the transfer agent until January 13, 2006 and were reflected in
shareholders’ equity as part of the caption “Shares to be Issued” at December
31, 2005.


A
director of the Company purchased 50,000 shares of the common capital stock of
the Company on December 28, 2005 at $0.50 per share for $25,000. These shares
were not issued by the Transfer Agent until January 13, 2006 and were reflected
in shareholders’ equity as part of the caption “Shares to be Issued” at December
31, 2005.





During
the year ended December 31, 2006, the Company paid $61,087 (2005 - $131,156) to
companies which, at that time, beneficially owned 9.3% (2005 – 9.1%) of the
Company for investor relations services. Of this amount, investor relations
services in the amount of $61,087 (2005 - $54,793) are included in
Administrative Expenses and private placement commissions of $ Nil (2005 -
$26,363) are included as share issue costs in Additional Paid In
Capital.





During
the year ended December 31, 2006, the Company issued 2,000,000 common shares in
consideration for corporate development services rendered to the Company by an
individual, who beneficially owned 9.3% of the Company. The shares were valued
at market price of $.05 per share and were recorded as General and
Administrative Expense and an addition to Additional Paid in
Capital.





During
December, 2006, a director of the Company purchased 5,000 units comprising three
flow-through shares and one common share at a price per unit of $6.40 Cdn.
($1.60 Cdn. per share). These shares were classified as Shares To Be Issued as
at December 31, 2006 as the share certificates were not issued until February,
2007.





For the
year ended December 31, 2008, the Company paid $ nil (2007 - $108,624; 2006 -
$83,259) to Sicamous Oil & Gas Consultants Ltd. (:Sicamous”), a company
owned by the current Chief Executive Officer, President & COO of the Company
for consulting services rendered by him. As at December 31, 2008, there was a
note payable to Sicamous for $32,841 (2007 and 2006 - $ nil)





For the
year ended December 31, 2007, the Company paid $51,125 (2006 - $53,247) to MHC
Corp., a company owned by the former Chief Executive Officer of the Company for
consulting services rendered by him. At December 1, 2007, this individual
resigned as Chief Executive Officer.





For the
year ended December 31, 2008, the Company paid $113,481 (2007 - $86,550; 2006 $
nil) to Harbour Oilfield Consulting Ltd., a company owned by the Vice President
- Operations of the Company for consulting services rendered by him, of which
amount $8,621 was payable as at December 31, 2008 (December 31, 2007 - $
nil).





For the
year ended December 31, 2008, the Company paid $171,376 (2007 - $128,711; 2006 -
$ nil) to the current Chief Financial Officer of the Company for services
rendered by him, of which amount $6,524 was payable as at December 31, 2008
(December 31, 2007 - $ nil).





For the
year ended December 31, 2006, the Company paid $29,508 to the former Chief
Financial Officer of the Company for services rendered by her.





As at
December 31, 2008, 2007 and 2006, no other amounts were owing to any related
parties for services rendered.




47





ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES





Audit
Fees





The
Company paid audit fees to Meyers Norris Penny LLP for December 31, 2007
totaling $100,000 and estimate the 2008 fees to be $80,000. The 2008 fees
include approximately $55,000 relative to Internal Controls & Financial
Reporting (2007 - $63,000).





Audit-Related
Fees


None





Tax
Fees


None





All Other
Fees


None





Audit
committee policies & procedures


The above
services were approved by the company's Audit Committee of the Board of
Directors.








ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





a.
Exhibits





10.1           Stock
Purchase Agreement dated December 29, 2005, among Kodiak Energy and various
shareholders incorporated  herein by reference to Exhibit 4.1 to the
registrant's Current Report on Form 8-K filed with the Commission on December
29, 2005)





23.1           Consent
of Meyers Norris Penny LLP





31.1           Certification
of Chief Executive Officer, pursuant to Rule 13a-14(a)of the Exchange Act, as
enacted by  Section 302 of the Sarbanes-Oxley Act of 2002.(1)





31.2           Certification
of Chief Financial Officer, pursuant to Rule 13a-14(a)of the Exchange Act, as
enacted by Section 302 of the Sarbanes-Oxley Act of 2002.(1)





32.1           Certification
of Chief Executive Officer, pursuant to 18 United States Code Section as
enacted by Section 906 of the Sarbanes-Oxley Act of 2002.





32.2           Certification
of Chief Financial Officer, pursuant to 18 United States Code Section as
enacted by Section 906 of the Sarbanes-Oxley Act of 2002.




48





SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





/s/ William
Tighe


William
Tighe, Chairman, Chief Executive Officer, Chief Operating Officer and
President





/s/ William
Brimacombe


William
Brimacombe, Chief Financial Officer





/s/ Glenn
Watt


Glenn
Watt, Vice President Operations and Director





/s/ Peter
Schriber


Peter
Schriber, Director





/s/ Leslie R.
Owens


Leslie
R. Owens, Director








49


---