UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549



FORM 10-KSB



xANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the fiscal year endedDecember 31, 2005



oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



Commission File Number:000-30009



PETROL OIL AND GAS, INC.

(Name of small business issuer in its charter)



|Nevada                          |  | 90-0066187         
|------------------------------- |  | -------------------
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)



|3161 E. Warm Springs Rd., Ste. 300       |  |           
|---------------------------------------- |  | ----------
|Las Vegas, Nevada                        |  | 89120     
|(Address of principal executive offices) |  | (Zip Code)



Issuer's telephone number:(702) 454-7318



Copies of Communications to:

Stoecklein Law Group

402 West Broadway, Suite 400

San Diego, CA 92101

(619) 595-4882

Fax (619) 595-4883



Securities registered pursuant to Section 12(b) of the Exchange Act:  None



Securities registered pursuant to Section 12(g) of the Exchange Act:



Common Stock, $0.001 par value

(Title of Class)



Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  [     ]



Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or 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.

YesXNo _____



Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  [     ]



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes _____  NoX



The issuers revenues for its most recent fiscal year ended December 31, 2005.$6,040,957.



The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the average bid and ask price, as of March 30, 2006 was $48,096,876.10 based on a share value of $1.945.



The number of shares of Common Stock, $0.001 par value, outstanding on March 30, 2006 was 28,328,471 shares.



|Transitional Small Business Disclosure Format (check one):  Yes ___ No | X
|---------------------------------------------------------------------- | -





---





PETROL OIL AND GAS, INC.

FOR THE FISCAL YEAR ENDED

DECEMBER 31, 2005



Index to Report

on Form 10-KSB





|PART I  | Page                                                |   
|------- | --------------------------------------------------- | --
|        |                                                     |   
|Item 1. | Description of Business                             | 5 
|Item 2. | Description of Property                             | 17
|Item 3. | Legal Proceedings                                   | 20
|Item 4. | Submission of Matters to a Vote of Security Holders | 20
|        |                                                     |   



PART II



|Item 5.  | Market for Common Equity and Related Stockholder Matters                             | 20
|-------- | ------------------------------------------------------------------------------------ | --
|Item 6.  | Managements Discussion and Analysis of Financial Condition                          | 26
|Item 7.  | Financial Statements                                                                 | 49
|Item 8.  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 49
|Item 8A. | Controls and Procedures                                                              | 49
|Item 8B. | Other Information                                                                    | 49



PART III



|Item 9.  | Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act | 49
|-------- | --------------------------------------------------------------------------------------------------------------- | --
|Item 10. | Executive Compensation                                                                                          | 53
|Item 11. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  | 55
|Item 12. | Certain Relationships and Related Transactions                                                                  | 56
|Item 13. | Exhibits                                                                                                        | 56
|Item 14. | Principal Accountant Fees and Services                                                                          | 58





---





FORWARD-LOOKING STATEMENTS



This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements other than statements of historical fact are forward-looking statements for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objections of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing.



Forward-looking statements may include the words may, could, estimate, intend, continue, believe, expect or anticipate or other similar words.  These forward-looking statements present our estimates and assumptions only as of the date of this report.  Except for our ongoing securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement.



Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any or our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties.  The factors impacting these risks and uncertainties include, but are not limited to:



| | increased competitive pressures from existing competitors and new entrants;
|- | ---------------------------------------------------------------------------

| | increases in interest rates or our cost of borrowing or a default under any material debt agreements;
|- | -----------------------------------------------------------------------------------------------------

| | deterioration in general or regional economic conditions;
|- | ---------------------------------------------------------

| | adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | hedging risks;                                                       | 
|- | -------------------------------------------------------------------- | 
| | inability to achieve future sales levels or other operating results;
| | fluctuations of oil and gas prices;                                  | 
| | the unavailability of funds for capital expenditures; and            | 
| | operational inefficiencies in distribution or other systems.         | 
|  |                                                                      | 



For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see Factors That May Affect Our Results of Operation in this document.



In this form 10-KSB references to "PETROL", the Company, "we," "us," and "our" refer to PETROL OIL AND GAS, INC.



Throughout this document we may use certain terms or phrases that are specific to the oil and gas industry. We have included a glossary containing these terms and phrases. We encourage you to refer to the glossary to gain a better understanding of industry terms used throughout this filing.





1



---





GLOSSARY



|Term                    | Definition                                                                                                                                                                                                                                                                            
|----------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                        |                                                                                                                                                                                                                                                                                       
|Adsorb                  | A process by which molecules are taken up on the surface of a solid by physical or chemical action. Large amounts of gases may be adsorbed on the surface of a porous material such as coal.                                                                                          
|                        |                                                                                                                                                                                                                                                                                       
|Barrel                  | In the energy industry, a barrel is a unit of volume measurement used for petroleum and is equivalent to 42 U.S. gallons measured at 60 ° Fahrenheit.                                                                                                                                 
|                        |                                                                                                                                                                                                                                                                                       
|Basin                   | A depressed area where sediments have accumulated during geologic time and considered to be prospective for oil and gas deposits.                                                                                                                                                     
|                        |                                                                                                                                                                                                                                                                                       
|Blowout                 | An uncontrolled flow of oil, gas, water or mud from a wellbore caused when drilling activity penetrates a rock layer with natural pressures greater than the drilling mud in the borehole.                                                                                            
|                        |                                                                                                                                                                                                                                                                                       
|Coal rank               | The classification of coal relative to other coals, according to their degree of metamorphism, or progressive alteration, in the natural series from lignite to anthracite. Synonymous with coal quality.                                                                             
|                        |                                                                                                                                                                                                                                                                                       
|Coalification process   | A progressive process (bacterial decay and heat) that turns decayed plant material (peat) into the various ranks of coal. The first stage (peat to lignite) is decay and the remaining stages are thermal. The major by-products are methane, carbon dioxide, and water.              
|                        |                                                                                                                                                                                                                                                                                       
|Completion / Completing | A well made ready to produce oil or natural gas. Completion involves cleaning out the well, running and cementing steel casing in the hole, adding permanent surface control equipment, and perforating the casing so oil or gas can flow into the well and be brought to the surface.
|                        |                                                                                                                                                                                                                                                                                       
|Desorb                  | The release of materials (e.g., gas molecules) from being adsorbed onto a surface. The opposite of adsorb.                                                                                                                                                                            
|                        |                                                                                                                                                                                                                                                                                       
|Development             | The phase in which a proven oil or gas field is brought into production by drilling production (development) wells.                                                                                                                                                                   
|                        |                                                                                                                                                                                                                                                                                       
|Division order          | A contract for the sale of oil or gas, by the holder of a revenue interest in a well or property, to the purchaser (often a pipeline transmission company).                                                                                                                           
|                        |                                                                                                                                                                                                                                                                                       
|Drilling                | The using of a rig and crew for the drilling, suspension, production testing, capping, plugging and abandoning, deepening, plugging back, sidetracking, redrilling or reconditioning of a well. Contrast to "Completion" definition.                                                  
|                        |                                                                                                                                                                                                                                                                                       
|Drilling logs           | Recorded observations made of rock chips cut from the formation by the drill bit, and brought to the surface with the mud, as well as rate of penetration of the drill bit through rock formations. Used by geologists to obtain formation data.                                      
|                        |                                                                                                                                                                                                                                                                                       
|Exploration             | The phase of operations which covers the search for oil or gas by carrying out detailed geological and geophysical surveys followed up where appropriate by exploratory drilling. Compare to "Development" phase.                                                                     





2



---







|                           |                                                                                                                                                                                                                                                                                                                                                                                                               
|-------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Farm out                   | Assignment or partial assignment of an oil and gas lease from one lessee to another lessee                                                                                                                                                                                                                                                                                                                    
|                           |                                                                                                                                                                                                                                                                                                                                                                                                               
|Gathering line / system    | A pipeline that transports oil or gas from a central point of production to a transmission line or mainline.                                                                                                                                                                                                                                                                                                  
|                           |                                                                                                                                                                                                                                                                                                                                                                                                               
|Gross acre                 | An acre in which a working interest is owned. The number of gross acres is the total number of acres in which a working interest is owned                                                                                                                                                                                                                                                                     
|                           |                                                                                                                                                                                                                                                                                                                                                                                                               
|Gross well                 | A well in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned.                                                                                                                                                                                                                                                                     
|                           |                                                                                                                                                                                                                                                                                                                                                                                                               
|Held-By-Production (HBP)   | Refers to an oil and gas property under lease, in which the lease continues to be in force, because of production from the property.                                                                                                                                                                                                                                                                          
|                           |                                                                                                                                                                                                                                                                                                                                                                                                               
|Land services              | Services performed by an oil and gas company or agent, or landman, who negotiates oil and gas leases with mineral owners, cures title defects, and negotiates with other companies on agreements concerning the lease.                                                                                                                                                                                        
|                           |                                                                                                                                                                                                                                                                                                                                                                                                               
|Logging (electric logging) | Process of lowering sensors into a wellbore to acquire downhole recordings that indicate a well's rock formation characteristics and indications of hydrocarbons                                                                                                                                                                                                                                              
|                           |                                                                                                                                                                                                                                                                                                                                                                                                               
|Methane                    | An organic chemical compound of hydrogen and carbon (i.e., hydrocarbon), with the simplest molecular structure (CH4)                                                                                                                                                                                                                                                                                          
|                           |                                                                                                                                                                                                                                                                                                                                                                                                               
|Mineral Lease              | A legal instrument executed by a mineral owner granting exclusive right to another to explore, drill, and produce oil and gas from a piece of land                                                                                                                                                                                                                                                            
|                           |                                                                                                                                                                                                                                                                                                                                                                                                               
|Natural gas quality        | The value of natural gas is calculated by its BTU content. A cubic foot of natural gas on the average gives off 1000 BTU, but the range of values is between 500 and 1500 BTU. Energy content of natural gas is variable and depends on its accumulations which are influenced by the amount and types of energy gases they contain: the more non-combustible gases in a natural gas, the lower the Btu value.
|                           |                                                                                                                                                                                                                                                                                                                                                                                                               
|Net acre                   | A net acre is deemed to exist when the sum of fractional working interests owned in gross acres equals one. The number of net acres is the sum of fractional working interests owned in gross acres expressed as whole numbers and fractions thereof.                                                                                                                                                         
|                           |                                                                                                                                                                                                                                                                                                                                                                                                               
|Net well                   | A net well is deemed to exist when the sum of fractional working interests owned in gross wells equals one. The number of net wells is the sum of fractional working interests owned in gross wells expressed as whole numbers and fractions thereof.                                                                                                                                                         
|                           |                                                                                                                                                                                                                                                                                                                                                                                                               
|Operator                   | A person, acting for himself or as an agent for others and designated to the state authorities as the one who has the primary responsibility for complying with its rules and regulations in any and all acts subject to the jurisdiction of the state                                                                                                                                                        
|                           |                                                                                                                                                                                                                                                                                                                                                                                                               
|Pennsylvanian age          | Geologic age of sediments deposited 320 to 286 million years ago                                                                                                                                                                                                                                                                                                                                              
|                           |                                                                                                                                                                                                                                                                                                                                                                                                               





3



---







|Permeability           | The property of a rock formation which quantifies the flow of a fluid through the pore spaces and into the wellbore.                                                                                                                                                                                                                        
|---------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Pooled, Pooled Unit    | A term frequently used interchangeably with "Unitization" but more properly used to denominate the bringing together of small tracts sufficient for the granting of a well permit under applicable spacing rules.                                                                                                                           
|                       |                                                                                                                                                                                                                                                                                                                                             
|Proved Reserves        | Estimated quantities of crude oil, natural gas, condensate, or other hydrocarbons that geological and engineering data demonstrate with reasonable certainty to be commercially recoverable in the future from known reservoirs under existing conditions using established operating procedures and under current governmental regulations.
|                       |                                                                                                                                                                                                                                                                                                                                             
|Re-completion          | Completion of an existing well for production from one formation or reservoir to another formation or reservoir that exists behind casing of the same well.                                                                                                                                                                                 
|                       |                                                                                                                                                                                                                                                                                                                                             
|Reserves               | Generally the amount of oil or gas in a particular reservoir that is available for production.                                                                                                                                                                                                                                              
|                       |                                                                                                                                                                                                                                                                                                                                             
|Reservoir              | The underground rock formation where oil and gas has accumulated. It consists of a porous rock to hold the oil or gas, and a cap rock that prevents its escape                                                                                                                                                                              
|                       |                                                                                                                                                                                                                                                                                                                                             
|Reservoir Pressure     | The pressure at the face of the producing formation when the well is shut-in. It equals the shut in pressure at the wellhead plus the weight of the column of oil in the hole.                                                                                                                                                              
|                       |                                                                                                                                                                                                                                                                                                                                             
|Shut-in well           | A well which is capable of producing but is not presently producing. Reasons for a well being shut-in may be lack of equipment, market or other.                                                                                                                                                                                            
|                       |                                                                                                                                                                                                                                                                                                                                             
|Stratigraphic Trap     | A variety of sealed geologic containers capable of retaining hydrocarbons, formed by changes in rock type or pinch-outs, unconformities, or sedimentary features.                                                                                                                                                                           
|                       |                                                                                                                                                                                                                                                                                                                                             
|Structural Trap        | A variety of sealed geologic structures capable of retaining hydrocarbons, such as a faults or a folds.                                                                                                                                                                                                                                     
|                       |                                                                                                                                                                                                                                                                                                                                             
|Tight gas sandstones   | Low permeability (having lower capacity to flow fluids through pore spaces) sedimentary rocks with natural gas occuring in the pore spaces. Contrast to high permeability sandstone definition.                                                                                                                                             
|                       |                                                                                                                                                                                                                                                                                                                                             
|Undeveloped acreage    | Leased acreage which has yet to be drilled on to test the potential for hydrocarbons.                                                                                                                                                                                                                                                       
|                       |                                                                                                                                                                                                                                                                                                                                             
|Unitize, Unitization   | Joint operations to maximize produced hydrocarbon recovery among separate operators within a common reservoir                                                                                                                                                                                                                               
|                       |                                                                                                                                                                                                                                                                                                                                             
|Western Interior Basin | Ancient inland sea and area of sediment deposition which divided North America into two separate landmasses in the Late Cretaceous Period, approximately 75 to 80 million years ago.                                                                                                                                                        
|                       |                                                                                                                                                                                                                                                                                                                                             





4



---







|Working Interest | The right granted to the lessee of a property to explore for and to produce and own oil, gas, or other minerals. The working interest owners bear the exploration, development, and operating costs on either a cash, penalty, or carried basis.
|---------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



PART I



|ITEM 1. | DESCRIPTION OF BUSINESS
|------- | -----------------------



(a) Business Development



Petrol Oil and Gas, Inc. was incorporated in the State of Nevada in March of 2000 as Euro Technology Outfitters.  On August 19, 2002 we acquired approximately 289 oil and gas mineral leases from Petrol Energy, and concurrently changed our name to Petrol Oil and Gas, Inc.



(b) Business of Issuer



Petrol is an oil and gas exploration, development and production company.  Our primary business objective is to create value in the company through the acquisition, development and production of economic quantities of natural gas from buried coal seams, denoted as coal-bed methane (CBM) and other gas bearing formations, as well as the production of oil.  The first step in value creation was achieved through the acquisition of the mineral leases from Petrol Energy and others.



Our recent activities have consolidated a strong lease position in CBM that contains quality proven gas reserves, some of which are adjacent to interstate pipeline systems which provide ready access to market for our produced gas.  During 2005 our focus turned to developing and producing those leases so as to realize the value held within their reserves.  With 165,000 gross leased acres (132,000 net acres) the task of developing the properties with wells on 160 acre spacing will involve in excess of 1,000 wells. Petrol holds a 100 % working interest and an average 80% net revenue interest in these leases. In order to develop this large resource base we have segregated our leases into five separate Projects which include:



| | Petrol-Neodesha Project -a 10,000 gross acre (8,000 net acres) gas producing property with operations consisting of a gas gathering system, 90 producing wells, 8 salt water disposal wells and 50-100 potential new well locations.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Coal Creek Project -current development of about 92,000 gross acres (73,000 net acres) with 40 production wells, 2 salt water disposals wells and gas gathering infrastructure.                                                     
| | Pomona Project 35,000 gross acres (28,000 net acres) with 17 shut in production wells, 1 salt water disposal well and some gas gathering infrastructure.                                                                           
| | Missouri Project 18,000 gross acres (12,000 net acres) with 5 test/evaluation wells.                                                                                                                                               

| | Oil Field Projects 10,000 gross acres
|- | --------------------------------------



During the past three years, we have evolved from a start-up company holding oil and gas leases, into a production and development company with 150 gas wells, and 300 oil wells, and



5



---



plans to bring over 40 additional new wells on line during the first half of 2006. Our drilling program is anticipated to significantly increase revenues, operating cash flows, profitability and proved reserves throughout 2006 and into 2007.



We have acquired leasehold interests in more than 165,000 gross acres in Eastern Kansas and Western Missouri. Most of the leases are located in the relatively undeveloped Bourbon Arch, which lies between two established gas-producing basins with well-defined production and reserve characteristics-the Cherokee Basin to the south and the Forest City basin to the north.



In September 2004, we acquired approximately 10,000 gross acres of leaseholds and 71 producing gas wells in Wilson and Neosho counties in eastern Kansas (100% working interest/81% Net Revenue Interest). Since that time, we have drilled another 19 gas wells, 100% of which were successful producers. Recent wells have been drilled deeper (to approximately 1,200 feet) than the initially acquired wells (approximately 700 feet) and have encountered additional coal seams. We have the potential to drill another 50 to 100 wells on this property (known as Petrol-Neodsha), and we expect future wells to come on line at daily production rates up to 150% greater than our initially acquired wells.



In November 2005, we executed a credit facility with Laurus Master Fund, providing us up to $50 million for drilling activities. We have received $10 million under this credit facility, which funds have been utilized for drilling purposes, and a request for an additional $5 million has been recently submitted and approved. These funds have provided us with the capital required to launch an aggressive drilling program in our Coal Creek project centered around Coffee County, Kansas, where our leasehold interests encompass approximately 92,000 gross acres. We have drilled and tested 40 coalbed methane wells in the Burlington and Waverly areas, and gas gathering and compressor systems are partially completed and have commenced delivering gas. As a result of bringing these wells on line to delivery systems, and the anticipation of additional wells being drilled, we expect increases in our
revenue as early as the 2ndQuarter of 2006. Based on our 160 acre spacing, we have the potential to drill approximately 575 additional wells in the Coal Creek project over the next several years.



In Petrols leased areas that contain Probable and Possible gas reserves, Petrol will determine whether it can produce sufficient amounts of oil and/or natural gas to be commercially viable. If an area is shown to be commercially productive, we intend to explore several methods of funding development and gas gathering operations in that area. The most conservative method would be to limit development to the extent it could be funded through revenues obtained from sales of our ongoing oil and gas production.  An accelerated development program could be established by making use of Working Interest (WI) or Joint Venture (JV) partners that would contribute to the costs of drilling and completion and then share in revenues derived from future production.  A further acceleration plan could be established which would require debt to fund drilling and gathering activities at a pace that
would allow greater leverage of our current lease position.  These economic alternatives may allow us to utilize our own financial assets for the creation of value through the growth of our leased acreage holdings, the acquisition of strategic oil and gas producing companies and generally expand our existing operations.



The Market: Natural Gas Supply and Demand



Petrol believes that the rising oil and gas prices, combined with geopolitical instability and soaring demand from burgeoning economies in China and India have increased the intrinsic



6



---



value of predictable, secure, North American reserves, and we expect this trend to continue in light of tensions in the Middle East and certain other foreign countries (e.g., Venezuela, Nigeria).



The National Petroleum council estimates the US demand for natural gas to increase from 22 Trillion cubic feet (TCF) in 1998 to over 31 TCF by 2015. This nearly 50% increase in demand for natural gas coupled with constrained supplies from conventional sources and storage facilities suggests an urgent need for new gas sources.  Although conventional gas sources such as high permeability sandstones currently supply about 60% of the US demand (13 TCF in 1998), projections indicate a flat to declining supply through year 2015. The shortfall in conventional gas supply is expected to be taken up by production from un-conventional sources such as tight gas sandstones/shales, associated gas, and CBM.



CBM shows great promise as a future source of natural gas, with the US Geological Survey estimating some 700 TCF contained in 6 major CBM basins in the continental US. This constitutes an enormous reserve, almost the entire US demand for the next 25 years.  The Western Interior Basin covering portions of Oklahoma, Kansas, and Missouri is one of those 6 major basins. The Gas Research Institute estimates CBM gas reserves in the Forrest City and Cherokee basin, the two sub-basins of the Western Interior Basin, contain approximately 7 TCF. Petrols leases all lie within one or both of these sub-basins



Given the current volatility of the natural gas market, hedging has become a part of Petrols operating strategy.  We believe the current supply and demand fundamentals will lead to a strengthening in prices.  Consequently, Petrol intends to continually evaluate its hedge position, if any, and enter into contracts accordingly.



CBM Production



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



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





7



---





CBM production also differs from conventional gas production that normally starts at its highest production rate and then declines with time. Because coal-beds have water residing within the cleats, the water needs to be withdrawn in order to promote production of the adsorbed gases. Thus, for the case of CBM, initial water production is high and diminishes with time. CBM gas production, however, starts at a relatively low rate reaching a peak some months later and then begins to decline.



CBM production is attractive due to several geological factors.  Coal stores six or seven times as much gas as a conventional natural gas reservoir of equal rock volume due to the large internal surface area of coal.  Significant amounts of coal are accessible at shallow depths, making well drilling and completion relatively inexpensive.  Finding costs are also low since methane occurs in coal deposits, and the location of the Nations coal resources is well defined by the USGS.



Corporate Business Objectives



Petrols primary business objective is to create value in the company through the production of economic quantities of natural gas from CBM and other producible intervals.  In the 6 major US CBM basins, the coal-beds vary greatly in thickness, quality and gas content. They also range in depths from very near surface, less than 500 ft, to very deep, greater than 25,000 ft. The difficulty, risks and costs associated with extracting CBM from deep formations increases quite rapidly and nonlinearly with depth. Average depth for a well in the areas where Petrol holds leases range between 600 ft and 1,700 ft.



Petrol intends to achieve its objective of continuously creating value by:



|(a) | Establishing suitable scaled and financed development programs to realize commercial production from proven reserves on our existing leased acreage.                         
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | Determining the appropriate financing and development methods to realize production from probable reserves in relative close proximity to our existing proven leased acreage.

|(c) | Assessing farm out arrangements for non core leases or geographies.
|--- | -------------------------------------------------------------------

|(d) | Adding mineral leases in core areas to achieve economies of scale, while continually selling marginal and non strategic leased properties.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------
|(e) | Acquiring and developing potentially high profit margin leased properties, including producing oil and gas fields.                        
|(f) | Enhancing the value of our production through the use of marketing arrangements and forward sales of known production.                    



Developmental Program



Petrol acquired leases in the Forrest City and Cherokee Basins because the leased area had the following attributes:



| | relatively shallow CBM (<2,500 ft),                            | 
|- | -------------------------------------------------------------- | 
| | good coal rank, gas content and distribution within the basin,
| | low cost mineral leases,                                       | 
| | access to interstate pipeline systems, and                     | 
|  |                                                                | 





8



---





| | nearby oil and gas services.
|- | ----------------------------



The Western Interior Basin located in the mid-continent, where the Petrol leases are located, shows great promise because the basin embodies an extensive aerial distribution of shallow buried coal-beds, appears to contain large quantities of high quality natural gas and has several readily available interstate pipelines for sales and distribution. It appeared that an area well suited for Petrols Coal Creek Project was in and around Coffey County, Kansas, where gas bearing coals are contained within the Forrest City and Cherokee basins, sub-basins of the larger Western Interior basin.



Since portions of the acquired mineral leases have existing oil or gas wells, some of them are being considered for re-completion in sandstones and/or coal-beds that appear economically productive. These will add to our knowledge base and may provide financial support for anticipated expansion. This developmental strategy is exemplified in our Petrol-Neodesha project which produces approximately 2.9 Million cubic feet of gas per day (2.10 Million cubic feet per day of net production to the Company).



Operational Area



As an oil and gas exploration and development company, Petrols primary objective is the development of CBM gas production projects. We identified CBM early on as an area in the oil and gas industry that was gaining recognition as a viable source of natural gas and was experiencing above average growth.  Petrol expects to focus investment efforts in natural gas well development projects located within known or highly-likely gas-bearing CBM formations in southeastern Kansas and western Missouri.



The Western Interior Coal Region includes three basins in the central United States that contain gas bearing coal deposits of similar area and rank.  They are the Arkoma, Forest City and Cherokee Basins.  Together these three basins stretch from western Arkansas and central Oklahoma northward through eastern Kansas and western Missouri into central Iowa.  Our primary interests lie within areas overlaying the Cherokee basin and portions of the Forest City Basin which are defined geographically as the area bounded to the north by Bourbon Arch, to the east and southeast by Ozark Dome, and to the west by the Nemaha uplift, encompassing northern Oklahoma, southeastern Kansas, and southwestern Missouri.



The Cherokee Basin formation contains Pennsylvanian age coal-beds which are believed to be relatively contiguous throughout the entire basin.  Coal found throughout the basin is generally of the same age and type and therefore theoretically should contain similar quantities and quality of gas.  Historically, the majority of CBM gas production in Kansas has been in southeastern counties such as Labette, Wilson, Neosho and Cherokee counties, where coal seams and black shale averaging four feet in thickness produce commercial quantities of CBM gas. Our Petrol-Neodesha project is located within this producing Cherokee basin area.



Petrol-Neodesha Project



Currently our gas producing leases known as Petrol-Neodesha, in the Neosho and Wilson counties, account for approximately 10,000 of the total 165,000  gross leased acres.  These properties are in active production with on average 90 CBM producing wells that produce approximately 2.7 Million cubic feet of gas per day.  Studies to drill additional wells, improve



9



---



existing wells and enhance the gas gathering system were refined into an advanced development plan during the first quarter of 2005 and execution of the plan began in the second quarter of 2005.  This plan was designed to serve as the blueprint to enhance the Net Asset Value of these properties, increase production revenue and provide knowledge for development of remaining leases in this and our other Project areas. Petrol-Neodesha has provided us with a revenue stream and certain value in proven producing reserves.



In the second quarter of 2005, we implemented Phase I of our development plan that involved expanding the production of our existing gas gathering pipeline system and drilling several new production wells.  Phase I pipeline enhancements included adding approximately 3.5 miles of high capacity gas gathering pipeline and strategically incorporating 2 new booster stations to reduce  pipeline pressure as well as to provide a higher level of compressor redundancy. In addition, the reduced pipeline pressure was designed to increase production from existing production wells and in fact overall field production was found to increase by about 425 Mcfd. Furthermore, the capacity of the main pipeline gathering lines was doubled and will serve to accommodate production from 50 to 100 new development wells.



The second element of the Phase I development plan involved drilling five new CBM wells.  The initial production rates were about 150 Mcfd after approximately six weeks of de-watering.  These wells were the first set of wells we completed and connected to the newly enhanced gas gathering pipeline system.



Additionally, in the second quarter of 2005, we acquired an additional 400 gross acres adjacent to our Petrol-Neodesha property and drilled four new production wells during the later half of 2005 on these newly acquired leases.



In the third quarter of 2005, we incorporated a new gas processing unit into our Neodesha pipeline system to support growing gas sales from our Petrol-Neodesha property and enhance gas quality.



We intend to continue seeking acquisition opportunities which compliment our current production.  We intend to fund our development activity primarily through the use of cash flow from operations and cash on hand, while seeking larger debt funding opportunities sufficient enough to develop a greater portion of our mineral leases. During 2005 we drilled, completed and began production from 14 new wells. On average we have included 3 new production wells per month in Petrol-Neodesha since we began implementing our drilling-development plan and plan to continue this monthly rate into 2006. Based on our current field production levels, we plan to aggressively develop future production activities.



Coal Creek Project



During 2005 Petrol embarked on securing funds for the development of the Coal Creek project centered in Coffey County, Kansas. The Coal Creek Project includes leases covering about 92,000 gross acres. In October 2005, we finalized an agreement and other documents whereby Laurus Master Funds, Ltd. would provide a debt facility of up to $50,000,000 with the first $10,000,000 tranche utilized immediately. In March 2006, an additional $5,000,000 was requested and approved for funding, subject to completion of finalized documents.





10



---





The Coal Creek development plan is based upon drilling and completing some 540 wells over a two to three year period along with miles of gas gathering pipelines and infrastructure to process, transport and sell gas in mid-west markets. To better manage the development of this large acreage position and take advantage of the three interstate pipelines that cross our leases, we divided the project into three fully self contained areas:



|1. | Burlington Area about 15,000 gross acres located in SW Coffey County, Kansas.  This was Petrols assessment area in which we drilled our first test wells.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Waverly Area about 40,000 gross acres located in NE Coffey County, Kansas, Southern Osage County and Western Anderson County, Kansas.                     

|3. | Lebo Area about 37,000 acres located in NW Coffey County, Kansas.
|-- | ------------------------------------------------------------------



The full development plan is expected to be executed in two phases. The first phase involves emplacing the basic gas gathering pipeline infra-structures and developing about 180 new CBM wells. Phase two includes finalizing the gas gathering pipeline and developing 360 new CBM wells. The anticipated costs of the full development plan are expected to be approximately $66,000,000. The pace of the development will obviously depend on the availability of the financing program, lender restrictions, general economic conditions, and potential other factors relevant to this type of development plan.



In November 2005, we received the first $10,000,000 tranche from Laurus Funds and have utilized these funds to primarily initiate Phase I development, which involved drilling gas production wells as well as the installation of a gas gathering pipeline system in both the Burlington and Waverly areas. At the end of December 2005 there were 22 production and 2 salt water disposal wells ready for connection to the gas gathering pipelines being installed in the Burlington area. Similarly, at the end of 2005 the first several production wells and salt water disposal well were emplaced and the gas gathering lines were being buried in the Waverly area.



Production and sales from the Burlington area is expected to begin in April 2006 with the Waverly area following in May 2006.



Pomona Project



Located primarily in Franklin County, Kansas the Pomona Project includes leases covering about 35,000 acres. There are about 17 shut in production wells, a salt water disposal well and portions of a gas gathering infrastructure.  Two interstate pipeline systems cross through the Petrol leases.



Missouri Project



Located in Cass and Bates County, Missouri our Missouri Project includes leases covering about 15,000 gross acres. Petrol drilled and tested 5 evaluation wells in this project area that abut to an interstate pipeline system.



Oil Field Project





11



---





Petrol has a 100% working interest in several oil producing properties that produce an average 80 barrels of oil per day. These oil producing wells are generally defined as stripper wells and are producing under the influence of a water flood.



Leasing Activities



As of December 31, 2005, we have about 900 signed lease agreements totaling approximately 165,000 gross acres (137,000 net acres). These leases are contained within Coffey County, Kansas and the adjacent counties of Anderson, Osage, Lyon, Franklin, Woodson, Wilson and Neosho as well as Cass and Bates counties in western Missouri.  In the event that we are successful in the development phase of our plan and find commercially producible gas or oil, we intend to lease additional available mineral rights to the extent that we believe such land will further our exploration and development activities and provide increased value to Petrol.



In the second quarter of 2005, we acquired an additional 400 gross acres adjacent to our producing property, Petrol-Neodesha and have committed to drill three well this year on these newly acquired leases.



All of the mineral leases that Petrol has executed grant it the exclusive right to explore for and develop oil, gas and other hydrocarbons and minerals that may be produced from wells drilled on the leased property without any depth restrictions. Each lease also grants us rights of way to easements for laying pipelines and servicing or drilling other wells in the vicinity of the leased property.



Our lease agreements vary both in term and price per acre. Some of our leases are for 2 year periods at $2/acre with extensions for 3 additional years, others are for 3 year periods at $3/acre with extensions for 3 additional years, while others are for 5 years at $1/acre with extensions for 3 additional years, and finally others are for 5 years at $10/acre with extensions for 3 additional years.



Our leases are on a paid up basis. Petrol has agreed to pay each lessor a royalty equal to 12.5% of any oil, gas or other minerals that may be produced from wells drilled on their leased property.  In the event of a shut-in well capable of producing oil or gas, we have agreed to pay the lessor a royalty per net mineral acre. All the lease agreements allow Petrol to hold the lease with production.



Under its leases, Petrol has the right to pool the leased property with other land owned or leased by it in the immediate vicinity for the production of oil or gas.  With respect to shallow gas and associated hydrocarbons produced in conjunction therewith, we have the right to pool or unitize the leased properties into a development pool of a maximum of 3,000 acres if we have drilled at least 2 wells within the pooled unit no later than 1 year after the expiration of the primary term of the lease.



We have completed a standard due diligence process on our leased property, including obtaining a title or title insurance to confirm our rights to any oil, gas or other minerals produced pursuant to our leases. Our final interest in any oil, gas or other mineral that we produce may vary depending upon negotiations with the mineral owners, financers, if any, as well



12



---



organizations that we may contract to perform drilling, completion and operating activities on our wells.



Petrol has rights to a 100% working interest in all of its leased acreage.  A working interest is the operating interest that gives us, as the operator, the right to drill, produce and conduct operating activities on the property and a share of production. Petrol has a Net Revenue interest (NRI) between 79.5% and 84.375% on all leased acreage.



Until the acquisition of the Petrol-Neodesha, most of our capital expenditures were associated with the acquisition of oil and gas mineral leases, raising capital and administrative costs. Our strategy now shifts to that of realizing value from those expenditures through the drilling and production of our properties, starting in our proven reserve areas. We intend to continue to expand our lease base, as appropriate. The rate of development will be carefully designed to blend external financing with income from existing production and other sources.



Gas Purchase and Sale Agreement



To reduce our exposure to unfavorable changes in natural gas prices we utilize energy swaps in order to have a fixed-price contract.  These contracts allow us to be able to predict with greater certainty the effective natural gas prices to be received for hedged production and benefit operating cash flows and earnings when market prices are less than the fixed prices provided under the contracts.  However, we will not benefit from market prices that are higher than fixed prices in contracts for hedged production.  If we are unable to provide the quantity that we have contracted for we will have to go to the open market to purchase the required amounts that we have contracted to provide.



In 2005, Petrol entered into contracts with Seminole Energy Services LLC to sell 60,000 mmbtu per month for the period of March 2005 to February 2006 at various fixed prices with the overall average price of $5.99.  Additionally, Petrol has contracts with Virginia Power to sell certain of its gas production through March 2007 at various fixed prices with the overall average price of $8.13. We have an expectation that revenue will increase in 2006 due to the expiration of lower price hedges.



RECENT DEVELOPMENTS  SUBSEQUENT TO YEAR END



On January 4, 2006 we announced the successful completion of our third new well drilled during the month of December on our Petrol-Neodesha property in southeast Kansas.



On January 17, 2006, we announced the signing of an agreement with Enbridge Pipeling (ENB) to connect a second gas injection tap on the ENB interstate pipeline system. The injection tap serves as the second sales point for us to market natural gas produced from our Coal Creek project.



On January 30, 2006 we announced our inclusion in the Kansas Geologic Societys listing of the top 5% of gas producing companies in Kansas based on gas volumes for 2005.



On March 28, 2006 we commenced operations of our new gas gathering pipeline system which we recently connected to the delivering system, which provides the method for distributing our gas from our 92,000 acre Coal Creek project.



13



---





Governmental Regulations



Regulation of Oil and Natural Gas Production.  Our oil and natural gas exploration, production and related operations, when developed, are subject to extensive rules and regulations promulgated by federal, state, tribal and local authorities and agencies. For example, some states in which we may operate require permits for drilling operations, drilling bonds and reports concerning operations and impose other requirements relating to the exploration and production of oil and natural gas. Such states may also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum rates of production from wells, and the regulation of spacing, plugging and abandonment of such wells. Failure to comply with any such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and gas industry will most likely increase our cost of doing business and may affect our profitability. Although we believe we are currently in substantial compliance with all applicable laws and regulations, because such rules and regulations are frequently amended or reinterpreted, we are unable to predict the future cost or impact of complying with such laws. Significant expenditures may be required to comply with governmental laws and regulations and may have a material adverse effect on our financial condition and results of operations.



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



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



Environmental Matters



Our operations and properties subject to extensive and changing federal, state and local laws and regulations relating to environmental protection, including the generation, storage, handling, emission, transportation and discharge of materials into the environment, and relating



14



---



to safety and health. The recent trend in environmental legislation and regulation generally is toward stricter standards, and this trend will likely continue. These laws and regulations may:



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



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



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



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



The Comprehensive Environmental, Response, Compensation, and Liability Act (CERCLA) and comparable state statutes impose strict, joint and several liability on owners and operators of sites and on persons who disposed of or arranged for the disposal of hazardous substances found at such sites. It is not uncommon for the neighboring land owners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. The Federal Resource Conservation and Recovery Act (RCRA) and comparable state statutes govern the disposal of solid waste and hazardous waste and authorize the imposition of substantial fines and penalties for noncompliance. Although CERCLA currently excludes petroleum from its definition of hazardous substance, state laws
affecting our operations may impose clean-up liability relating to petroleum and petroleum related products. In addition, although RCRA classifies certain oil field wastes as non-hazardous, such exploration and production wastes could be reclassified as hazardous wastes thereby making such wastes subject to more stringent handling and disposal requirements.



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



Competition



15



---





We compete with numerous other oil and gas exploration companies.  Many of these competitors have substantially greater resources than we do.  Should a larger and better financed company decide to directly compete with us, and be successful in its competitive efforts, our business could be adversely affected.



Personnel



We currently have three full time employees and two part time employees as well as eight contract personnel that support and operate our field operations. As drilling production activities increase, we intend to hire additional technical, operational and administrative personnel as appropriate. None of our employees are subject to any collective bargaining agreements; however, we have entered into employment agreements with Paul Branagan and Gary Bridwell. We expect a significant change in the number of full time employees over the next 12 months. However, at this time we are unable to quantify exactly how many. We intend to use the services of independent consultants and contractors to perform various professional services, particularly in the area of land services, drilling, water hauling, pipeline construction, well design, well-site monitoring and surveillance, permitting and
environmental assessment. We believe that this use of third-party service providers may enhance our ability to contain general and administrative expenses.



Effective May 9, 2005, John Garrison resigned as Chief Financial Officer of the Company.  Concurrently, the board of directors appointed Lawrence Finn as Vice President and Chief Financial Officer of the Company and effective November 15, 2005, Lawrence J. Finn resigned as Vice President and Chief Financial Officer of the Company. Mr. Finns resignation was the result of family requirements and the inability to relocate full time to Las Vegas.  Mr. Finns resignation was not the result of any disagreement with the Company or our management or any accounting or company financial issues.



Consultant



On August 7, 2005, we entered into a consulting agreement with CEOcast, Inc., wherein CEOcast agreed to provide us with investor relations services. The term of the agreement is for one year. We agreed to compensate CEOcast $7,500 upon signing the agreement and 60,000 shares of our restricted common stock. In addition, we will pay CEOcast $7,500 on or before the 7thday of each month during the term of the agreement. As of the date of this filing the 60,000 shares have not been issued.



On January 1, 2006, we entered into a consulting agreement with RJ Falkner & Company, Inc. for a period of one year.  The consultant agreed to prepare two Research Profile reports and distribute such reports to over 10,000 investment professionals during the first twelve months of the agreement.  We agreed to pay a retainer fee payable monthly, in advance, at a rate of $3,500 per month plus reimbursement of any expenses incurred in the provision of these services.  In addition we agreed to grant the consultant a three year option to purchase 110,000 shares of our common stock at $1.76 per share.



Employment Agreement



On November 2, 2005, we entered into an employment agreement with Paul Branagan, wherein Mr. Branagan agreed to serve as the Companys Chief Executive Officer and President.



16



---



The term of employment is for five (5) years. We agreed to pay Mr. Branagan annual compensation of $225,000. In addition to the cash compensation, we granted Mr. Branagan an extension of previously granted stock options to purchase 1,250,000 shares of our common stock at prices ranging from $0.05 per share to $2.50 per share, exercisable at any time and expiring on September 30, 2010. We also granted Mr. Branagan additional options to purchase 500,000 shares of our common stock at $1.75 per share, exercisable at any time and expiring on September 30, 2010. Mr. Branagan will also receive a 1/100 Over Riding Royalty on production from any wells completed on our current and future leased acreage. The Over Riding Royalty shall be paid as determined by our Board of Directors and the term of the payment of the Over Riding Royalty shall be in perpetuity.



Our proposed personnel structure could be divided into three broad categories: management and professional, administrative, and project field personnel. As in most small companies, the divisions between these three categories are somewhat indistinct, as employees are engaged in various functions as projects and work loads demand.



AVAILABLE INFORMATION



We file annual, quarterly and special reports and other information with the SEC that can be inspected and copied at the public reference facility maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549-0405. Information regarding the public reference facilities may be obtained from the SEC by telephoning 1-800-SEC-0330. The Company's filings are also available through the SEC's Electronic Data Gathering Analysis and Retrieval System which is publicly available through the SEC's website (www.sec.gov). Copies of such materials may also be obtained by mail from the public reference section of the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549-0405 at prescribed rates.



|ITEM 2. | DESCRIPTION OF PROPERTY
|------- | -----------------------



General Background



In fiscal 2004 we continued to build a solid asset base of mineral leases and in the fourth quarter completed a significant asset purchase, which has substantial jump started our operations.  We continued additional field development through fiscal 2005. Although our focus will be on development of our existing properties, we also intend to continue seeking acquisition opportunities which compliment our current portfolio. We intend to fund our development activity primarily through use of cash flow from operations and cash on hand, while pursuing substantial debt financing to fully develop our lease holdings.



As of December 31, 2005, we had estimated net reserves and future net income of:



|                         |  | Proved   
|------------------------ |  | ---------
|                         |  | Developed
|                         |  | Producing
|Net Remaining Reserves   |  |          
|Oil (stock-tank barrels) |  | 74,552   
|Gas (mcf)                |  | 4,086,883
|                         |  |          
|Income Data              |  |          
|Future Net Cash Flows    |  |          





17



---







|Discounted FNCF @10% |  |  |  |  |  |  |  | $34,580,000
|-------------------- |  |  |  |  |  |  |  | -----------



Current State of Operations



Petrol-Neodesha Project



On November 1, 2004, Petrol purchased mineral leases covering lands in Neosho and Wilson Counties, Kansas, that included 72 producing gas wells and a gas gathering system. The total purchase price was $10,000,000. Funding was accomplished using funds received from a unit offering and a convertible note from Laurus Master Fund. The producing property was named Petrol-Neodesha.



Petrol-Neodesha covers about 10,000 gross mineral acres (7,620 net acres) and includes 85 producing gas wells, 8 water disposal wells, about 60 miles of gas gathering and water lines as well as gas compressor sites and a fully equipped operations and maintenance shop. Daily gas production from Petrol-Neodesha at the end of December 2005 averaged approximately 2.7 Million cubic feet per day.



In the second quarter of 2005, we implemented Phase I of our development plan that involved expanding the production of our existing gas gathering pipeline and drilling several new production wells.  Phase I pipeline enhancements included adding approximately 3.5 miles of high capacity gas gathering pipeline and strategically incorporating 2 new booster stations to reduce pipeline pressure and provide a higher level of compressor redundancy. In addition, the reduced pipeline pressure was designed to increase CBM production from existing production wells and in fact overall field production was found to increase by about 425 Mcfd. Furthermore, the capacity of the pipeline has now been doubled and will serve to accommodate production from new development wells.



The second element of the Phase I development plan involved drilling five new CBM wells.  Four of our five new wells are in various stages of completion and have increased gas production by 150 Mcfd after approximately six weeks of de-watering.  These new wells are the first set of wells we have completed and connected to our newly enhanced gas gathering pipeline system.  Based on our current field production levels, we plan to aggressively develop future production activities.



Additionally, in the second quarter of 2005, we acquired an additional 400 gross acres adjacent to our Petrol-Neodesha property and have committed to drill three wells this year on these newly acquired leases.



Coal Creek Project



As of December 31, 2005, Petrol had drilled and tested 45 wells in a pilot/exploration program located within its leased acreage in Coffey County, Kansas. Following drilling, logging and setting steel casing, these wells were perforated in some of the coal intervals that appeared to contain gas. The perforated coal intervals in some wells were acidizied and subsequently



18



---



fractured using conventional hydraulic techniques in order to stimulate production. Wellheads and downhole pumping systems were used in the process of de-watering the coals and their fractures or cleats. Daily water production ranged between 50-350 barrels per day while produced gases were either flare tested or shut-in at the wellhead. Petrol owns and operates two salt water disposal wells on its Coal Creek properties.



Missouri Project



During 2004 Petrol continued to evaluate mineral leases in Missouri. Petrol drilled and tested five (5) exploratory wells in Cass County, Missouri and has acquired leases covering about 20,000 gross acres (12,430 net acres) in Cass and Bates counties, Missouri.



Pomona Project



In 2004 Petrol acquired mineral leases amounted to about 36,000 gross acres (30,750 net acres) from CBM Energy Inc.  The acquisition included 17 wells, several miles of gas gathering and water disposal pipelines, and a salt water disposal well. The Pomona project is located in Douglas, Franklin and Osage counties, Kansas.



Production



The following table shows the results of operations from our oil and gas producing activities during the years presented in the financial statements.  Results of operations from these activities have been determined using historical revenues, production costs, depreciation, depletion and amortization of the capitalized costs subject to amortization.  General and administrative expenses and interest expense have been excluded from this determination.



|                                                                  | Years Ended December 31,
|----------------------------------------------------------------- | ------------------------
|                                                                  | 2005                    
|Production revenues                                               | $6,040,957              
|Production and pipeline costs                                     | (4,111,589)             
|Depreciation and depletion                                        | (808,138)               
|Income tax  (allocated on gross profits based
On statutory rates) | (345,000)               
|Results of operations for producing activities                    | $  775,891              



Executive and Field Offices



We currently maintain an executive office at 3161 E. Warm Springs Road, Suite 300, Las Vegas, Nevada 89120.  The space consists of approximately 1,864 square feet, which houses administrative and corporate offices.  The monthly rental for the space is $3,450 per month (increasing by the consumer price index as defined in the lease with minimum annual increase of 3%) commencing April 15, 2004 and ending June 30, 2007 with the first three months free.



We also lease approximately 2,500 square feet of space in Waverly, Kansas, where our field and leasing offices are located.  This facility is leased on a month-to-month basis with our monthly lease obligation being $300.





19



---





In April 2006, we are relocating our principal executive offices to Overland Park, Kansas.  We have executed a one year lease for 150 square feet.  The monthly rental for the space is approximately $1,300 per month.





|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------



Petrol is and may become involved in various routine legal proceedings incidental to its business. However, to Petrols knowledge as of the date of this report, there are no material pending legal proceedings to which Petrol is a party or to which any of its property is subject.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------



We held our annual meeting of stockholders on December 20, 2005. Business conducted at the meeting included the following proposals:



|1. | To elect new directors to serve until the next annual meeting or until their successors are elected and qualified; Paul Branagan and Loren Moll were re-elected and Suzanne Herring was nominated to serve as the Companys directors;
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | To confirm the reaffirmation of Weaver & Martin LLC as our independent auditors; and
|-- | ------------------------------------------------------------------------------------
|3. | To schedule the next annual meeting of stockholders.                                



Each share of Common Stock was entitled to one vote. Only stockholders of record at the close of business on November 18, 2005, were entitled to vote.  The number of outstanding shares at the time was 26,351,797 held by approximately 103 stockholders. The required quorum of stockholders was present at this meeting.



Votes on the election of a new director were as follows:



| | Director        | For        | Against | Broker Non-Votes
| | --------------- | ---------- | ------- | ----------------
| | Paul Branagan   | 13,616,535 | 0       | 12,735,444      
| | Loren Moll      | 13,616,535 | 0       | 12,735,444      
| | Suzanne Herring | 13,616,535 | 0       | 12,735,444      



PART II



|ITEM 5. | MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- | --------------------------------------------------------



(a) Market Information



Since March 4, 2004, we have been eligible to participate in the over-the-counter securities market through the National Association of Securities Dealers Automated Quotation Bulletin Board System, under the trading symbol POIG.  The following table sets forth the quarterly high and low bid prices for our Common Stock during our last two fiscal years, as reported by a Quarterly Trade and Quote Summary Report of the OTC Bulletin Board. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.



20



---







|           | 2004
|---------- | ----
|           | High
|1stQuarter | 0   
|2ndQuarter | 3.75
|3rdQuarter | 2.30
|4thQuarter | 2.50
|          
|           | 2005
|           | High
|1stQuarter | 2.65
|2ndQuarter | 2.49
|3rdQuarter | 2.25
|4thQuarter | 1.76



(b) Holders of Common Stock



As of March 30, 2006, we had approximately 108 stockholders of record of the 28,328,471 shares outstanding.  As of March 30, 2006, the closing price of our shares of common stock was $1.95 per share.



(c) Dividends



We have never declared or paid dividends on our Common Stock.  We intend to follow a policy of retaining earnings, if any, to finance the growth of the business and do not anticipate paying any cash dividends in the foreseeable future.  The declaration and payment of future dividends on the Common Stock will be the sole discretion of the Board of Directors and will depend on our profitability and financial condition, capital requirements, statutory and contractual restrictions, future prospects and other factors deemed relevant.



(d) Securities Authorized for Issuance under Equity Compensation Plans



2002/2003 Stock Option Plan



Effective December 16, 2002, we adopted a 2002/2003 Stock Option Plan.  The maximum number of shares that may be issued pursuant to the plan is 3,000,000 shares.  As of December 31, 2005, 2,975,000 options have been granted under this plan.



2006 Stock Option Plan



Effective December 21, 2005, we adopted a 2006 Stock Option Plan.  The maximum number of shares that may be issued pursuant to the plan is 3,000,000 shares.  As of December 31, 2005, 500,000 options have been granted under this plan.  Subsequent to year end, we granted and additional 110,000 options under this plan.



Officers (including officers who are members of the board of directors), directors (other than members of the stock option committee to be established to administer the stock option plans) and other employees and consultants and its subsidiaries (if established) will be eligible to receive options under the stock option plans.  The committee will administer the stock option



21



---



plans and will determine those persons to whom options will be granted, the number of options to be granted, the provisions applicable to each grant and the time periods during which the options may be exercised.  No options may be granted more than ten years after the date of the adoption of the stock option plans.



Non-qualified stock options will be granted by the committee with an option price equal to the fair market value of the shares of common stock to which the non-qualified stock option relates on the date of grant.  The committee may, in its discretion, determine to price the non-qualified option at a different price.  In no event may the option price with respect to an incentive stock option granted under the stock option plans be less than the fair market value of such common stock to which the incentive stock option relates on the date the incentive stock option is granted.



Each option granted under the stock option plans will be exercisable for a term of not more than ten years after the date of grant.  Certain other restrictions will apply in connection with the plans when some awards may be exercised.  In the event of a change of control (as defined in the stock option plans), the date on which all options outstanding under the stock option plans may first be exercised will be accelerated.  Generally, all options terminate 90 days after a change of control.



The following table sets forth information as of December 31, 2005 regarding outstanding options granted under the plans, warrants issued to consultants and options reserved for future grant under the plan.



|Plan Category                                           |     | Number
of shares to be issued upon exercise of outstanding options, warrants and rights
(a)                                                                                            |  | Weighted-average exercise price of outstanding options, warrants and rights
(b) |  | Number of shares remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a))
(c)
|------------------------------------------------------- | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|                                                        |     |                                                                                                                                                                                        |  |                                                                                 |  |                                                                                                                                        
|Equity compensation plans approved by stockholders      |     | --                                                                                                                                                                                     |  | $                        --                                                     |  | --                                                                                                                                     
|                                                        |     |                                                                                                                                                                                        |  |                                                                                 |  |                                                                                                                                        
|Equity compensation plans not approved  by stockholders |     | 3,125,000                                                                                                                                                                              |  | $                    1.78                                                       |  | 2,525,000                                                                                                                              
|                                                        |     |                                                                                                                                                                                        |  |                                                                                 |  |                                                                                                                                        
|Total                                                   |     | 3,125,000                                                                                                                                                                              |  | $                    1.78                                                       |  | 2,525,000 (1)                                                                                                                          
|                                                        |     |                                                                                                                                                                                        |  |                                                                                 |  |                                                                                                                                        
|                                                        | (1) | 25,000 options available for issuance under our 2002/2003 stock option plan and 2,500,000 options available for the issuance under our 2006 stock option plan as of December 31, 2005. | 
|                                                        |     |                                                                                                                                                                                        |  |                                                                                 |  |                                                                                                                                        





22



---





These plans are intended to encourage directors, officers, employees and consultants to acquire ownership of common stock.  The opportunity so provided is intended to foster in participants a strong incentive to put forth maximum effort for its continued success and growth, to aid in retaining individuals who put forth such effort, and to assist in attracting the best available individuals to the Company in the future.  As of December 31, 2005, 25,000 shares remained available for issuance under the 2002/2003 stock option plan and 2,500,000 shares remained available for issuance under the 2006 stock option plan.  As of March 24, 2006, 25,000 shares remained available under the 2002/2003 stock option plan and 2,390,000 shares remained available under the 2006 stock option plan.



Recent Sales of Unregistered Securities



The following table shows the conversions of principal and accrued interest made in the fourth quarter and subsequent by Laurus Master Fund Ltd. pursuant to the Convertible Term Note dated October 24, 2004.



|CONVERSION
DATE      | PRINCIPAL
AMOUNT | INTEREST
AMOUNT | # OF SHARES FOR PRINCIPAL | # OF SHARES
FOR INTEREST | DATE
ISSUED
|-------------------- | ---------------- | --------------- | ------------------------- | ------------------------ | -----------
|10/4/2005            | $0.00            | $54,210.33      | 0                         | 36,140                   | 10/5/2005  
|10/13/2005           | $37,500.00       | $0.00           | 25,000                    | 0                        | 10/13/2005 
|11/1/2005            | $15,000.00       | $0.00           | 10,000                    | 0                        | 11/9/2005  
|11/8/2005            | $164,264.56      | $55,371.36      | 109,510                   | 36,914                   | 11/9/2005  
|12/6/2005            | $228,382.28      | $53,663.84      | 152,255                   | 35,776                   | 12/7/2005  
|SUBSEQUENT ISSUANCES
|1/9/2006             | $228,382.28      | $54,287.55      | 152,255                   | 36,192                   | 1/9/2006   
|2/7/2006             | $150,000.00      | $0.00           | 100,000                   | 0                        | 2/8/2006   
|2/8/2006             | $37,500.00       | $0.00           | 25,000                    | 0                        | 2/9/2006   
|2/8/2006             | $40,882.28       | $52,989.21      | 27,255                    | 35,326                   | 2/14/2006  
|2/16/2006            | $228,382.28      | $0.00           | 152,255                   | 0                        | 2/17/2006  
|3/09/2006            | $0.00            | $46,250         | 0                         | 30,834                   | 3/09/2006  
|TOTAL                | $1,130,293.68    | $316,772.29     | 753,530                   | 211,182                  |            



The shares issued for the conversion of principal were previously registered under our SB-2 declared effective on June 30, 2005.



The shares issued for the conversion of accrued interest were shares of our restricted common stock. We believe that the issuance of the shares was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2) and Regulation D Rule 506. The shares were issued directly by us and did not involve a public offering or general solicitation. Laurus Funds is an Accredited Investor as defined in Rule 501 of Regulation D promulgated under the Securities Act. Laurus was afforded an opportunity for effective access to files and records of the Company that contained the relevant information needed to make its investment decision, including the financial statements and Exchange Act reports. We reasonably believe that Laurus immediately prior to issuing the shares, had such knowledge and experience in financial and business matters
that they were capable of evaluating



23



---



the merits and risks of their investment. Laurus had the opportunity to speak with our management on several occasions prior to its investment decision.



On October 11, 2005, we issued 10,000 shares of our restricted common stock to Edward Birk as payment for a water disposal well. We believe that the issuance of the shares was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2).



On October 11, 2005, we issued 50,000 shares of our restricted common stock to Haas Oil Group, pursuant to a Purchase and Sales Agreement dated September 20, 2004. We believe that the issuance of the shares was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2).



Pursuant to the Laurus Funds transaction entered into on October 31, 2005, we executed a $10 million secured term note and granted Laurus Funds a warrant to purchase 1,000,000 shares of our common stock at $2.00 per share. The Warrant is exercisable at any time or from time to time before 5:00 p.m., New York time, through the close of business on October 31, 2010. We believe that the issuance and sale of the Warrant was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2) and Regulation D Rule 506. The warrant was issued directly by us and did not involve a public offering or general solicitation. Laurus Funds is an Accredited Investor as defined in Rule 501 of Regulation D promulgated under the Securities Act. Laurus was afforded an opportunity for effective access to files and records of the Company that
contained the relevant information needed to make its investment decision, including the financial statements and Exchange Act reports. We reasonably believe that Laurus immediately prior to issuing the warrant, had such knowledge and experience in financial and business matters that they were capable of evaluating the merits and risks of their investment. Laurus had the opportunity to speak with our management on several occasions prior to its investment decision.



In connection with the Laurus Funds financing, we will pay Laurus Funds a management fee of $350,000, plus $32,586.36 for due diligence and legal fees, and $2,500 in escrow fees. Further, we paid a cash finders fee of $50,000 and issued 50,000 shares of our common stock.



We believe the issuance of the 50,000 shares was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2). The shares were issued directly by us and did not involve a public offering or general solicitation. The recipient of the shares was afforded an opportunity for effective access to files and records of the Company that contained the relevant information needed to make its investment decision, including our financial statements and 34 Act reports. We reasonably believe that the recipient, immediately prior to issuing the shares, had such knowledge and experience in our financial and business matters that it was capable of evaluating the merits and risks of its investment. The recipient had the opportunity to speak with the Companys president and directors on several occasions prior to its investment decision.



Pursuant to Paul Branagans employment agreement executed on November 2, 2005, we granted Mr. Branagan an extension of previously granted stock options to purchase 1,250,000 shares of our common stock at prices ranging from $0.05 per share to $2.50 per share, exercisable at any time and expiring on September 30, 2010. We also granted Mr. Branagan additional options to purchase 500,000 shares of our common stock at $1.75 per share,



24



---



exercisable at any time and expiring on September 30, 2010. We believe the grant of the options was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2). The options were issued directly by us and did not involve a public offering or general solicitation. The recipient of the options is the CEO/President of the Company, which affords him an opportunity for effective access to files and records of the Company that contain relevant information needed to make his investment decision, including the Companys financial statements and 34 Act reports. We reasonably believe that the recipient, immediately prior to granting the options, had such knowledge and experience in our financial and business matters that he was capable of evaluating the merits and risks of his investment.



On December 20, 2005, ECS Capital Management, LP exercised 250,073 warrants through a cashless exercise by tendering to us its warrant to purchase 845,000 shares, thereby using the 594,927 remaining warrant shares to satisfy the exercise price. The 250,073 shares were issued on December 21, 2005 and were previously registered in our registration statement declared effective on June 30, 2005.



On December 21, 2005, Cordillera Fund LP exercised 125,000 warrants at a price of $1.50 per share.  The 125,000 shares were issued on January 4, 2006 and were previously registered in our registration statement declared effective June 30, 2005.



On December 30, 2005, we issued 60,000 shares of our restricted common stock to CEOcast, Inc., pursuant to its consulting agreement dated August 7, 2005.  We believe that the issuance of the shares was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2).



During February 2006, we issued a total of 586,676 shares of our restricted common stock to the members of Petrol Oil, II LLC and Petrol Paola LLC in exchange for their respective membership interests pursuant to agreements entered into in December 2005.  We believe that the issuance of the shares was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2).



Pursuant to Joseph Blankenships Research Agreement dated February 9, 2004, he received options to purchase 25,000 shares for our common stock at $2.50 and options to purchase 25,000 shares of our common stock at $4.00 per share.  On February 2, 2006, we extended the expiration date of his options from February 9, 2006 to February 9, 2008.



On February 8, 2006, we issued 7,595 shares of our restricted common stock to ECON Investor Relations, Inc., pursuant to its consulting agreement dated June 15, 2004.  We believe that the issuance of the shares was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2).



On February 13, 2006, GSSF Master Fund, LP exercised 50,000 warrants at a price of $1.50 per share. The 50,000 shares were issued on February 22, 2006 and were previously registered in our registration statement declared effective on June 30, 2005.



On February 13, 2006, Gryphon Master Fund, L.P. exercised 50,000 warrants at a price of $1.50 per share. The 50,000 shares were issued on February 22, 2006 and were previously registered in our registration statement declared effective on June 30, 2005.





25



---





On February 17, 2006, we issued 50,000 shares of our restricted common stock to Mike Draper as a finders fee for the Laurus Financing in October of 2005.  We believe that the issuance of the shares was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2).





ITEM 6.MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION



With the exception of historical matters, the matters discussed herein are forward-looking statements that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements concerning anticipated trends in revenues and net income, projections concerning operations and available cash flow. Actual results and events could differ materially from those projected, anticipated, or implicit, in the forward-looking statements as a result of the risk factors set forth below and elsewhere in this report.  The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto appearing elsewhere herein.



OVERVIEW AND OUTLOOK



We are an oil and gas exploration, development and production company.  Our properties are located in the Cherokee Basin along the Kansas and Missouri border.  Our corporate strategy is to continue building value in the Company through the development and acquisition of gas and oil assets that exhibit consistent, predictable, and long-lived production.  Our current focus is Coal Bed Methane reservoirs in the central U.S., which produce both Coal Bed Methane (CBM) and at times conventional gas.



Our recent activities include the consolidation of a strong lease position in CBM that contains quality proven gas reserves, some of which are adjacent to interstate pipeline systems which provide ready access to sales market for our produced gas.  During 2005 our focus turned to developing and producing those leases so as to realize the value held within their reserves.  With 165,000 gross leased acres (132,000 net acres) the task of developing the properties with wells on 160 acre spacing will involve in excess of 1,000 wells. Petrol holds a 100 % working interest and an average 80% net revenue interest in these leases. In order to develop this large resource base we have segregated our leases into five separate Projects which include:



|1. | Petrol-Neodesha Project -a 10,000 gross acre (8,000 net acres) gas producing property                                                                                          
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Coal Creek Project -current development of about 92,000 gross acres (73,000 net acres) with 40 production wells, 2 salt water disposals wells and gas gathering infrastructure.
|3. | Pomona Project 35,000 gross acres (28,000 net acres) with 17 shut in production wells, 1 salt water disposal well and some gas gathering infrastructure.                      
|4. | Missouri Project 18,000 gross acres (12,000 net acres) with 5 test/evaluation wells.                                                                                          

|5. | Oil Field Projects 10,000 gross acres
|-- | --------------------------------------





26



---





Petrol-Neodesha Project



Currently our gas producing leases known as Petrol-Neodesha, in the Neosho and Wilson counties, account for approximately 10,000 of the total 165,000 gross leased acres.  These properties are in active production with on average 90 CBM producing wells that produce approximately 2.7 Million cubic feet of gas per day.  Studies to drill additional wells, improve existing wells and enhance the gas gathering system were refined into an advanced development plan during the first quarter of 2005 and execution of the plan began in the second quarter of 2005.  This plan was designed to serve as the blueprint to enhance the Net Asset Value of these properties, increase production revenue and provide knowledge for development of remaining leases in this and our other Project areas. These Petrol-Neodesha properties have provided us with a revenue stream and certain value in proven producing reserves.



In the second quarter of 2005, we implemented Phase I of our development plan that involved expanding the production of our existing gas gathering pipeline system and drilling several new production wells.  Phase I pipeline enhancements included adding approximately 3.5 miles of high capacity gas gathering pipeline and strategically incorporating 2 new booster stations to reduce pipeline pressure as well as to provide a higher level of compressor redundancy. In addition, the reduced pipeline pressure was designed to increase production from existing production wells and in fact overall field production was found to increase by about 425 Mcfd. Furthermore, the capacity of the main pipeline gathering lines was doubled and will serve to accommodate production from 50 to 100 new development wells.



The second element of the Phase I development plan involved drilling five new CBM wells.  The initial production rates were about 150 Mcfd after approximately six weeks of de-watering.  These wells were the first set of wells we completed and connected to the newly enhanced gas gathering pipeline system.



Additionally, in the second quarter of 2005, we acquired an additional 400 gross acres adjacent to our Petrol-Neodesha property and drilled four new production wells during the later half of 2005 on these newly acquired leases.



In the third quarter of 2005, we incorporated a new gas processing unit into our Neodesha pipeline system to support growing gas sales from our Petrol-Neodesha property and enhance gas quality.



We intend to continue seeking acquisition opportunities which compliment our current production.  We intend to fund our development activity primarily through the use of cash flow from operations and cash on hand, while seeking larger debt funding opportunities sufficient enough to develop a greater portion of our mineral leases. During 2005 we drilled, completed and began production from 14 new wells. On average we have included 3 new production wells per month in Petrol-Neodesha since we began implementing our drilling-development plan in late mid-year and have continued that new well monthly rate into 2006. Based on our current field production levels, we plan to aggressively develop future production activities.



Coal Creek Project



During 2005 Petrol embarked on securing funds for the development of our Coal Creek project centered in Coffey County, Kansas. The Coal Creek Project includes leases covering



27



---



about 92,000 gross acres. In October we finalized an agreement and other documents whereby Laurus Master Funds, Ltd. would provide a debt facility of up to $50,000,000 with the first $10,000,000 tranche received in November 2005.



The Coal Creek development plan is based upon drilling and completing some 540 wells over a two to three year period along with miles of gas gathering pipelines and infrastructure to process, transport and sell gas in mid-west markets. To better manage the development of this large acreage position and take advantage of the three interstate pipeline that cross our leases we divide the project into three fully self contained areas:



|4. | Burlington Area about 15,000 gross acres located in southwestern Coffey County, Kansas.  This was our assessment area in which we drilled our first test wells.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|5. | Waverly Area about 40,000 gross acres located in northeastern Coffey County, Kansas, Southern Osage County and Western Anderson County, Kansas.                

|6. | Lebo Area about 37,000 acres located in northwestern Coffey County, Kansas.
|-- | ----------------------------------------------------------------------------



The full development plan is expected to be executed in two phases. The first phase involves emplacing the basic gas gathering pipeline infra-structures and developing about 180 new CBM wells. Phase two includes finalizing the gas gathering pipeline and developing 360 new CBM wells. The anticipated costs of the full development plan are expected to be approximately $66,000,000. The pace of the development will obviously depend on the availability of the financing program, lender restrictions, general economic conditions, and potential other factors relevant to this type of development plan.



The first $10,000,000 tranche broke escrow in November 2005 and has been used primarily to initiate Phase I development which involved drilling gas production wells as well as the installation of a gas gathering pipeline system in both the Burlington and Waverly areas. At the end of December 2005 there were 22 production and 2 salt water disposal wells ready for connection to the gas gathering pipelines that were being installed in the Burlington area. Similarly, at the end of 2005 the first several production wells and salt water disposal well were emplaced and the gas gathering lines were being buried in the Waverly area.



Production and sales from the Burlington area is expected to begin in April 2006 with the Waverly area following in May 2006.



Pomona Project



Located primarily in Franklin County, Kansas the Pomona Project includes leases covering about 35,000 acres. There are about 17 shut in production wells, a salt water disposal well and portions of a gas gathering infrastructure.  Two interstate pipeline systems cross through our leases.



Missouri Project



Located in Cass and Bates Counties, Missouri, our Missouri Project includes leases covering about 15,000 gross acres. We drilled and tested 5 evaluation wells on our lease that abut an interstate pipeline system.





28



---





Oil Field Project



We have a 100 % working interest in several oil producing properties that produce an average 80 barrels of oil per day. These oil producing wells are generally defined as stripper wells and are producing under the influence of a water flood.



Results of Operations



The following overview provides a summary of key information concerning our financial results for the fiscal years ended on December 31, 2005 and 2004.



|                                         |  | Year Ended December 31, |  | 
|---------------------------------------- |  | ----------------------- |  | 
|                                         |  | 2005                    |  | 
|                                         |  | Amount                  |  | 
|Revenue                                  |  |                         |  | 
|Oil and gas activities                   |  | $  5,945,957            |  | 
|Operator fees                            |  | 95,000                  |  | 
|Total revenue                            |  | 6,040,957               |  | 
|                                         |  |                         |  | 
|Expenses:                                |  |                         |  | 
|Direct costs                             |  | 3,084,494               |  | 
|Royalty expense                          |  | 796,151                 |  | 
|Pipeline costs                           |  | 230,944                 |  | 
|General and administrative               |  | 2,115,019               |  | 
|Professional and consulting fees         |  | 2,577,970               |  | 
|Depreciation, depletion and amortization |  | 1,392,342               |  | 
|Acquisition cost                         |  | -                       |  | 
|Total expenses                           |  | 10,196,920              |  | 
|                                         |  |                         |  | 
|Net operating (loss)                     |  | (4,155,963)             |  | 
|                                         |  |                         |  | 
|Other income (expense):                  |  |                         |  | 
|Interest and other income                |  | 65,054                  |  | 
|Interest expense                         |  | (1,872,887)             |  | 
|Total other income (expense)             |  | (1,807,833)             |  | 
|                                         |  |                         |  | 
|Net loss                                 |  | $(5,963,796)            |  | 



Fiscal Year Ended on December 31, 2005 Compared to Fiscal Year Ended on December 31, 2004



Revenue:Total revenue was $6,040,957 and $866,924 for the fiscal years ended December 31, 2005 and 2004, respectively, for an increase of $5,174,033 or 597%. The increase in revenues is a result of our acquisition in September of 2004 of 10,000 gross acres of leaseholds which included 71 producing gas wells in Wilson and Neosho counties in Eastern Kansas.  Additionally, we added 14 new wells to our Petrol-Neodesha Project by year end 2005.  Revenues from our Petrol-Neodesha were our primary source of revenues for year end 2005.



29



---





Direct costsare the costs associated with operating producing wells, and transporting the oil and natural gas to the market for sale. Direct costs totaled $3,084,494 and $221,339 for the fiscal year of 2005 and 2004, respectively, for an increase of $2,863,155.  The increase in direct costs is primarily the result of increased costs associated with the production of gas in our Petrol-Neodesha project.  As a result of our revenue increase related to the Petrol-Neodesha, we had increased costs directly related to the production of gas.



Royalty expensestotaled $796,151 and $0 for the fiscal year of 2005 and 2004, respectively, for and increase of $796,151, which relates to the royalties paid to limited liability companies in which we were the managing member.  As of December 31, 2005, we acquired the membership interests of 2 of the limited liability companies and we are in the process of acquiring the membership interests of the remaining limited liability company.



Pipeline coststotaled $230,944 and $0 for the fiscal year of 2005 and 2004, respectively, for an increase of $230,944, relating to our increased production of gas in our Petrol-Neodesha project.



General and administrative expensesfor the fiscal year ended December 31, 2005 were $2,115,019 compared to $1,000,029 in the fiscal year ended December 31, 2004, respectively, for an increase of $1,114,990. The increase is attributable to expenses associated with additional staff and expenses related thereto as the result of our increased operations.



Professional and consulting feeswere $2,577,970 and $1,906,036 for the fiscal years ended December 31, 2005 and 2004, respectively, an increase of $671,934. The increase is a result of increased oil and gas operations and increased consulting costs associated with the increased operations in addition to increases of legal and accounting related to registrations of our securities primarily related to our additional financing during 2005.



Depreciation, depletion, and amortization expensefor the fiscal years ended December 31, 2005 and 2004 were $1,392,342 and $213,475 for an increase of $1,178,867. Historically, as a development stage company, we had not placed in service depreciable assets nor had we begun production eliminating the need for a depletion expense. The increase was a result of recently completed acquisition obligations and commencement of production.



|Other Income (Expense):
|-----------------------



Interest and other incomefor the fiscal years ended December 31, 2005 and 2004 was $65,054 and $39,417, respectively, for an increase of $25,637 which was the result of increased interest income in 2005 due to average higher account balances.



Interest Expensefor the fiscal years ended December 31, 2005 and 2004 was $(1,872,887) and $(1,435,369), respectively, for an increase of $437,518. The increase in interest expense is the result of increased financing in the sum of $8,000,000, which we borrowed in December of 2004.



Net Loss:Our net loss for fiscal years ended December 31, 2005 and 2004 was $5,963,796 and $4,523,907, respectively, for an increase in net loss in the amount of $1,439,889.





30



---





Analysis and Discussion of Cash Flow



During fiscal year 2005 our cash position increased by approximately $6,642,000.  The increase in the cash flow position was from our net financing activities of $9,972,154.  This was the result of note proceeds in excess of payments and fee amortization of $9,484,654 and proceeds from the exercise of warrants of $487,500.



We used our cash to acquire and develop oil and gas properties for a net total of $1,694,495.  In our operations we used $1,653,341 of cash which is the results of Petrol becoming an operating company for a full year.



Results of Operations for the Years Ended December 31, 2004 and 2003



The following overview provides a summary of key information concerning our financial results for the years ended December 31, 2004 and 2003.



|                                         |  | 2004         |  | 2003            |  | Increase     
|---------------------------------------- |  | ------------ |  | --------------- |  | -------------
|                                         |  | Amount       |  | Amount          |  | (Decrease)   
|Revenue                                  |  | $   866,924  |  | $             - |  | $     866,924
|                                         |  |              |  |                 |  |              
|Expenses:                                |  |              |  |                 |  |              
|Direct costs                             |  | 221,339      |  | -               |  | 221,339      
|General and administrative               |  | 1,000,029    |  | 343,941         |  | 656,088      
|Professional and
consulting fees         |  | 1,906,036    |  | 1,374,754       |  | 531,282      
|Depreciation, depletion
and amortization |  | 213,475      |  | -               |  | 213,475      
|Acquisition cost                         |  | 654,000      |  | -               |  | 654,000      
|Total                                    |  | 3,994,879    |  | 1,718,695       |  | 2,276,184    
|                                         |  |              |  |                 |  |              
|Net loss from operations                 |  | (3,127,955)  |  | (1,718,695)     |  | (1,409,260)  
|Other income (expense):                  |  |              |  |                 |  |              
|Interest and other income                |  | 39,417       |  | 1,067           |  | 38,350       
|Interest expense                         |  | (1,435,369)  |  | (16,156)        |  | (1,419,213)  
|Net loss                                 |  | $(4,523,907) |  | $(1,733,784)    |  | $(2,790,123) 



Year Ended December 31, 2004 Compared to Year Ended December 31, 2003



Revenue:Total revenue for the years ended December 31, 2004 and 2003 was $866,924 and $0. Historically, we have been in a development stage, acquiring various mineral leases and implementing all necessary capital improvements in order to become efficient in our production efforts. During the first three quarters of 2004 we had acquired and developed specific properties in order to begin production during the fourth quarter of 2004. Upon commencement of production, we have earned $142,298 through oil drilling efforts and $724,626 in gas production efforts.



|Expenses:
|---------





31



---





Direct costfor the years ended December 31, 2004 and 2003 were $221,339 and $-0-, respectively, for and increase of $221,339.  The increase is attributable to costs associated with the production of gas and oil.



General and administrative expensesfor the years ended December 31, 2004 and 2003 were $1,000,029 and $343,941, respectively, for an increase of $656,088.  The increase is attributable to the additional overhead incurred in connection with the commencement of field operations.



Acquisition costfor the years ended December 31, 2004 and 2003 were $654,000 and $0, respectively, for an increase of $654,000.  The increase is attributable to the acquisition of leases from CBM Energy, Inc.



Professional and consulting feeswere $1,906,036 and $1,374,754 during the years ended December 31, 2004 and 2003, for an increase of $531,282.  During the first and second quarters of 2004, we entered into several professional consulting agreements in order to successfully execute the private placement in the third quarter as well as obtain the required financing to complete the Petrol-Neodesha acquisition, which was the primary reason for the increase in professional and consulting fees.



Depreciation, depletion and amortization expensefor the years ended December 31, 2004 and 2003 were $213,475 and $0.  Historically, as a development stage company, we had not placed in service depreciable assets nor had we begun production eliminating the need for a depletion expense. As of December 31, 2004, we have completed all current acquisitions obligations and have commenced production.



|Other Income (Expense):
|-----------------------



Interest and other incomefor the years ended December 31, 2004 and 2003 was $39,417 and $1,067, respectively, for an increase of $38,350 which was derived from our $200,000 investment with CPA Investments.



Interest Expensefor the years ended December 31, 2004 and 2003 was $1,435,369 and $16,156, respectively, for an increase of $1,419,213.  During the year ended December 31, 2004, we acquired financing in the form of a convertible note in the amount of $8,000,000.  Due to the nature of this debt instrument, we have calculated and expensed beneficial conversion of the note, which attributes $1,013,000 to the amount expensed. The additional increase over the prior year is allocated to the accrual of normal principal balance of the loan.



Net Loss:Our net loss for the years ended December 31, 2004 and 2003 was $4,523,907 and $1,733,784, respectively, for an increase loss in the amount of $2,790,123.  Of these losses, approximately $1,800,000 was attributable to asset acquisitions and financing arrangements and the balance to increased overhead in connection with field operations and production costs.



Operation Plan



During the next twelve months we plan to continue to focus our efforts on increasing Production Revenues, and enhancing our Net Asset Value. We expect to achieve this through the:



32



---





| | sustained development and production of CBM and other natural gases on our existing properties at the Petrol-Neodesha Project,
|- | ------------------------------------------------------------------------------------------------------------------------------

| | aggressive development of our 92,000 gross acre Coal Creek Project,
|- | -------------------------------------------------------------------
| | pursuing strategic acquisitions of producing properties and;       
| | creating value by furthering our business plan.                    
|  |                                                                    



Petrol-Neodesha Project



With the acquisition of the Petrol-Neodesha and certain oil properties, we are currently providing ongoing revenue and cash from these properties. As we expand development and operational activities, we will weigh the pace of further drilling and development against the availability of internal and external funding. Currently, we have been drilling about 3 wells per month beginning in the fall of 2005. Given appropriate economics we plan to continue with that development rate.



With the enhancements to gas gathering pipeline systems that we finalized late spring and early summer of 2005 we now have additional pipeline capacity to fully develop this 10,000 gross acre property. In fact during 2005 we have drilled and completed 14 new production wells that were all 100% successes.



Coal Creek Project



On October 31, 2005, we entered into agreements with Laurus Master Fund, Ltd.  Under the terms of the Laurus Funds agreements, $10,000,000 was funded into an escrow account and was disbursed to us in November 2005 after finalization of certain closing requirements.  We issued a Secured Term Note (the Note) in the aggregate principal amount of $10,000,000 and a five-year warrant (the Warrant) to purchase 1,000,000 shares of our common stock at $2.00 per share. The Note has a three-year term and bears an interest rate equivalent to the prime rate published by the Wall Street Journal from time to time plus 3.25%, subject to a floor of 10% and a ceiling of 14% per annum.



In addition, Laurus Master Funds, in their sole discretion, may purchase additional notes from us in an aggregate principal amount of up to $40,000,000 pursuant to substantially similar terms of the initial Note dated October 31, 2005.



The net proceeds derived from this first Laurus Funds Financing Transaction have been utilized in the development of two areas within the Coal Creek project, specifically the Burlington area and the Waverly area. This will involve some 40 production wells, 3 salt water disposal wells and the installation of miles of gas gathering pipelines and processing systems within each of those production areas.



The entire Coal Creek development plan includes drilling and completing of some 540 wells and three gas gathering pipeline systems over a two to three year period. The anticipated costs of this full development plan is expected to be approximately $66,000,000 for which we expect to acquire a majority of funding through the $50,000,000 Laurus Master Fund Ltd credit



33



---



facility. The pace of the development will obviously depend on the availability of the financing program and favorable market conditions.



The first $10,000,000 tranche is being used primarily to initiate Phase I with the drilling of gas production wells as well as the installation of a gas gathering pipeline system in two of the three areas, Burlington and Waverly. We also intend to fund portions of our field operations and development program from revenues obtained from sales of our CBM gas and oil production, outside lenders, and from proceeds of anticipated exercise of warrants and options. In addition, we may take on Joint Venture (JV) or Working Interest (WI) partners that will contribute to the capital costs of drilling and completion and then share in revenues derived from production. This economic strategy may allow us to realize the value in our own financial assets toward the growth of our leased acreage holdings, pursue the acquisition of strategic oil and gas producing properties or companies and generally
expand our existing operations.



Our future financial results will depend primarily on: (i) the ability to continue to produce gas and oil from existing wells; (ii) the ability to discover commercial quantities of natural gas and oil; (iii) the market price for oil and gas; and (iv) the ability to fully implement our exploration and development program, which is dependent on the availability of capital resources. In order to be successful in all or any of these respects, the prices of oil and gas prevailing at the time of production must be at a level allowing for profitable production, and we must be able to obtain additional funding to increase our capital resources.



Liquidity and Capital Resources



Financing.On October 28, 2004, we entered into agreements with Laurus Master Fund, Ltd., a Cayman Islands corporation. Under the terms of the Laurus Funds agreements we issued a Secured Convertible Term Note (the Note) in the aggregate principal amount of $8.0 million and a five-year warrant (the Warrant) to purchase 3,520,000 shares of our common stock at $2.00 per share and 1,813,333 shares of our common stock at $3.00 per share. The Note is convertible into shares of our common stock at a fixed conversion price of $1.50 per share. The Note has a three-year term and bears an interest rate equivalent to the prime rate published by the Wall Street Journal from time to time plus 3%, subject to a floor of 7.5% per annum.



On January 28, 2005, we amended the Laurus Note and the Registration Rights Agreement. Laurus agreed to move six months of principal payments (January through May of 2005) to be paid on the Maturity Date (October 28, 2007). Additionally, Laurus agreed to extend certain filing and effectiveness dates under the registration rights agreement. In consideration for the amendment, we issued an additional common stock purchase warrant to Laurus to purchase up to 1,000,000 shares of our common stock at $2.50 per share for the first 666,667 shares and $3.00 per share for the next 333,333 shares. Further, pursuant to the amendment agreement executed on April 28, 2004, we have agreed to file semi-annual registration statements to register shares of our common stock issued to Laurus for the conversion of interest under the Note.



As of March 9, 2006, Laurus has converted $2,055,440.52 of principal payments into 1,370,295 shares of our common stock and $729,580.39 of accrued interest into 486,387 shares of our common stock (1,856,682 shares in total). The conversion of principal and accrued interest allowed us additional cash to use in our operations.





34



---





Cash Flows.Since inception, we have financed cash flow requirements through debt financing and the issuance of common stock. As we expand operational activities, we may experience net negative cash flows from operations, pending receipt of sales or development fees, and may be required to obtain additional financing to fund operations through common stock offerings and debt borrowings to the extent necessary to provide working capital.



In October 2004 we sold 5,633,333 units for a total purchase price of $6,760,000. As part of the unit offering, we were required to use commercially reasonable efforts to file a registration statement with the SEC covering the units and have the registration declared effective within 120 days of the last Closing (October 27, 2004) under the unit offering. On October 29, 2004, we filed a registration statement on Form SB-2 which included the units and was declared effective on June 30, 2005. The subscription agreement for the unit offering contains a liquidated damage clause calling for us to pay damages ranging from 1%-2% for each thirty day period the registration statement is not effective as follows; (i) 1% of the purchase price of the Units for the first 30 day period, (ii) 1.5% of the purchase price of the Units for the second 30 day period, and (iii) 2% of the purchase price of the
Units for each 30 day period thereafter (i) and (ii). We believe we used commercially reasonable best efforts in an attempt to have the registration statement declared effective and that the liquidated damages provision of the subscription is unenforceable; therefore we will not be subject to payment of the liquidated damages.



Satisfaction of our cash obligations for the next 12 months.



A critical component of our operating plan impacting our continued existence is to efficiently manage the production from our Petrol-Neodesha Development and successfully develop our Coal Creek Project. Our ability to obtain additional capital through additional equity and/or debt financing, and Joint Venture or Working Interest partnerships will also be important to our expansion plans. In the event we experience any significant problems assimilating acquired assets into our operations or cannot obtain the necessary capital to pursue our strategic plan, we may have to reduce the growth of our operations. This may materially impact our ability to increase revenue and continue our growth.



Over the next twelve months we believe that our existing capital combined with cash flow from operations and funds from the October 31, 2005 Laurus Funds Financing Transaction, will be sufficient to sustain operations and planned expansion without additional financing through fiscal 2006.



We may incur operating losses over the next twelve months. Our lack of operating history makes predictions of future operating results difficult to ascertain. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development and production, particularly companies in the oil and gas industry. Such risks include, but are not limited to, an evolving and unpredictable business model and the management of growth. To address these risks we must, among other things, implement and successfully execute our business and marketing strategy, continue to develop and upgrade technology and products, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material
adverse effect on our business prospects, financial condition and results of operations.





35



---





Under our current operating plan, we are required to make certain lease payments to maintain our rights to develop and drill for oil and gas. These lease payments are material obligations to us.



Summary of product and research and development that we will perform for the term of our plan.



Field Development



Our original Operation Plan for field development started with identifying the most promising and cost-effective drill sites on our current leased acres, drilling and testing wells to prove reserves, completing the more promising test wells, extracting the gas, oil and other hydrocarbons that we find, and delivering them to market. We believe that we have leased sufficient mineral acreage to move forward with our field development and with the proceeds of our recent $10 million financing we are proceeding with the next phase of our operations which is large field scale development of our Coal Creek Project.



During a two year exploration and development phase of our operational plan in the Coal Creek and Missouri projects, we drilled and tested a total of 23 wells. The results of these drilling and testing efforts have provided our geologists and engineers with data that support the quantitative determination concerning the gas content and commercially producible amounts of CBM or other types of more conventional natural gas. Eighteen of these exploratory/test wells are contained within our Coal Creek project in Coffey county, Kansas. Most are in proximity to an existing interstate gas pipeline. The total drilling depth for our Kansas project wells in Coal Creek is approximately 1,700 ft, while in Missouri that depth shallow to about 700 ft.



Kansas Geologic Society (KGS) joined us in our scientific effort designed to assess the gas reserves from our CBM exploratory/test wells in the Coal Creek Project. KGS took samples from coal beds found in our Coffey County wells. Their laboratory test results yielded similar gas content values to those obtained by our geologist, Mr. William Stoeckinger, that were derived from sampling of our other exploratory/test wells. We view these independent gas content values quite favorably since they indicate quantitative similarities to the CBM producing coal beds found in our Petrol-Neodesha producing Prioject just south of the Coal Creek Project.



Based on our first series of exploratory/test wells and current bid pricing we anticipate that each well in our Coal Creek Project will cost approximately $180,000, which includes locating, drilling, testing, hydraulically fracturing and connecting to the gas gathering pipeline. Operational costs are expected to be about $1,600 per month per well to pay for electricity, pulling and repairs, pumping, general maintenance and other miscellaneous charges. In support of these operations we have working agreements with local third parties to monitor and maintain our wells and perform drilling and work-over activities



Our Reserve Report dated December 31, 2005 indicates Petrol has significant proven undeveloped gas reserves on its leases in the Coal Creek Project.  After receiving the $10,000,00 tranche from Laurus Master Funds in November 2005 we immediately began the development of the Coal Creek Project with the intent of producing those reserves and increasing the Net Asset Value of that Project area.





36



---





Our Petrol-Neodesha project has room for another 50 to 100 wells to fully develop this existing 10,000 gross leased mineral acreage. In 2005 we finalized enhancing the production capacity of our gas gathering system which included the addition of a several of new booster pumps and miles of larger diameter trunk lines that will accommodate production form all our new wells. Since the fall of 2005 we have drilled on average 3 new wells per month and have continued at that rate into first quarter of 2006. Finally, we instituted a well remediation program for some older producing wells that has resulted enhanced production.



In general our field development plan is employed over all its projects and involves several assessment stages: each new well is drilled through all possible CBM reservoirs and individually evaluated, upon a favorable evaluation of its overall production capacity the well will be fully completed and connected to our local gas gathering and water disposal pipelines during which an assessment will be made with regard to its de-water process and gas production.



When we identified a proposed drilling site, we as a licensed operator in the State of Kansas and Missouri, will be engaged in all aspects of well site operations. As the operator we will be responsible for permitting the well, which will include obtaining permission from the Kansas Oil and Gas commission or Missouri relative to spacing requirements and any other state and federal environmental clearances required at the time that the permitting process commences. Additionally, we will formulate and deliver to all interest owners an operating agreement establishing each participants rights and obligations in that particular well based on the location of the well and the ownership. In addition to the permitting process, we as the operator will be responsible for hiring the driller, geologist and land men to make final decisions relative to the zones to be targeted, confirming that we
have good title to each leased parcel covered by the spacing permit and to actually drill the well to the target zones. We will be responsible for completing each successful well and connecting it to the most appropriate portion of our gas gathering system.



As the operator we will be the caretaker of the well once production has commenced. As the operator, we will be responsible for paying bills related to the well, billing working interest owners for their proportionate expenses in drilling and completing the well, and selling the production from the well. Once the production has been sold, we anticipate that the purchaser thereof will carry out its own research with respect to ownership of that production and will send out a division order to confirm the nature and amount of each interest owned by each interest owner. Once a division order has been established and confirmed by the interest owners, the production purchaser will issue the checks to each interest owner in accordance with its appropriate interest.  From that point forward, we as operator will be responsible for maintaining the well and the wellhead site during the entire term
of the production or until such time as we have been replaced or the site appropriately abandoned.



Along with the drilling and completion of our CBM production wells we will formulate, design and install a gas gathering and compression system to transport the gas from wellhead to the high pressure interstate pipeline tap and sales market. Our experience in Petrol-Neodesha will be brought to bear on these new areas in Coal Creek or Missouri. We have identified several major interstate distribution pipelines that operate within and pass through the counties in which we have lease holdings. These include pipelines owned and operated by Southern Star, CMS Energy, Enbridge and Kinder Morgan. We have initiated contact with these companies to ascertain the specific locations of their pipelines, their requirements to transport gas from us (including volume of gas and quality of gas), and the costs to connect to their pipelines. We



37



---



currently have agreements with Southern Star in our Petrol-Neodesha Project and Enbridge in our Coal Creek Project



Presently, we are determining the costs of transporting our gas products to these existing interstate pipelines. The cost of installing a distribution infrastructure or local gathering system will vary depending upon the distance the gas must travel from wellhead to the compressor station and high pressure pipeline tap, and whether the gas must be treated to meet the purchasing companys quality standards. However, based on the close proximity of several major distribution pipelines to our leased properties, plus our intent to drill as close to these pipelines as practicable, we anticipate that the total cost of installing a distribution infrastructure for a group of about 50-75 producing wells will be approximately $6,500 each plus a one-time expense of $5,000 per well to tap into the high pressure interstate pipeline and support a compressor and monitoring system.



The prices obtained for oil and gas are dependent on numerous factors beyond our control, including domestic and foreign production rates of oil and gas, market demand and the effect of governmental regulations and incentives.  We have entered into forward sales contracts for a portion of the gas and oil we presently produce.  We do not have any delivery commitments for gas or oil from wells not currently drilled. However, due to the U.S. governments recent push toward increased domestic production of energy sources, and the high demand for natural gas, we do not anticipate any difficulties in selling any oil and gas we produce, once it has been delivered to a distribution facility.



The timing of most of our capital expenditures is discretionary. Currently there are no material long-term commitments associated with any capital expenditure plans, that are currently in the investigative planning stage. Consequently, we have a significant degree of flexibility to adjust the level of such expenditures as circumstances warrant. The level of our capital expenditures will vary in future periods depending on energy market conditions and other related economic factors.



Significant changes in the number of employees.



We currently have four full time employees and two part time employees as well as eight contract personnel that support and operate our field operations. As drilling production activities increase, we intend to hire additional technical, operational and administrative personnel as appropriate. None of our employees are subject to any collective bargaining agreements; however, we have entered into employment agreements with Paul Branagan and Gary Bridwell. We expect a significant change in the number of full time employees over the next 12 months. However, at this time we are unable to quantify exactly how many. We intend to use the services of independent consultants and contractors to perform various professional services, particularly in the area of land services, drilling, water hauling, pipeline construction, well design, well-site monitoring and surveillance, permitting and
environmental assessment. We believe that this use of third-party service providers may enhance our ability to contain general and administrative expenses.



Our proposed personnel structure could be divided into three broad categories: management and professional, administrative, and project field personnel. As in most small companies, the divisions between these three categories are somewhat indistinct, as employees are engaged in various functions as projects and work loads demand.



38



---





Off-Balance Sheet Arrangements



We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.





Derivatives



To reduce our exposure to unfavorable changes in natural gas prices we have entered into an agreement to utilize energy swaps in order to have a fixed-price contract. This contract allows us to be able to predict with greater certainty the effective natural gas prices to be received for hedged production and benefit operating cash flows and earnings when market prices are less than the fixed prices provided under the contracts. However, we will not benefit from market prices that are higher than the fixed prices in our contracts for hedged production. If we are unable to provide the quantity that we have contracted for we will have to go to the open market to purchase the required amounts that we have contracted to provide.



The following table summarizes our fixed price contracts as of December 31, 2005:



|                       | Year Ending December 31,
|---------------------- | ------------------------
|                       | 2006                    
|Gas                    |                         
|Contract volume        | 732,200                 
|Weighted-average price | $8.13                   
|                       |                         
|Oil
Contract volume    | 6,600                   
|Weighted-average price | 53.93                   
|                       |                         
|Fair value liability   | ($1,696,616)            



Critical Accounting Policies and Estimates



Our accounting estimates includes bad debts on our receivables, amount of depletion of our oil and gas properties subject to amortization, the asset retirement obligation and the value of the options and warrants that we issue.  Our receivables have been fully collectible since inception and we only have sales to a small base of customers so we believe that all of our receivables are collectible.  The depletion of our oil and gas properties is based in part on the evaluation of our reserves and an estimate of our reserves.  We obtain an evaluation of the proved reserves from a professional engineering company and on a quarterly basis we review the estimates and determine if any adjustments are needed.  If the actual reserves are less than the estimated reserves we would not fully deplete our costs.  The asset retirement obligation relates to the plug and abandonment costs when our wells
are no longer useful.  We determine the value of the liability by obtaining quotes for this service and estimate the increase we will face in the



39



---



future.  We then discount the future value based on an intrinsic interest rate that is appropriate for Petrol.  If costs rise more than what we have expected there could be additional charges in the future however we monitor the costs of the abandoned wells and we will adjust this liability if necessary.  The value we assign to the options and warrants that we issue is based on the fair market value as calculated by the Black-Scholes pricing model.  To perform a calculation of the value of our options and warrants we determine the volatility of our stock.  We believe our estimate of volatility is reasonable and we review the assumptions used to determine this whenever we have an equity instrument that needs a fair market value.  Although the offset to the valuation is in paid in capital were we to have an incorrect material volatility assumption our expenses would be understated. The preparation of our
financial statements requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. We base our assumptions and estimates on historical experience and other sources that we believe to be reasonable at the time. Actual results may vary from our estimates due to changes in circumstances, weather, politics, global economics, mechanical problems, general business conditions and other factors.



Effects of Inflation and Pricing



The oil and natural gas industry is very cyclical and the demand for goods and services of oil field companies, suppliers and others associated with the industry puts extreme pressure on the economic stability and pricing structure within the industry. Material changes in prices impact revenue stream, estimates of future reserves, borrowing base calculations of bank loans and value of properties in purchase and sale transactions. Material changes in prices can impact the value of oil and natural gas companies and their ability to raise capital, borrow money and retain personnel. We anticipate the increased business costs will continue while the commodity prices for oil and natural gas, and the demand for services related to production and exploration, both remain high (from a historical context) in the near term.



Quantitative and Qualitative Disclosure About Market Risk



Commodity Price Risk

Since new well development is an ongoing program, management expects revenue to grow in the foreseeable future. In order to reduce natural gas price volatility, we have entered into hedging transactions.



Normal hedging arrangements have the effect of locking in for specified periods the prices we would receive for the volumes and commodity to which the hedge relates. Consequently, while hedges are designed to decrease exposure to price decreases, they also have the effect of limiting the benefit of price increases.



Interest Rate Risk



Our long term debt with Laurus Funds has a floating interest rate of prime plus 3% to 3 1/4%, with a floor of 7.5% to 10%. Therefore, interest rate changes will impact future results of operations and cash flows.



FACTORS THAT MAY AFFECT OUR RESULTS OF OPERATION



Risks Associated with Laurus Funds Financing



40



---





We have substantial indebtedness to Laurus Master Fund, Ltd. which is secured by all of our assets. If an event of default occurs under the secured notes issued to Laurus Funds, Laurus Funds may foreclose on all of our assets and we may be forced to curtail our operations or sell some of our assets to repay the notes.



On October 28, 2004, we entered into an $8 million credit facility with Laurus Master Fund, Ltd. pursuant to a secured convertible term note and related agreements. On October 1, 2005, we entered into a $10 million credit facility with Laurus Master Fund, Ltd., pursuant to a secured note and related agreements. Subject to certain grace periods, the notes and agreements provide for the following events of default (among others):



| | Failure to pay interest and principal when due;
|- | -----------------------------------------------



| | An uncured breach by us of any material covenant, term or condition in any of the notes or related agreements;
|- | --------------------------------------------------------------------------------------------------------------



| | A breach by us of any material representation or warranty made in any of the notes or in any related agreement;
|- | ---------------------------------------------------------------------------------------------------------------



| | Any money judgment or similar final process is filed against us for more than $50,000;
|- | --------------------------------------------------------------------------------------



| | Any form of bankruptcy or insolvency proceeding is instituted by or against us; and
|- | -----------------------------------------------------------------------------------



| | Suspension of our common stock from our principal trading market for five consecutive days or five days during any ten consecutive days.
|- | ----------------------------------------------------------------------------------------------------------------------------------------



In the event of a future default under our agreements with Laurus Funds, Laurus Funds may enforce its rights as a secured party and we may lose all or a portion of our assets or be forced to materially reduce our business activities.



There can be no assurance that we will satisfy all of the conditions of the agreements executed in the private placement with Laurus Funds.



Pursuant to the terms of certain agreements, we are subject to a condition subsequent to obtain an effective registration statement permitting the resale of common stock issued upon the exercise of the conversion rights of the purchaser and the exercise of the warrants by the purchaser on or before one hundred days. Although we believe that we will meet the deadline for obtaining an effective registration statement, there can be no assurance that such a statement will be declared effective within the time required. Failure to satisfy this condition subsequent would constitute a default. In connection with the transaction, we have granted to Laurus Funds a security interest in the assets purchased.



The issuance of shares to Laurus Funds upon conversion of the convertible term note and exercise of its warrants may cause immediate and substantial dilution to our existing stockholders.





41



---





The issuance of shares upon conversion of the convertible term note and exercise of warrants may result in substantial dilution to the interests of other stockholders. Laurus Funds may ultimately convert and sell the full amount issuable on conversion. Although Laurus Funds in some cases may not, subject to certain exceptions, convert their term note and/or exercise their warrants if such conversion or exercise would cause them to own more than 4.99% of our outstanding common stock, this restriction does not prevent Laurus Funds from converting and/or exercising some of their holdings and then converting the rest of their holdings. In this way, Laurus Funds could sell more than this limit while never holding more than this limit, which will have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock.



It is likely at the time shares of common stock are issued to Laurus Funds, the conversion price of such securities will be less than the market price of the securities. The issuance of common stock under the terms of our agreements with Laurus Funds will result in dilution of the interests of the existing holders of common stock at the time of the conversion. Furthermore, the sale of common stock owned by Laurus Funds as a result of the conversion of the convertible term note may result in lower prices for the common stock if there is insufficient buying interest in the markets at the time of conversion.



Laurus Funds has no obligation to convert shares if the market price is less than the conversion price.



Laurus has no obligation to cause us to issue common stock if the market price is less than the applicable conversion price. In some of the days of the third quarter our stock price was lower than the conversion discounted price granted to Laurus. Laurus has no obligation to convert the securities or to accept common stock as payment for interest if the market price of the securities for five trading days prior to a conversion date is less than 115% the conversion price. The amount of common stock that may be issued to Laurus is subject to certain limitations based on price, volume and/or the inventory of our common stock held by Laurus.



Drilling wells is speculative, often involving significant costs that may be more than our estimates, and may not result in any addition to our production or reserves. Any material inaccuracies in drilling costs, estimates or underlying assumptions will materially affect our business.



Developing and exploring for natural gas and oil involves a high degree of operational and financial risk, which precludes definitive statements as to the time required and costs involved in reaching certain objectives. The budgeted costs of drilling, completing and operating wells are often exceeded and can increase significantly when drilling costs rise due to a tightening in the supply of various types of oilfield equipment and related services. Drilling may be unsuccessful for many reasons, including title problems, weather, cost overruns, equipment shortages and mechanical difficulties. Moreover, the successful drilling of a natural gas or oil well does not ensure a profit on investment. Exploratory wells bear a much greater risk of loss than development wells. A variety of factors, both geological and market-related, can cause a well to become uneconomical or only marginally
economic. Our initial drilling and development sites, and any potential additional sites that may be developed, require significant additional exploration and development, regulatory approval and commitments of resources prior to commercial development. Any success that we may have with these wells or any future drilling operations will most likely not be indicative of our current or future drilling success rate,



42



---



particularly, because we intend to emphasize on exploratory drilling. If our actual drilling and development costs are significantly more than our estimated costs, we may not be able to continue our business operations as proposed and would be forced to modify our plan of operation.



Development of our reserves, when established, may not occur as scheduled and the actual results may not be as anticipated. Drilling activity may result in downward adjustments in reserves or higher than anticipated costs. Our estimates will be based on various assumptions, including assumptions required by the Securities and Exchange Commission relating to natural gas and oil prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The process of estimating our natural gas and oil reserves is anticipated to be extremely complex, and will require significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir. Due to our inexperience in the oil and gas industry and development stage operations, our estimates may not be reliable enough to allow us to be successful in our
intended business operations. Our actual production, revenues, taxes, development expenditures and operating expenses will likely vary from those anticipated. These variances may be material.



Gas and Oil prices are volatile. This volatility may occur in the future, causing negative change in cash flows which may result in our inability to cover our capital expenditures.



Our future revenues, profitability, future growth and the carrying value of our properties is anticipated to depend substantially on the prices we may realize for our natural gas and oil production. Our realized prices may also affect the amount of cash flow available for capital expenditures and our ability to borrow and raise additional capital.



Natural gas and oil prices are subject to wide fluctuations in response to relatively minor changes in or perceptions regarding supply and demand. Historically, the markets for natural gas and oil have been volatile, and they are likely to continue to be volatile in the future. For example, natural gas and oil prices declined significantly in late 1998 and 1999 and, for an extended period of time, remained substantially below prices obtained in previous years. Among the factors that can cause this volatility are:



| | worldwide or regional demand for energy, which is affected by economic conditions;
|- | ----------------------------------------------------------------------------------

| | the domestic and foreign supply of natural gas and oil;        | 
|- | -------------------------------------------------------------- | 
| | weather conditions;                                            | 
| | domestic and foreign governmental regulations;                 | 
| | political conditions in natural gas and oil producing regions;
|  |                                                                | 

| | the ability of members of the Organization of Petroleum Exporting Countries to agree upon and maintain oil prices and production levels; and
|- | --------------------------------------------------------------------------------------------------------------------------------------------

| | the price and availability of other fuels.
|- | ------------------------------------------



It is impossible to predict natural gas and oil price movements with certainty. Lower natural gas and oil prices may not only decrease our future revenues on a per unit basis but also may reduce the amount of natural gas and oil that we can produce economically. A substantial or extended decline in natural gas and oil prices may materially and adversely affect our future business enough to force us to cease our business operations. In addition, our financial condition,



43



---



results of operations, liquidity and ability to finance planned capital expenditures will also suffer in such a price decline. Further, natural gas and oil prices do not necessarily move together.



We may incur substantial write-downs of the carrying value of our gas and oil properties, which would adversely impact our earnings.



We periodically review the carrying value of our gas and oil properties under the full cost accounting rules of the Securities and Exchange Commission. Under these rules, capitalized costs of proved gas and oil properties may not exceed the present value of estimated future net revenues from proved reserves, discounted at an annual rate of 10%. Application of this ceiling test requires pricing future revenue at the un-escalated prices in effect as of the end of each fiscal quarter and requires a write-down for accounting purposes if the ceiling is exceeded, even if prices were depressed for only a short period of time. We may be required to write down the carrying value of our gas and oil properties when natural gas and oil prices are depressed or unusually volatile, which would result in a charge against our earnings. Once incurred, a write-down of the carrying value of our
natural gas and oil properties is not reversible at a later date.



Competition in our industry is intense. We are very small and have an extremely limited operating history as compared to the vast majority of our competitors, and we may not be able to compete effectively.



We intend to compete with major and independent natural gas and oil companies for property acquisitions. We will also compete for the equipment and labor required to operate and to develop natural gas and oil properties. The majority of our anticipated competitors have substantially greater financial and other resources than we do. In addition, larger competitors may be able to absorb the burden of any changes in federal, state and local laws and regulations more easily than we can, which would adversely affect our competitive position. These competitors may be able to pay more for natural gas and oil properties and may be able to define, evaluate, bid for and acquire a greater number of properties than we can. Our ability to acquire additional properties and develop new and existing properties in the future will depend on our ability to conduct operations, to evaluate and select suitable
properties and to consummate transactions in this highly competitive environment. In addition, some of our competitors have been operating in our core areas for a much longer time than we have and have demonstrated the ability to operate through industry cycles.



The natural gas and oil business involves numerous uncertainties and operating risks that can prevent us from realizing profits and can cause substantial losses.



Our development, exploitation and exploration activities may be unsuccessful for many reasons, including weather, cost overruns, equipment shortages and mechanical difficulties. Moreover, the successful drilling of a natural gas and oil well does not ensure a profit on investment. A variety of factors, both geological and market-related, can cause a well to become uneconomical or only marginally economical. In addition to their cost, unsuccessful wells can hurt our efforts to replace reserves.



The natural gas and oil business involves a variety of operating risks, including:



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





44



---





| | blow-outs and surface cratering;                                            | 
|- | --------------------------------------------------------------------------- | 
| | uncontrollable flows of oil, natural gas, and formation water;              | 
| | natural disasters, such as hurricanes and other adverse weather conditions;
| | pipe, cement, or pipeline failures;                                         | 
| | casing collapses;                                                           | 
| | embedded oil field drilling and service tools;                              | 
| | abnormally pressured formations; and                                        | 
|  |                                                                             | 

| | environmental hazards, such as natural gas leaks, oil spills, pipeline ruptures and discharges of toxic gases.
|- | --------------------------------------------------------------------------------------------------------------



If we experience any of these problems, it could affect well bores, gathering systems and processing facilities, which could adversely affect our ability to conduct operations. We could also incur substantial losses as a result of:



| | injury or loss of life;                                                        | 
|- | ------------------------------------------------------------------------------ | 
| | severe damage to and destruction of property, natural resources and equipment;
| | pollution and other environmental damage;                                      | 
| | clean-up responsibilities;                                                     | 
| | regulatory investigation and penalties;                                        | 
| | suspension of our operations; and                                              | 
| | repairs to resume operations.                                                  | 
|  |                                                                                | 



Because we intend to use third-party drilling contractors to drill our wells, we may not realize the full benefit of worker compensation laws in dealing with their employees. Our insurance does not protect us against all operational risks. We do not carry business interruption insurance at levels that would provide enough funds for us to continue operating without access to other funds. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. If a significant accident or other event occurs and is not fully covered by insurance, it could impact our operations enough to force us to cease our operations.



The high cost of drilling rigs, equipment, supplies, personnel and other services could adversely affect our ability to execute on a timely basis our development, exploitation and exploration plans within our budget.



Shortages or an increase in cost of drilling rigs, equipment, supplies or personnel could delay or interrupt our operations, which could impact our financial condition and results of operations. Drilling activity in the geographic areas in which we conduct drilling activities may increase, which would lead to increases in associated costs, including those related to drilling rigs, equipment, supplies and personnel and the services and products of other vendors to the industry. Increased drilling activity in these areas may also decrease the availability of rigs. We do not have any contracts with providers of drilling rigs and we cannot assure you that drilling rigs will be readily available when we need them. Drilling and other costs may increase further and necessary equipment and services may not be available to us at economical prices.



At this stage of our business operations, even with our good faith efforts, potential investors have a possibility of losing their investment.



45



---





Because the nature of our business is expected to change as a result of shifts in the market price of oil and natural gas, competition, and the development of new and improved technology, management forecasts are not necessarily indicative of future operations and should not be relied upon as an indication of future performance.



While Management believes its estimates of projected occurrences and events are within the timetable of its business plan, our actual results may differ substantially from those that are currently anticipated.





Our lease ownership may be diluted due to financing strategies we may employ in the future due to our lack of capital.



To accelerate our development efforts we plan to take on working interest partners that will contribute to the costs of drilling and completion and then share in revenues derived from production. In addition, we may in the future, due to a lack of capital or other strategic reasons, establish joint venture partnerships or farm out all or part of our development efforts. These economic strategies may have a dilutive effect on our lease ownership and will more than likely reduce our operating revenues.



We may need additional capital in the future to finance our planned growth, which we may not be able to raise or it may only be available on terms unfavorable to us or our stockholders, which may result in our inability to fund our working capital requirements and harm our operational results.



We have and expect to continue to have substantial capital expenditure and working capital needs. We believe that current cash on hand and the other sources of liquidity are only sufficient enough to fund our operations through fiscal 2006. After that time we will need to rely on cash flow operations or raise additional cash to fund our operations, to fund our anticipated reserve replacement needs and implement our growth strategy, or to respond to competitive pressures and/or perceived opportunities, such as investment, acquisition, exploration and development activities.



If low natural gas and oil prices, operating difficulties or other factors, many of which are beyond our control, cause our revenues or cash flows from operations to decrease, we may be limited in our ability to spend the capital necessary to complete our development, production exploitation and exploration programs. If our resources or cash flows do not satisfy our operational needs, we will require additional financing, in addition to anticipated cash generated from our operations, to fund our planned growth. Additional financing might not be available on terms favorable to us, or at all. If adequate funds were not available or were not available on acceptable terms, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our business or otherwise respond to competitive pressures would be significantly limited. In such a capital restricted
situation, we may curtail our acquisition, drilling, development, and exploration activities or be forced to sell some of our assets on an untimely or unfavorable basis.





46



---





If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders would be reduced, and these newly issued securities might have rights, preferences or privileges senior to those of existing stockholders.



We are subject to complex laws and regulations, including environmental regulations, which can adversely affect the cost, manner or feasibility of doing business.



Development, production and sale of natural gas and oil in the United States are subject to extensive laws and regulations, including environmental laws and regulations. We may be required to make large expenditures to comply with environmental and other governmental regulations. Matters subject to regulation include:



| | location and density of wells;
|- | ------------------------------

| | the handling of drilling fluids and obtaining discharge permits for drilling operations;   
|- | -------------------------------------------------------------------------------------------
| | accounting for and payment of royalties on production from state, federal and Indian lands;
| | bonds for ownership, development and production of natural gas and oil properties;         

| | transportation of natural gas and oil by pipelines;       | 
|- | --------------------------------------------------------- | 
| | operation of wells and reports concerning operations; and
| | taxation.                                                 | 
|  |                                                           | 



Under these laws and regulations, we could be liable for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damages. Failure to comply with these laws and regulations also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties. Moreover, these laws and regulations could change in ways that substantially increase our costs. Accordingly, any of these liabilities, penalties, suspensions, terminations or regulatory changes could materially adversely affect our financial condition and results of operations enough to possibly force us to cease our business operations.



Our oil and gas operations may expose us to environmental liabilities.



Any leakage of crude oil and/or gas from the subsurface portions of our wells, our gathering system or our storage facilities could cause degradation of fresh groundwater resources, as well as surface damage, potentially resulting in suspension of operation of the wells, fines and penalties from governmental agencies, expenditures for remediation of the affected resource, and liabilities to third parties for property damages and personal injuries. In addition, any sale of residual crude oil collected as part of the drilling and recovery process could impose liability on us if the entity to which the oil was transferred fails to manage the material in accordance with applicable environmental health and safety laws.



We are highly dependent on Paul Branagan, our CEO, president and chairman. The loss of Mr.Branagan, whose knowledge, leadership and technical expertise upon which we rely, would harm our ability to execute our business plan.





47



---





Our success depends heavily upon the continued contributions of Paul Branagan, whose knowledge, leadership and technical expertise would be difficult to replace, and on our ability to retain and attract experienced engineers, geoscientists and other technical and professional staff. We have entered into an employment agreement with Mr. Branagan; however, maintain no key person insurance on Mr. Branagan. In addition, Mr. Branagan is an officer and director of other public companies, which may impact the amount of his time spent on our business matters. If we were to lose his services, our ability to execute our business plan would be harmed and we may be forced to cease operations until such time as we could hire a suitable replacement for Mr. Branagan.



We recently completed an acquisition of certain assets and we may acquire more assets or other businesses in the future.



We recently acquired certain assets owned by Savage Resources, LLC and Savage Pipeline, LLC for the purchase price of approximately $10 million, all of which was paid in cash. This is the first big acquisition for our Company and Management team. Our ability to successfully integrate the Savage acquisition into our existing operations is anticipated to depend on a number of factors.



We may consider acquisitions of other assets or other business. Any acquisition involves a number of risks that could fail to meet our expectations and adversely affect our profitability. For example:



| | The acquired assets or business may not achieve expected results;
|- | -----------------------------------------------------------------

| | We may incur substantial, unanticipated costs, delays or other operational or financial problems when integrating the acquired assets;
|- | --------------------------------------------------------------------------------------------------------------------------------------

| | We may not be able to retain key personnel of an acquired business;
|- | -------------------------------------------------------------------
| | Our managements attention may be diverted; or                     

| | Our management may not be able to manage the acquired assets or combined entity effectively or to make acquisitions and grow our business internally at the same time.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



If these problems arise we may not realize the expected benefits of an acquisition.



Because our common stock is deemed a low-priced Penny stock, an investment in our common stock should be considered high risk and subject to marketability restrictions.



Since our common stock is a penny stock, as defined in Rule 3a51-1 under the Securities Exchange Act, it will be more difficult for investors to liquidate their investment even if and when a market develops for the common stock. Until the trading price of the common stock rises above $5.00 per share, if ever, trading in the common stock is subject to the penny stock rules of the Securities Exchange Act specified in rules 15g-1 through 15g-10. Those rules require broker-dealers, before effecting transactions in any penny stock, to:



| | Deliver to the customer, and obtain a written receipt for, a disclosure document;
|- | ---------------------------------------------------------------------------------
| | Disclose certain price information about the stock;                              

| | Disclose the amount of compensation received by the broker-dealer or any associated person of the broker-dealer;
|- | ----------------------------------------------------------------------------------------------------------------
| | Send monthly statements to customers with market and price information about the penny stock; and               





48



---





| | In some circumstances, approve the purchasers account under certain standards and deliver written statements to the customer with information specified in the rules.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



Consequently, the penny stock rules may restrict the ability or willingness of broker-dealers to sell the common stock and may affect the ability of holders to sell their common stock in the secondary market and the price at which such holders can sell any such securities. These additional procedures could also limit our ability to raise additional capital in the future.



|ITEM 7. | FINANCIAL STATEMENTS
|------- | --------------------



See Index to Financial Statements and Financial Statement Schedules appearing on page F-1 through F-27 of this Form 10-KSB.



|ITEM 8. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------



None.



|ITEM 8A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods.  As of the end of the period covered by this report, Paul Branagan, our Chief Executive Officer and Principal Financial Officer evaluated the effectiveness of our disclosure controls and procedures. Based on the evaluation, which disclosed no significant deficiencies or material weaknesses, Mr. Branagan, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.



|ITEM 8B. | OTHER INFORMATION
|-------- | -----------------



|None.
|-----



PART III



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



The members of our board of directors serve for one year terms and are elected at the next annual meeting of stockholders, or until their successors have been elected.  The officers serve at the pleasure of the board of directors.



Resignation and Appointment of Officer





49



---





Effective May 9, 2005, John Garrison resigned as Chief Financial Officer of the Company.  Concurrently, the board of directors appointed Lawrence Finn as Vice President and Chief Financial Officer of the Company and effective November 15, 2005, Lawrence J. Finn resigned as Vice President and Chief Financial Officer of the Company. Mr. Finns resignation was the result of family requirements and the inability to relocate full time to Las Vegas.  Mr. Finns resignation was not the result of any disagreement with the Company or our management or any accounting or company financial issues.



Election of Director



Effective December 20, 2005, Suzanne Herring was elected as a Director of the Company at our annual meeting of stockholders.



|Information as to our current directors and executive officers is as follows:
|-----------------------------------------------------------------------------



|Name             | Age | Title                                         | Term      
|---------------- | --- | --------------------------------------------- | ----------
|Paul T. Branagan | 62  | President, CEO, Chairman, Secretary/Treasurer | Since 2002
|Loren Moll       | 49  | Director                                      | Since 2002
|Suzanne Herring  | 41  | Director                                      | Since 2005



Duties, Responsibilities and Experience



Paul Branagan, is the President, CEO, Chairman, Secretary and Treasurer of Petrol.  Mr. Branagan graduated from the University of Las Vegas Nevada with a B.S. in physics.  From 1993 to the present Mr. Branagan has been the President and Senior Scientist of Branagan & Associates, Inc.  From 1975 to 1993 he was the Project Manager, Assistant Oil and Gas Division Manager and Senior Scientist of CER Corporation of Las Vegas, Nevada. Since 1999, Mr. Branagan has been the President and a member of the board of directors of Millennium Plastics Corporation, a 34 Act Reporting Nevada Corporation. Since April 23, 2004, Mr. Branagan has also served as Director of Integrated Environmental Technologies, Ltd., a 34 Act Reporting Nevada Corporation.



Potential conflict of interest:Paul Branagan, our president, chief executive officer and chairman of the board, is an officer and director of Millennium Plastics Corporation, another public company, which may impact the amount of his time spent on our business matters.  Further, Mr. Branagan is a director of Integrated Environmental Technologies, Ltd., a 34 Act reporting company.  Mr. Branagan may have demands placed on his time, which will detract from the amount of time he is able to devote to us. Mr. Branagan devotes at least 40 hours per week of his business time and attention to our activities as required. Although Mr. Branagan has other current business interests he will attend to our business as his first priority. We consent to and understand this potential conflict of interest.



Loren W. Moll,is a Director of Petrol,has been a member of the law firm of Caldwell & Moll, L.C. in Overland Park, Kansas since its establishment in November 1996.  Mr. Moll concentrates his practice in all areas of real estate law, including commercial real estate transactions, breach of contract, escrow and title disputes, commercial leasehold disputes, real estate broker liability, and oil and gas.  Mr. Moll holds a B.A. degree from the University of Kansas (1983) and his Juris Doctor degree, Order of the Coif, from the University of Kansas School of Law (1986) where he was Research Editor for theUniversity of Kansas Law Review.



50



---



Mr. Moll was formerly a partner of the real estate law firm Lewis, Rice & Fingersh from 1986 to 1994 and was associated with the international law firm Bryan Cave LLP from 1994 to 1996.



Suzanne Herring, is a Director of Petrol. Ms. Herring has over 18 years of experience in the public and private accounting arenas. She has worked as an auditor of public and non-public companies and has served as a chief financial officer for multiple businesses. Further, Ms. Herring has a broad individual and corporate taxation background. Since February 2005, Ms. Herring has been president of Opus Pointe, a Las Vegas, Nevada based consulting firm specializing in providing contract CFO services and internal control compliance and implementation to publicly traded small business issuers. From 1995 to present, Ms. Herring has owned and operated American West Financial Services, a Las Vegas, Nevada based financial and taxation consulting firm. From 2003 through 2005, Ms. Herring was an auditor for a Las Vegas, Nevada based CPA firm, Beckstead and
Watts, LLP. Prior to joining Beckstead and Watts, Ms. Herring served as the Chief Financial Officer for a Las Vegas, Nevada based commercial development and construction company. From 1993 to 1995, Ms. Herring served as a staff accountant for Piercy, Bowler, Taylor & Kern CPAs, a Las Vegas, Nevada based CPA firm. In addition, Ms. Herring serves as a board member of the New Vista Ranch Charitable Organization and is a member of the American Institute of Certified Public Accountants (AICPA). Ms. Herring majored in accounting and minored in finance at the University of Nevada Las Vegas.



Limitation of Liability of Directors



Pursuant to the Nevada General Corporation Law, our Articles of Incorporation exclude personal liability for our Directors for monetary damages based upon any violation of their fiduciary duties as Directors, except as to liability for any breach of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or any transaction from which a Director receives an improper personal benefit. This exclusion of liability does not limit any right which a Director may have to be indemnified and does not affect any Directors liability under federal or applicable state securities laws. We have agreed to indemnify our directors against expenses, judgments, and amounts paid in settlement in connection with any claim against a Director if he acted in good faith and in a manner he believed to be in our best interests.



|Election of Directors and Officers.
|-----------------------------------



Directors are elected to serve until the next annual meeting of stockholders and until their successors have been elected and qualified. Officers are appointed to serve until the meeting of the Board of Directors following the next annual meeting of stockholders and until their successors have been elected and qualified.



No Executive Officer or Director of the Corporation has been the subject of any Order, Judgment, or Decree of any Court of competent jurisdiction, or any regulatory agency permanently or temporarily enjoining, barring suspending or otherwise limiting him from acting as an investment advisor, underwriter, broker or dealer in the securities industry, or as an affiliated person, director or employee of an investment company, bank, savings and loan association, or insurance company or from engaging in or continuing any conduct or practice in connection with any such activity or in connection with the purchase or sale of any securities.



51



---





No Executive Officer or Director of the Corporation has been convicted in any criminal proceeding (excluding traffic violations) or is the subject of a criminal proceeding which is currently pending.



No Executive Officer or Director of the Corporation is the subject of any pending legal proceedings.



Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act), requires our executive officers and directors, and persons who beneficially own more than ten percent of our common stock, to file initial reports of ownership and reports of changes in ownership with the SEC. Executive officers, directors and greater than ten percent beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based upon a review of the copies of such forms furnished to us and written representations from our executive officers and directors, we believe that as of the date of this filing they were all current in there filings.



Audit Committee



Prior to December 20, 2005, we did not have an Audit Committee and our board of directors performed the necessary functions of an Audit Committee, such as: recommending a firm of independent certified public accountants to audit the annual financial statements; reviewing the independent auditors independence, the financial statements, and their audit report; and reviewing managements administration of the system of internal accounting controls.



On December 20, 2005, we established and appointed members of the Board to the Audit Committee in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934.  The Audit Committee is comprised of two directors; Ms. Herring (Chairman) and Mr. Moll.  Currently, none of the members of the Audit Committee are or have been our officers or employees, and each member qualifies as an independent director as defined by Section 121B(2)(c) of the American Stock Exchange Company and Section 10A(m) of the Securities Exchange Act of 1934, and Rule 10A-3 thereunder.  The Audit Committee held 1 meeting (including telephonic meetings) since being established.



The Audit Committee has the sole authority to appoint (subject to ratification by our stockholders) and, when deemed appropriate replace our independent auditors, and has established a policy of pre-approving all audit and permissible non-audit services provided by our independent auditors.  The Audit Committee has, among other things, the responsibility to evaluate the qualifications and independence of our independent auditors; to review and approve the scope and results of the annual audit; to evaluate with the independent auditors our financial staff and the adequacy and effectiveness of our systems and internal financial controls; to review and discuss with management and the independent auditors the content of our financial statements prior to the filing of our quarterly reports on Form 10-QSB and annual reports on Form 10-KSB; to review the content and clarity of our proposed
communications with investors regarding our operating results and other financial matters; to review significant changes in our accounting polices; to establish procedures for receiving, retaining, and investigating reports of illegal acts involving us or complaints or concerns regarding questionable accounting or auditing matters, and supervise the investigation of any such reports, complaints or concerns; to establish



52



---



procedures for the confidential, anonymous submission by our employees of concerns or complaints regarding questionable accounting or auditing matters; and to provide sufficient opportunity for the independent auditors to meet with the committee without management present.



Audit Committee Report



Report of the Audit Committee



March 30, 2006



To the Board of Directors of Petrol Oil and Gas, Inc.



Petrols Audit Committee consists of Directors who, in the business judgment of the Board of Directors, are independent under Securities and Exchange Commission regulations and the American Stock Exchange listing standards. In addition, in the business judgment of the Board of Directors, Suzanne Herring, Chairman of the Audit Committee, has accounting or related financial management experience required under the listing standards and has been designated by the Board of Directors as an audit committee financial expert. We operate under a written charter, a copy of which is available as an exhibit to our Annual Report on Form 10-KSB. As required by the charter, we review and reassess the charter annually and recommend any changes to the Board of Directors for approval.



Petrols management is responsible for preparing Petrols financial statements and the principal independent accountants are responsible for auditing those financial statements. The Audit Committees role is to provide oversight of management in carrying out managements responsibility and to appoint, compensate, retain and oversee the work of the principal independent accountants. The Audit Committee is not providing any expert or special assurance as to Petrols financial statements or any professional certification as to the principal independent accountants work.



We have reviewed and discussed the consolidated financial statements of Petrol and its subsidiaries to be set forth in Petrols 2005 Annual Report on Form 10-KSB and at Item 7 of Petrols Annual Report on Form 10-KSB for the year ended December 31, 2005 with management of Petrol and Weaver & Martin, LLC, independent public accountants for Petrol.



We have discussed with Weaver & Martin, LLC the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, Statement on Auditing Standards No. 99, Consideration of Fraud in a Financial Statement Audit and Securities and Exchange Commission rules regarding auditor independence discussed in Final SEC Releases Nos. 33-8183 and 33-8183a.



We have received the written disclosures and the letter from Weaver & Martin, LLC required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees and have discussed with Weaver & Martin, LLC its independence from Petrol.



Based on the review and discussions with management of Petrol and Weaver & Martin, LLC referred to above, we recommend to the Board of Directors that Petrol publish the



53



---



consolidated financial statements of Petrol and subsidiaries for the year ended December 31, 2005 in Petrols Annual Report on Form 10-KSB for the year ended December 31, 2005.



It is not the duty of the Audit Committee to plan or conduct audits or to determine that Petrols financial statements are complete and accurate and in accordance with generally accepted accounting principles; that is the responsibility of management and Petrols independent public accountants. In giving its recommendation to the Board of Directors, the Audit Committee has relied on (i) managements representation that such financial statements have been prepared with integrity and objectivity and in conformity with generally accepted accounting principles and (ii) the reports of Petrols independent public accountants with respect to such financial statements.



Submitted by the members of the Audit Committee of the Board of Directors.



|Suzanne Herring, Chairman
|-------------------------
|Loren Moll               



Code of Business Conduct and Ethics



From our inception through November 18, 2005, we had not adopted a corporate code of ethics. However, on November 18, 2005, we adopted a Code of Business Conduct and Ethics that applies to our Directors, officers and employees. A copy of the Code of Business Conduct and Ethics is attached as Appendix A to the proxy filed with the SEC on November 22, 2005 and is also available on our website at www.petroloilandgas.com.



Nominating Committee



We do not have a Nominating Committee or Nominating Committee Charter. Our board of directors, perform some of the functions associated with a Nominating Committee. We have elected not to have a Nominating Committee in that we have only two current directors and have never received a stockholder nomination for additional directors.



Option Grants



On December 16, 2002, the board of directors adopted a 2002/2003 stock option plan pursuant to which incentive stock options or nonstatutory stock options to purchase up to 3,000,000 shares of common stock may be granted to employees, directors and consultants.  As of December 31, 2005, 175,000 shares remained available for issuance under the 2002/2003 stock option plan.  On December 20, 2005, the board of directors adopted a 2006 stock option plan pursuant to which incentive stock options or nonstatutory stock options to purchase up to 3,000,000 shares of common stock may be granted to employees, directors and consultants.  As of December 31, 2005, 2,200,000 shares remained available for issuance under the 2006 stock option plan.  Pursuant to the plans, stock options were granted as follows:



|Date Granted      |  | Exercise Price Per Share |  | Number of Shares
|----------------- |  | ------------------------ |  | ----------------
|                  |  |                          |  |                 
|December 31, 2002 |  |                          |  |                 
|Granted           |  | $0.50 to $2.50           |  | 1,950,000       
|Exercised         |  | -                        |  | -0-             





54



---







|Cancelled         |  | -              |  | -0-      
|----------------- |  | -------------- |  | ---------
|Expired           |  |                |  | -0-      
|                  |  |                |  |          
|December 31, 2003 |  |                |  |          
|Granted           |  | -              |  | -0-      
|Exercised         |  | -              |  | -0-      
|Cancelled         |  | -              |  | -0-      
|                  |  |                |  |          
|December 31, 2004 |  |                |  |          
|Granted           |  | $0.50 - $4.00  |  | 450,000  
|Exercised         |  | $0.50          |  | 700,000  
|Cancelled         |  | -              |  | -0-      
|                  |  |                |  |          
|December 31, 2005 |  |                |  |          
|Granted           |  | $1.75 to $2.33 |  | 1,135,000
|Exercised         |  | -              |  | -0-      
|Cancelled         |  | $2.23          |  | 60,000   
|                  |  |                |  |          
|Total outstanding |  | $0.50 to $4.00 |  | 2,775,000



|ITEM 10. | EXECUTIVE COMPENSATION
|-------- | ----------------------



The following table sets forth the cash compensation of our executive officer Paul Branagan and our non-executive employee Gary Bridwell.



Summary Compensation Table



|Name and Principal Position            | Year                | Annual Compensation                      | Long Term Compensation
|-------------------------------------- | ------------------- | ---------------------------------------- | ----------------------
|Salary                                 | Bonus               | Other Annual
Compen-
sation              | Awards                
|Restricted
Stock                       | Options             | LTIP
payouts                            
|Paul Branagan,
President               | 2005
2004
2003
2002 | $170,833.40
$166,666.75
$145,417
$35,000 | $5,000
-0-
-0-
-0-    
|Gary Bridwell
Field Operations Manager | 2005
2004           | $120,000
$125,000                        | $5,000
-0-            



|(1) | On November 20, 2003, we amended Mr. Branagans employment agreement granting Mr. Branagan a 1/100 over riding royalty on wells we complete.  On April 20, 2004, we amended Mr. Branagans agreement to amend the royalty provisions.  The over riding royalty is described in further detail below.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The options are exercisable at prices ranging from $0.50 to $2.50 per share and expire on September 30, 2010.                                                                                                                                                                                       
|(3) | As of December 31, 2004, $8,940 of the $10,725 over riding royalties had not been paid to Mr. Branagan.                                                                                                                                                                                             





55



---





|(4) | The options are exercisable at $1.75 per share and expire on September 30, 2010.
|--- | --------------------------------------------------------------------------------



Employment Agreements



Paul Branagan



On November 2, 2005, we entered into an employment agreement with Paul Branagan, wherein Mr. Branagan agreed to serve as the Companys Chief Executive Officer and President. The term of employment is for five (5) years. We agreed to pay Mr. Branagan annual compensation of $225,000. In addition to the cash compensation, we granted Mr. Branagan an extension of previously granted stock options to purchase 1,250,000 shares of our common stock at prices ranging from $0.05 per share to $2.50 per share, exercisable at any time and expiring on September 30, 2010. We also granted Mr. Branagan additional options to purchase 500,000 shares of our common stock at $1.75 per share, exercisable at any time and expiring on September 30, 2010. Mr. Branagan will also receive a 1/100 Over Riding Royalty on production from any wells completed on our current and future leased
acreage. The Over Riding Royalty shall be paid as determined by our Board of Directors and the term of the payment of the Over Riding Royalty shall be in perpetuity.



Non-Executive Employment Agreement



On November 1, 2003, Petrol executed an Employment Agreement with Gary Bridwell, wherein Mr. Bridwell agreed to serve as Petrols Field Operations Manager.  We agreed to pay Mr. Bridwell a starting salary of $10,000 per month and he is entitled to participate in Petrols group health insurance and also is entitled to utilize the Company credit card, which is for the sole use of Company business and is subject to the policies of the Company covering such matters.  On January 11, 2005, we issued 100,000 shares to Mr. Bridwell for completing on year of employment with the Company.  On August 25, 2005, we issued 10,000 shares to Mr. Bridwell as a bonus for his work as field engineering supervisor.



Compensation Committee



We currently do not have a compensation committee of the board of directors. However, the board of directors intends to establish a compensation committee, which is expected to consist of three inside directors and two independent members.  Until a formal committee is established our entire board of directors will review all forms of compensation provided to our executive officers, directors, consultants and employees including stock compensation and loans.



Director Compensation and Other Arrangements



Directors of Petrol who are not employees receive compensation of $1,000 for each meeting of the board, as well as travel expenses if required.  From time to time, certain directors who are not employees may receive grants of options to purchase shares of our common stock. In addition, we have agreed to compensate Suzanne Herring, our audit committee chairman, $60,000 per annum for her services.



Termination of Employment





56



---



There are no compensatory plans or arrangements, including payments to be received from Petrol, with respect to any person named in Cash Consideration set out above which would in any way result in payments to any such person because of his resignation, retirement, or other termination of such persons employment with Petrol, or any change in control of Petrol, or a change in the persons responsibilities following a change in control of Petrol.



|ITEM 11. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|-------- | -----------------------------------------------------------------------------------------------



The following table presents information, to the best of our knowledge, about the beneficial ownership of our common stock on March 30, 2006, held by those persons known to beneficially own more than 5% of our capital stock and by our directors and executive officers. The percentage of beneficial ownership for the following table is based on 28,328,471 shares of common stock outstanding as of March 30, 2006.



Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and does not necessarily indicate beneficial ownership for any other purpose. Under these rules, beneficial ownership includes those shares of common stock over which the stockholder has sole or shared voting or investment power. It also includes (unless footnoted) shares of common stock that the stockholder has a right to acquire within 60 days after March 24, 2006 through the exercise of any option, warrant or other right. The percentage ownership of the outstanding common stock, however, is based on the assumption, expressly required by the rules of the Securities and Exchange Commission, that only the person or entity whose ownership is being reported has converted options or warrants into shares of our common stock.



Security Ownership of Management

|Name of Beneficial Owner (1)      |                                                                                                                                                                                                                                                                                                                                   | Number
of Shares |  | Percent of Outstanding Shares of Common Stock (2)
|--------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- |  | -------------------------------------------------
|Paul Branagan, President          |                                                                                                                                                                                                                                                                                                                                   | 2,250,000 (3)    |  | 8%                                               
|Loren Moll, Director              |                                                                                                                                                                                                                                                                                                                                   | 3,100,000        |  | 11%                                              
|Suzanne Herring, Director         |                                                                                                                                                                                                                                                                                                                                   | 0                |  | 0%                                               
|Directors and Officers as a Group |                                                                                                                                                                                                                                                                                                                                   | 5,350,000        |  | 19%                                              
|(1)                               | As used in this table, beneficial ownership means the sole or shared power to vote, or to direct the voting of, a security, or the sole or shared investment power with respect to a security (i.e., the power to dispose of, or to direct the disposition of, a security).  The address of each person is care of the Company.
|                                  |                                                                                                                                                                                                                                                                                                                                   |                  |  |                                                  

|(2) | Figures are rounded to the nearest whole percent.                                                                   | 
|--- | ------------------------------------------------------------------------------------------------------------------- | 
|(3) | Includes 1,750,000 options to purchase our restricted common stock at prices ranging from $0.50 to $2.50 per share.
|    |                                                                                                                     | 



Security Ownership of Certain Beneficial Owners

|Name of Beneficial Owner (1)                                                              |  | Number
of Shares |  | Percent of
Class (2)
|----------------------------------------------------------------------------------------- |  | ---------------- |  | --------------------
|Spindrift Investors (Bermuda) L.P. (3) (5) (6)*
Clarendon House, 2 Church Street
Hamilton |  | 1,975,400        |  | 7%                  





57



---







|Spindrift Partners, L.P. (4) (6) (7)*
75 State Street
Boston, MA 02109   |     | 1,633,800                                                                                                                                                                                                                                                                     |  | 6% 
|------------------------------------------------------------------------ | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|Wellington Management Company, LLP (6)(8)*
75 State St.
Boston, MA 02109 |     | 4,976,800 (9)                                                                                                                                                                                                                                                                 |  | 18%
|Beneficial Owners as a Group*                                            |     | 7,586,000                                                                                                                                                                                                                                                                     |  | 28%
|                                                                         | (1) | As used in this table, beneficial ownership means the sole or shared power to vote, or to direct the voting of, a security, or the sole or shared investment power with respect to a security (i.e., the power to dispose of, or to direct the disposition of, a security).
|                                                                         |     |                                                                                                                                                                                                                                                                               |  |    

|(2) | Figures are rounded to the nearest whole percent.
|--- | -------------------------------------------------

|(3) | Spindrift Investors (Bermuda) L.P., Wellington Global Holdings, Ltd., and Wellington Global Administrator, Ltd. have shared dispositive power over 1,975,700 shares, assuming exercise of warrants.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Spindrift Partners, L.P., Wellington Hedge Management, LLC, and Wellington Hedge Management, Inc. have shared dispositive power over 1,633,800, assuming exercise of warrants.                     

|(5) | A Bermuda limited partnership.
|--- | ------------------------------

|(6) | Each have the right to receive, or the power to direct the receipt of, dividends from, or the proceeds from the sale of, such securities.  No other person is known to have such right or power with respect to more than five percent of this class of securities, except for Wellington Management Company, LLP.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | A Massachusetts limited partnership.    
|--- | ----------------------------------------
|(8) | A Bermuda limited liability partnership.

|(9) | The 4,976,800 shares represents the amount of shares Wellington Management Company, LLP (WMC) may be deemed to beneficially own as investment advisor, which are held of record by clients of WMC.  No such client of WMC is known to have such right or power with respect to more than five percent of this class of securities, except for Spindrift Investors (Bermuda) L.P. and Spindrift partners, L.P.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The information used for the table of Security Ownership of Certain Beneficial Owners is based on the information reported on the beneficial owners Schedule 13G filings.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 12. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------



Paul Branagan



As part of Mr. Branagans employment agreement, as amended, we are obligated to pay Mr. Branagan a perpetual 1/100 Over Riding Royalty on production from any wells completed on our leased acreage. For the year ended December 31, 2004, Mr. Branagan earned a total of $10,725 as part of the Over Riding Royalty.



|ITEM 13. | EXHIBITS
|-------- | --------



|Exhibit Number | Description                                                                                                                                                                                                      
|-------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2              | Asset Purchase Agreement between Petrol Energy, Inc. and Euro Technology Outfitters, August 19, 2002(Incorporated by reference to Exhibit (2) to Form SB-2 filed on January 22, 2003)                            
|3i             | Articles of Incorporation                                                                                                                                                                                        
|               | (a)          Certificate of Amendment of Articles of Incorporation of Euro Technology Outfitters, filed on August 20, 2002(Incorporated by reference to Exhibit (3)(i)(a) to Form SB-2 filed on January 22, 2003)
|               | (b)          Articles of Incorporation for Euro Technology Outfitters, filed on March 3, 2000(Incorporated by reference to Exhibit (3)(i)(b) to Form SB-2 filed on January 22, 2003)                             
|3ii            | Bylaws for Euro Technology Outfitters(Incorporated by reference to Exhibit (3)(ii) to Form SB-2 filed on January 22, 2003)                                                                                       





58



---







|10.1  | Amendment to Translation and Business Consulting agreement with Goran Blagojevic dated December 20, 2002(Incorporated by reference to Exhibit 10.1 to Form SB-2 filed on January 22, 2003)      
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.2  | Service and Water Disposal Agreement dated November 15, 2002(Incorporated by reference to Exhibit 10.2 to Form SB-2 filed on January 22, 2003)                                                  
|10.3  | Employment agreement with Paul Branagan dated December 19, 2002(Incorporated by reference to Exhibit 10.3 to Form SB-2 filed on January 22, 2003)                                               
|10.4  | Geologist/Technical Advisor Consulting Agreement with William Stoeckinger dated December 19, 2002(Incorporated by reference to Exhibit 10.4 to Form SB-2 filed on January 22, 2003)             
|10.5  | Land Services Consulting Agreement with Russell Frierson dated December 27, 2002(Incorporated by reference to Exhibit 10.5 to Form SB-2 filed on January 22, 2003)                              
|10.6  | Land Services Consulting Agreement with Lawrence Kehoe dated December 27, 2002(Incorporated by reference to Exhibit 10.6 to Form SB-2 filed on January 22, 2003)                                
|10.7  | Land Services Consulting Agreement with Cody Felton dated December 27, 2002(Incorporated by reference to Exhibit 10.7 to Form SB-2 filed on January 22, 2003)                                   
|10.8  | Waverly Kansas Office Lease dated January 21, 2003(Incorporated by reference to Exhibit 10.8 to Form SB-2 filed on January 22, 2003)                                                            
|10.9  | 2002 Master Stock Option Plan(Incorporated by reference to Exhibit 10.9 to Form SB-2 filed January 22, 2003)                                                                                    
|10.10 | Term Sheet of Compensation for Enutroff, dated 7/01/03(Incorporated by reference to Exhibit 10.1 to Form 10-QSB filed on September 30, 2003)                                                    
|10.11 | Consultant Agreement of CSC Group LLC(Incorporated by reference to Exhibit 10.10 to Form 10-KSB filed on April 15, 2004)                                                                        
|10.12 | Employment Agreement of David Polay(Incorporated by reference to Exhibit 10.11 to Form 10-KSB filed on April 15, 2004)                                                                          
|10.13 | Addendum to Employment Agreement of Paul Branagan(Incorporated by reference to Exhibit 10.12 to Form 10-KSB filed on April 15, 2004)                                                            
|10.14 | Employment Agreement of Gary Bridwell(Incorporated by reference to Exhibit 10.13 to Form 10-KSB filed on April 15, 2004)                                                                        
|10.15 | Letter Agreement with William D. Burke(Incorporated by reference to Exhibit 10.14 to Form 10-KSB filed on April 15, 2004)                                                                       
|10.16 | Purchase and Sale Agreement with CBM Energy Inc.(Incorporated by reference to Exhibit 10.15 to Form 10-KSB filed on April 15, 2004)                                                             
|10.17 | Research Agreement with Joseph E. Blankenship(Incorporated by reference to Exhibit 10.16 to Form 10-KSB filed on April 15, 2004)                                                                
|10.18 | Research Agreement Scope of Work and Compensation(Incorporated by reference to Exhibit 10.17 to Form 10-KSB filed on April 15, 2004)                                                            
|10.19 | Business Partnership Term Sheet with John Haas, Mark Haas, and W.B. Mitchell(Incorporated by reference to Exhibit 10.18 to Form 10-KSB filed on April 15, 2004)                                 
|10.20 | Addendum #2 Employment Agreement of Paul Branagan(Incorporated by reference to Exhibit 10.6 to Form 10-QSB filed on May 17, 2004)                                                               
|10.21 | Securities Purchase Agreement for Laurus(Incorporated by reference to Exhibit 10.21 to Form SB-2 filed on February 7, 2005)                                                                     
|10.22 | Registration Rights Agreement for Laurus(Incorporated by reference to Exhibit 10.22 to Form SB-2 filed on February 7, 2005)                                                                     
|10.23 | Subscription and Registration Rights Agreement for Unit Offering(Incorporated by reference to Exhibit 10.23 to Form SB-2 filed on February 7, 2005)                                             
|10.24 | Warrant Agreement for Unit Offering(Incorporated by reference to Exhibit 10.24 to Form SB-2 filed on February 7, 2005)                                                                          
|10.25 | Amendment No. 1 to the Secured Convertible Term Note & Registration Rights Agreement with Laurus, dtd 1/28/05(Incorporated by reference to Exhibit 10.25 to Form SB-2 filed on February 7, 2005)





59



---







|10.26 | Common Stock Purchase Warrant of Laurus, dated 01/28/05(Incorporated by reference to Exhibit 10.26 to Form SB-2 filed on February 7, 2005)      
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------
|10.27 | Letter Amendment Agreement with Laurus, dated 04/28/05(Incorporated by reference to Exhibit 10.27 to Form SB-2 filed on May 12, 2005)           
|10.28 | Consulting Agreement with CEOcast, dated 08/7/04(Incorporated by reference to Exhibit 10.28 to Form SB-2 filed on May 12, 2005)                 
|10.29 | Amendment No. 1 to October 2004 Securities Purchase Agreement(Incorporated by reference to Exhibit 10.29 to Form SB-2 filed on December 1, 2005)
|10.30 | Securities Purchase Agreement dated October 31, 2005(Incorporated by reference to Exhibit 10.30 to Form SB-2 filed on December 1, 2005)         
|10.31 | Secured Term Note dated October 31, 2005(Incorporated by reference to Exhibit 10.31 to Form SB-2 filed on December 1, 2005)                     
|10.32 | Common Stock Purchase Warrant dated October 31, 2005(Incorporated by reference to Exhibit 10.32 to Form SB-2 filed on December 1, 2005)         
|10.33 | Registration Rights Agreement dated October 31, 2005(Incorporated by reference to Exhibit 10.33  to Form SB-2 filed on December 1, 2005)        
|10.34 | Amended and Restated Mortgage(Incorporated by reference to Exhibit 10.34 to Form SB-2 filed on December 1, 2005)                                
|21*   | List of Subsidiaries of Petrol Oil and Gas, Inc.                                                                                                
|31*   | Certification of Paul Branagan pursuant to Section 302 of the Sarbanes-Oxley Act.                                                               
|32*   | Certification of Paul Branagan pursuant to Section 906 of the Sarbanes-Oxley Act.                                                               
|99*   | Audit Committee Charter                                                                                                                         

________________________

|* | Filed herewith
|- | --------------



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------



(1) AUDIT FEES



The aggregate fees billed for professional services rendered by Weaver & Martin, LLC, for the audit of our annual financial statements and review of the financial statements included in our Form 10-QSB or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for fiscal years 2005 and 2004 were $99,775 and $98,127, respectively.



(2) AUDIT-RELATED FEES



|NONE
|----



(3) TAX FEES



The aggregate fees to be billed by Weaver & Martin LLC for professional services to be rendered for tax fees for fiscal years 2005 and 2004 were $10,250 and $5,000, respectively.



(4) ALL OTHER FEES



The aggregate fees for professional services for audit related services relating to the Registration Statement on Form SB-2 for fiscal years 2005 and 2004 were $18,500 and $20,426, respectively. There were no other fees to be billed by Weaver & Martin LLC for the fiscal years 2005 and 2004 other than the fees described herein and above.



60



---





(5) AUDIT COMMITTEE POLICIES AND PROCEDURES



We do not have an audit committee.



(6) If greater than 50 percent, disclose the percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees.



|Not applicable.
|---------------





61



---





SIGNATURES



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



|PETROL OIL AND GAS, INC.
|------------------------





|By:/s/ Paul Branagan |                         
|-------------------- | ------------------------
|                     | Paul Branagan, President
|                     |                         



|Date:March 30, 2006
|-------------------



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



|Signature | Title | Date
|--------- | ----- | ----



|/s/ Paul Branagan | President, Secretary/Treasurer, | 3/30/2006
|----------------- | ------------------------------- | ---------
|Paul Branagan     | CEO, Chairman                   |          
|                  |                                 |          





|/s/ Loren Moll | Director | 3/30/2006
|-------------- | -------- | ---------

Loren Moll





|/s/ Suzanne M. Herring | Director | 3/30/2006
|---------------------- | -------- | ---------

Suzanne M. Herring





63



---





Petrol Oil and Gas, Inc.

Index To Consolidated Financial Statements





|Report of Independent Certified Public Accountants                                      | F-1       
|--------------------------------------------------------------------------------------- | ----------
|                                                                                        |           
|Consolidated Balance Sheets, December 31, 2005 and 2004                                 | F-2       
|                                                                                        |           
|Consolidated Statement of Operations for the Years Ended December 31, 2005 and 2004     | F-3       
|                                                                                        |           
|Consolidated Statement of Stockholders' Equity for the years ended December 31, 2005 to |           
|December 31, 2004                                                                       | F-4       
|                                                                                        |           
|Consolidated Statement of Cash Flows for the Year Ended December 31, 2005 and 2004      | F-5       
|                                                                                        |           
|Notes to Consolidated Financial Statements                                              | F-6  F-27













64



---







Report of Independent Registered Public Accounting Firm



Stockholders and Directors

Petrol Oil and Gas, Inc.



We have audited the accompanying balance sheet of Petrol Oil and Gas, Inc. as of December 31, 2005 and 2004 and the related statements of operations, shareholders deficit, and cash flows for each of the two years in the period ended December 31, 2005. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our 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 the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide 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 Petrol Oil and Gas, Inc. as of December 31, 2005 and 2004 and the results of its operations and cash flows for each of the two years in the period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.





/s/Weaver & Martin, LLC

Weaver & Martin, LLC

Kansas City, Missouri

March 30, 2006









F-1



---





Petrol Oil and Gas, Inc.

Consolidated Balance Sheet



|                                                                                                                                                | December 31,
|----------------------------------------------------------------------------------------------------------------------------------------------- | ------------
|                                                                                                                                                | 2005        
|Assets                                                                                                                                          |             
|                                                                                                                                                |             
|Current assets:                                                                                                                                 |             
|Cash                                                                                                                                            | $           
|Cash, restricted                                                                                                                                |             
|Accounts receivable                                                                                                                             |             
|Prepaid expenses and other assets                                                                                                               |             
|Total current assets                                                                                                                            |             
|                                                                                                                                                |             
|Fixed assets, net                                                                                                                               |             
|                                                                                                                                                |             
|Other assets:                                                                                                                                   |             
|Oil and gas properties using full cost accounting:                                                                                              |             
|Properties not subject to amortization                                                                                                          |             
|Properties subject to amortization                                                                                                              |             
|Capitalized loan costs, net                                                                                                                     |             
|Total other assets                                                                                                                              |             
|                                                                                                                                                |             
|                                                                                                                                                |             
|                                                                                                                                                | $           
|                                                                                                                                                |             
|Liabilities and Stockholders' Equity                                                                                                            |             
|                                                                                                                                                |             
|Current liabilities:                                                                                                                            |             
|Accounts payable                                                                                                                                |             
|Accrued liabilities                                                                                                                             |             
|Short-term derivative liability                                                                                                                 |             
|Asset retirement obligation                                                                                                                     |             
|Accrued payable - related party                                                                                                                 |             
|Current portion of long term debt                                                                                                               |             
|Total liabilities                                                                                                                               |             
|                                                                                                                                                |             
|Long-term derivative liability                                                                                                                  |             
|Long-term debt, less current portion                                                                                                            |             
|                                                                                                                                                |             
|Commitments and contingencies                                                                                                                   |             
|                                                                                                                                                |             
|Stockholders' Equity:                                                                                                                           |             
|Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding                                               |             
|Common stock, $0.001 par value, 100,000,000 shares authorized, 26,890,083 and 24,619,660 shares issued and outstanding at 12/31/05 and 12/31/04 |             
|Stock bought or for services not issued, 740,449 and 175,500                                                                                    |             
|shares at 12/31/05 and 12/31/04                                                                                                                 |             
|Unamortized cost of stock, warrants & options issued for services                                                                               |             
|Subscription receivable                                                                                                                         |             
|Additional paid-in capital                                                                                                                      |             
|Other comprehensive income (loss)                                                                                                               |             
|Accumulated (deficit)                                                                                                                           |             
|                                                                                                                                                |             
|                                                                                                                                                |             
|                                                                                                                                                | $           



See notes to consolidated financial statements.





F-2



---





Petrol Oil and Gas, Inc.

Consolidated Statement of Operations



|                                                                               | Year Ended December 31,
|------------------------------------------------------------------------------ | -----------------------
|                                                                               | 2005                   
|                                                                               |                        
|                                                                               |                        
|Revenue                                                                        |                        
|Oil and gas activities                                                         | $                      
|Operator fees                                                                  |                        
|Total revenue                                                                  |                        
|                                                                               |                        
|Expenses:                                                                      |                        
|Direct costs                                                                   |                        
|Royalty expense                                                                |                        
|Pipeline costs                                                                 |                        
|General and administrative                                                     |                        
|Professional and consulting fees                                               |                        
|Depreciation, depletion and amortization                                       |                        
|Acquisition costs                                                              |                        
|Total expenses                                                                 |                        
|                                                                               |                        
|Net operating (loss)                                                           |                        
|                                                                               |                        
|Other income (expense):                                                        |                        
|Interest and other income                                                      |                        
|Interest expense                                                               |                        
|Total other income (expense)                                                   |                        
|                                                                               |                        
|Net (loss)                                                                     | $                      
|                                                                               |                        
|                                                                               |                        
|Weighted average number of common shares outstanding - basic and fully diluted |                        
|                                                                               |                        
|Net (loss) per share - basic and fully diluted                                 | $                      





















See notes to consolidated financial statements.



F-3



---





Petrol Oil and Gas, Inc.

Consolidated Statements of Changes in Stockholders' Equity



|                                             | Common Stock | Additional
Paid-in
Capital | Stock Bought or for Services Not Issued | Unamortized Cost of Stock, Warrants & Options Issued For Services | Other
Comprehensive
Loss | Subscription
Receivable | Accumulated
Deficit | Total
Stockholders'
Equity
|-------------------------------------------- | ------------ | -------------------------- | --------------------------------------- | ----------------------------------------------------------------- | ------------------------ | ----------------------- | ------------------- | --------------------------
|                                             | Shares       | Amount                    
|Balance, December 31, 2003                   | 17,247,466   | $         17,247           | $    4,630,713                          | $             160                                                 | $        (1,000)         | $                  -    | $                -  | $  (2,443,483)            
|Shares issued for services                   | 413,861      | 415                        | 904,085                                 | -                                                                 | -                        | -                       | -                   | -                         
|Shares issued                                | 160,000      | 160                        | -                                       | (160)                                                             | -                        | -                       | -                   | -                         
|Shares issued for asset acquisition          | 765,000      | 765                        | 764,235                                 | -                                                                 | -                        | -                       | -                   | -                         
|Warrants and options issued for services     | -            | -                          | 548,600                                 | -                                                                 | -                        | -                       | -                   | -                         
|Shares for services not yet issued           | -            | -                          | 200,873                                 | 125                                                               | -                        | -                       | -                   | -                         
|Shares for acquisition not yet issued        | -            | -                          | 94,950                                  | 50                                                                | -                        | -                       | -                   | -                         
|Options exercised                            | 1,350,000    | 1,350                      | 836,150                                 | -                                                                 | -                        | -                       | -                   | -                         
|Shares returned from collateral              | (1,000,000)  | (1,000)                    | -                                       | -                                                                 | 1,000                    | -                       | -                   | -                         
|Shares held by lender as collateral          | 50,000       | 50                         | -                                       | -                                                                 | (50)                     | -                       | -                   | -                         
|Shares issued for cash                       | 5,633,333    | 5,633                      | 6,135,567                               | -                                                                 | -                        | -                       | -                   | -                         
|Beneficial conversion of convertible stock   | -            | -                          | 1,013,000                               | -                                                                 | -                        | -                       | -                   | -                         
|Warrants issued in financing                 | -            | -                          | 2,072,534                               | -                                                                 | -                        | -                       | -                   | -                         
|Other comprehensive loss                     | -            | -                          | -                                       | -                                                                 | -                        | (229,435)               | -                   | -                         
|Net loss                                     | -            | -                          | -                                       | -                                                                 | -                        | -                       | -                   | (4,523,907)               
|Balance, December 31, 2004                   | 24,619,660   | 24,620                     | 17,200,707                              | 175                                                               | (50)                     | (229,435)               | -                   | (6,967,390)               
|Shares issued for services                   | 252,785      | 252                        | 537,747                                 | -                                                                 | -                        | -                       | -                   | -                         
|Warrants and options issued for services     | -            | -                          | 803,050                                 | -                                                                 | (537,230)                | -                       | -                   | -                         
|Warrants issued in financing                 | -            | -                          | 1,376,803                               | -                                                                 | -                        | -                       | -                   | -                         
|Shares issued for debt conversion            | 1,297,565    | 1,297                      | 1,945,048                               | -                                                                 | -                        | -                       | -                   | -                         
|Warrants exercised                           | 550,073      | 550                        | 561,825                                 | 125                                                               | -                        | -                       | (75,000)            | -                         
|Shares authorized and unissued for services  | -            | -                          | 93,468                                  | 54                                                                | -                        | -                       | -                   | -                         
|Shares used to acquire property              | 10,000       | 10                         | 1,108,529                               | 546                                                               | -                        | -                       | -                   | -                         
|Shares previously authorized now issued      | 160,000      | 160                        | -                                       | (160)                                                             | -                        | -                       | -                   | -                         
|Options granted for services - related party | -            | -                          | 1,906,937                               | -                                                                 | (1,843,085)              | -                       | -                   | -                         
|Other Comprehensive loss                     | -            | -                          | -                                       | -                                                                 | -                        | (1,467,181)             | -                   | -                         
|Net loss                                     | -            | -                          | -                                       | -                                                                 | -                        | -                       | -                   | (5,963,796)               
|Balance, December 31, 2005                   | 26,890,083   | $         26,889           | $  25,534,114                           | $             740                                                 | $         (2,380,365)    | $    (1,696,616)        | $    (75,000)       | $(12,931,186)             







See notes to consolidated financial statements.



F-4



---





Petrol Oil and Gas, Inc.

Consolidated Statement of Cash Flows

|                                                         | Year Ended December 31,
|-------------------------------------------------------- | -----------------------
|                                                         | 2005                   
|Cash flows from operating activities                     |                        
|Net (loss)                                               | $                      
|Depreciation, depletion and amortization                 |                        
|Shares issued for services                               |                        
|Shares issued for asset acquisition                      |                        
|Warrant accretion                                        |                        
|Shares issued for interest                               |                        
|Shares issued for financing                              |                        
|Warrants and options issued for services                 |                        
|Beneficial conversion                                    |                        
|Adjustments to reconcile net (loss) to cash              |                        
|used in operating activities:                            |                        
|Increase in accounts receivable                          |                        
|Decrease (increase) in prepaid expenses & other assets   |                        
|Increase in accounts payable                             |                        
|(Decrease) increase in accrued liabilities               |                        
|(Decrease) in due to officer                             |                        
|(Decrease) increase in due to related party              |                        
|Net cash used in operating activities                    |                        
|                                                         |                        
|Cash flows from investing activities                     |                        
|Purchase of proved properties                            |                        
|Purchase of related oil and gas equipment                |                        
|Purchase of other property and equipment                 |                        
|Purchase of oil and gas leases                           |                        
|Investments                                              |                        
|Release of (additional) restricted cash                  |                        
|Additions to capitalized oil and gas costs               |                        
|Net cash used in investing activities                    |                        
|                                                         |                        
|Cash flows from financing activities                     |                        
|Amortized loan fees                                      |                        
|Payments on notes payable                                |                        
|Proceeds from loans payable                              |                        
|Proceeds from the exercise of warrants to purchase stock |                        
|Proceeds from sale of common stock                       |                        
|Net cash provided from financing activities              |                        
|                                                         |                        
|Net increase in cash                                     |                        
|Cash - beginning                                         |                        
|Cash - ending                                            | $                      
|                                                         |                        
|Supplemental disclosures:                                |                        
|Interest paid                                            | $                      
|Income taxes paid                                        |                        
|                                                         |                        
|Non-cash transactions                                    |                        
|Shares issued for oil & gas properties                   | $                      
|Shares issued for services                               |                        
|Shares issued for debt conversion                        |                        
|Shares for services and acquisition not issued           |                        
|Warrants and options issued for services & financing     |                        
|Cashless exercise of warrants                            |                        

See notes to consolidated financial statements.



F-5



---





PETROL OIL AND GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1 - Significant Accounting Policies

Nature of Business

The Company was organized on March 3, 2000, under the laws of the State of Nevada, as Euro Technology Outfitters (Euro). On August 19, 2002 Euro acquired, in an asset purchase agreement, land leases and accumulated expenditures and assumed liabilities from Petrol Energy, Inc. (Petrol).  On August 20, 2002, the Company amended its Articles of Incorporation to rename the Company, Petrol Oil and Gas, Inc. and increased the authorized capital stock to 100,000,000 shares of Common Stock $0.001 par value and, 10,000,000 shares of Preferred Stock $0.001 par value.



We are now engaged in the exploration, development, production and marketing of oil and natural gas. The Companys primary objective is the development of Coalbed Methane (CBM) gas production projects.  CBM was identified early on as an area in the oil and gas industry that was gaining recognition as a viable source of natural gas and was experiencing above average growth.  We have focused our efforts to eastern Kansas and western Missouri where leases were acquired that appeared geologically suitable for CBM exploration.



Principles of Consolidation

Our consolidated financial statements include the accounts of our wholly owned subsidiaries, Neodesha Pipeline, LLC and Coal Creek Pipeline, LLC., after elimination of intercompany transactions.



Use of Estimates

The preparation of these consolidated financial statements requires the use of estimates by management in determining our assets, liabilities, revenue, and expenses and related disclosures.  Actual results could differ from those estimates.



Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. We regularly review collectibility and establish or adjust an allowance for uncollectible accounts as necessary using the specific identification method. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. There were no reserves for uncollectible amounts in the periods presented.



Stock-Based Compensation

Common stock, warrants and options issued for services by non-employees are accounted for based on the fair market value at the date the services are



F-7



---



performed.  If the services are to be performed over a period of time the value is amortized over the life of the period that services are performed.



We account for our stock option plan in accordance with the provisions of SFAS No. 123R, Accounting for Stock Based Compensation.  The cost of options are included as an expense when the options are vested.



Income Taxes

We account for income taxes under SFAS 109,Accounting for IncomeTaxes.  The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities.  The provision for income taxes differ from the amounts currently payable because of temporary differences in the recognition of certain income and expense items for financial reporting and tax reporting purposes.



Fair value of financial instruments

The carrying value of current assets and liabilities reasonably approximates their fair value due to their short maturity periods.  The carrying values of our debt obligations reasonably approximate their fair value and the stated interest rate approximates current market interest rates for debt available to us with similar terms.



Earnings per common share

SFAS No. 128,Earnings Per Share.This standard requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the diluted loss per share computation.



Potentially issuable shares of common stock pursuant to outstanding stock options and warrants are excluded from the diluted computation, as their effect would be anti-dilutive.



Cash and cash equivalents

Cash and cash equivalents include cash in banks and certificates of deposit that mature within three months of the date of purchase.



Revenue recognition

It is our policy to recognize revenue when title passes to our customers based on the contractual point of delivery.



Capitalized loan costs

Costs related to securing our long-term convertible debt and term note are recorded as an asset and are amortized over the life of the debt (generally three years).  For the years ended December 31, 2005 and 2004 we recorded as loan cost expense $445,757 and $67,000 respectively.





F-8



---





Property and Equipment

Property and equipment are recorded at cost.  Depreciation is on a straight-line method using the estimated lives of the assets (3-15 years).   Expenditures for maintenance and repairs are charged to expense.



Oil and gas properties

We follow the full cost method of accounting for oil and gas properties.  Accordingly, all costs associated with acquisition, exploration, and development are capitalized.



All capitalized costs included in the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves.  Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs.  If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.  Abandonments of oil and gas properties are charged to the full cost pool and amortized.



Under the full cost method, the net book value of oil and gas properties are subject to a ceiling.  The ceiling is the estimated after-tax future net revenue from proved oil and gas properties, discounted at 10% per annum plus the lower of cost or fair market value of unproved properties.  In calculating future net revenues, prices and costs in effect at the time of the calculation are held constant indefinitely, except for changes that are fixed and determinable by existing contracts.  The excess, if any, of the net book value above the ceiling is written off as an expense.



Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized as income.



Long-lived assets

Impairment of long-lived assets is recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying value. The carrying value of the assets is then reduced to their estimated fair value which is usually measured based on an estimate of future discounted cash flows. No adjustments were necessary during the periods presented.



Asset retirement obligations

We accrue for asset retirement obligations, primarily for assets on leased sites, in the period in which the obligations are incurred.  We accrue these costs at estimated fair value.  When the related liability is initially recorded, we capitalize the cost by increasing the carrying amount of the long-lived asset.  Over time, the liability is accreted to its settlement value and the capitalized cost is depreciated



F-9



---



over the useful life of the related asset.  Upon settlement of the liability, we recognize a gain or loss for any difference between the settlement amount and the liability recorded.  We have identified asset retirement obligations pertaining to the closure of wells on our land leases.  We have estimated the fair value of our asset retirement obligations, based in part on the terms of quoted agreements.



Concentration of credit risk

We substantially sell all oil and gas production to two customers. In 2005 the two largest customers accounted for 81% and 18% of sales and in 2004 the two largest customers accounted for 83% and 16% of sales.



Accounting for Derivative Instruments and Hedging Activities

We seek to reduce our exposure to unfavorable changes in natural gas prices by utilizing energy swap contracts (effectively fixed price contracts).  We have adopted SFAS 133, as amended by SFAS 138,Accounting forDerivative Contracts and Hedging Activities.It requires that all derivative instruments be recognized as assets or liabilities in the statement of financial position, measured at fair value.  Accounting for changes in the fair value of the derivative depends on the intended use of the derivative and the resulting designation.  For derivatives that are designated as cash flow hedges changes in fair value are recognized in other comprehensive income until the hedged item is recognized in earnings.  Hedge effectiveness is measured at least quarterly based on the relative changes in fair
value between the derivative contract and the hedged item over time.  Any change in fair value resulting from ineffectiveness is recognized immediately in earnings.



Although our fixed price contracts may not qualify for special hedge accounting treatment from time to time under specific guidelines of SFAS 133, we refer to these contracts as hedges inasmuch as this was the intent when such contracts were executed, the characterization is consistent with the actual economic performance of the contracts, and we expect the contracts to continue to mitigate our commodity price risk in the future.  The accounting for the contracts is consistent with the requirements of SFAS 133.



We have established the fair value of all derivative instruments using estimates determined by using established index prices and bases adjustments.  The values reported in the financial statements change as these estimates are revised to reflect actual results, changes in market conditions or other factors.



Recent issued accounting Standards

In September 2005, the Financial Accounting Standards Board ratified the consensus reached by the Emerging Issues Task Force (EITF) on Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty. The issue defines when a purchase and a sale of inventory with the same party that operates in the same line of business is recorded at fair value or considered a single non-monetary transaction subject to the fair value exception of APB Opinion No. 29. The purchase and sale transactions may be pursuant to a



F-10



---



single contractual arrangement or separate contractual arrangements and the inventory purchased or sold may be in the form of raw materials, work-in-process, or finished goods. In general, two or more transactions with the same party are treated as one if they are entered into in contemplation of each other. The rules apply to new arrangements entered into in reporting periods beginningafter March 15, 2006. We are currently studying the provisions of this consensus to determine the impact on the consolidated financial statements; however, management does not believe any impact on net income would be material.



In June 2005, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 154, Accounting Changes and Error Correctionsa replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. This Statement also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change.
However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. This Statement shall be effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. We do not expect this guidance to have a significant impact on our financial statements.



In April 2005, the FASB issued Accounting for Suspended Well Costs (FSP 19-1). This position concluded that exploratory well costs should continue to be capitalized beyond twelve months when the well has found a sufficient quantity of reserves to justify its completion as a producing well, and the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project. This guidance requires management to exercise more judgment than was previously required and also requires additional disclosure. Management does not believe this statement of position will have a significant effect on the financial statements.



In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143. This interpretation clarifies that the term, conditional asset retirement obligation, as used in FASB Statement No. 143, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Thus, the timing



F-11



---



and/or method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred, generally upon acquisition, construction, or development and/or through the normal operation of the asset. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. SFAS No. 143 acknowledges that, in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. We do not expect this guidance to have a significant impact on Petrol.



Reclassifications

Certain reclassifications have been made to prior periods to conform to current presentation.



Note 2 -  Stockholders Equity



Common stock



As of December 31, 2005 and 2004, there were 740,449 and 175,500 shares unissued, respectively.



Stock Transactions



Fiscal 2004

We entered into a geologist/technical advisor consulting agreement with Mr. William Stoeckinger.  The agreement was for a one-month term and Mr. Stoeckinger received 20,000 shares valued at $20,000.  The fair market value of the stock was determined based on the price that we were selling shares to our investors.  Professional and consulting expense was charged  $20,000 in 2004.



On January 14, 2004, we entered into a twelve-month consulting agreement with Consulting Solutions whereby Consulting solutions would provide introduction to international strategic alliance partners for investment in drilling activities related to CBM production. At December 31, 2004, we issued 35,000 shares in the name of Fidelity Insurance Co. on behalf of Consulting Solutions for services provided per the consulting agreement. The value of the stock as determined by the market price of our stock on the day of the agreement was $73,500 and this was recorded as professional and consulting fee expense.



On January 15, 2004 we agreed to exchange 765,000 shares of our stock to Mr. John Haas, Mr. Mark Haas and Mr. W.B. Mitchell, principals of CBM Energy, Inc. for oil and gas mineral leases covering approximately 36,000 acres and title to approximately 10 existing wells. The value of the transaction is $765,000. $31,000 of value was assigned to property not subject to amortization based on



F-12



---



the remaining lease cost of each leased acre.  $80,000 of value was assigned to property subject to amortization based on the fair market value of the test wells on the leased property.  The remaining $654,000 was expensed in January 2004.



On February 9, 2004, we agreed to issue 10,000 shares of common stock to Joseph Blankenship. The value of the stock of $10,000 was recorded as a professional and consulting fees expense.  The shares were issued to Mr. Blankenship in 2005.



On May 3, 2004, we issued 100,000 shares of our common stock to CPA Directed Investments (CDI) pursuant to a secured promissory note agreement dated May 5, 2004.  CDI will return 50,000 shares for cancellation at such time the loan and interest are paid in full.  The remaining 50,000 shares will be retained by CDI as a loan fee.  Due to the nature of this being a short-term loan the loan fee was expensed.  The amount was determined based on the market value of our stock on the date of the agreement and totaled $132,500.  The par value ($50) of the 50,000 shares held as collateral was recorded as unamortized cost of stock issued for services until such time as the shares are returned.



On June 17, 2004 we issued 120,000 shares of our common stock to XXR Consulting Inc. pursuant to a consulting agreement we executed on June 4, 2004.  The value of the stock as determined by the market price of our stock on the day of the agreement was $276,000 and was recorded as professional and consulting fee expense.



On June 15, 2004 we agreed to a consulting agreement with ECON Investor Relations, Inc.  The monthly fee is $10,000 of which $6,000 is payable in stock.  The agreement is for one year with either party able to terminate the agreement based on 30 days written notice. Stock earned but not issued to the consultant at December 31, 2004 was recorded at par value.



We entered into an agreement with Haas Oil Group whereby we agreed to issue 50,000 shares of common stock in exchange for 100% working interest in certain leases that Hass owned.  The shares were valued at $1.90 per share, which was the trading price of our common stock on September 20, 2004 the date the agreement was signed.  As of December 31, 2004 the shares were not issued.



On November 1, 2004 we recorded as additional compensation $152,000 that represented the market value (as determined based on the price our shares were trading on that day) of 100,000 shares of our common stock that was earned by Mr. Gary Bidwell.   The shares were not issued as of December 31, 2004.



On December 2, 2004, we issued 90,000 shares of common stock to Hard Funding, Inc. pursuant to the twelve-month financial consulting agreement entered into on January 14, 2004. The value of the stock as determined by the



F-13



---



market price of our stock on the day of the agreement was $189,000 and was recorded as professional and consulting fee expense.



On December 16, 2004, we issued 90,000 shares of common stock to CEOcast pursuant to the consulting agreement entered into on June 2004. The value of the stock as determined by the market price of our stock on the day of the agreement was $152,100 and was recorded as professional and consulting fee expense.



We sold 5,633,333 shares of our common stock in 2004.  Each share was sold for $1.20 and it included a warrant to purchase an additional share of common stock for a price of $1.50 per share expiring on September 8, 2007.  The proceeds raised totaled $6,760,000. The proceeds were offset by direct costs relating to commissions paid, totaling $479,800, legal fees of $131,500 and other costs of $7,500. We also issued 845,000 warrants as additional commission to Energy Capital Solutions (see options and warrants below).  The value assigned to the warrants would normally be recorded as additional paid-in capital, however, since this was a cost of the offering there was no additional paid-in capital. The net amount received from the sale was $6,141,200.



A supplier has agreed to be paid in stock for 10% of any invoice.  Stock earned but not issued to the supplier at December 31, 2004 was recorded at par value.



Fiscal 2005

On January 11, 2005, we awarded Mr. David Polay 50,000 shares and Mr. LoCascio 10,000 shares of our common stock for services.  The value of the stock was determined based on the closing value of its stock on the date the stock was issued.  We recorded $141,000 as professional fee expense.



On January 11, 2005, we issued 60,000 shares of its common stock in lieu of cash compensation to Russell A. Frierson for land and administrative support rendered to the Company.  The value of the stock was determined based on the closing value of its stock on the date the stock was issued.  We recorded $141,000 as professional fee expense.



We entered into consulting agreements with CEOcast, Inc., in 2005 wherein we agreed to issue 100,000 shares of our common stock to CEOcast.  The value of the stock was determined based on the closing value of the stock on the date the stock was issued.  We recorded $186,800 as professional fee expense



On August 8, 2005, we issued 22,785 shares of our common stock (valued at $54,000) to ECON Investor Relations, Inc. pursuant to its consulting agreement.



On August 25, 2005, we issued 10,000 shares of our common stock to Gary Bridwell as a bonus for his work as field engineering supervisor.  The value of our common stock on the day of the bonus was used to record the wage expense of $15,200.



F-14



---





During fiscal 2005 Laurus Master Fund Ltd. Converted $1,370,294 of principal and $576,053 of accrued interest under the convertible term note.  Pursuant to the conversion rate of $1.50 they were issued 1,297,565 shares of common stock.



In connection with our financing we agreed to issue 50,000 shares of our common stock to Draper & Associates.  The value of our common stock on the day the services were agreed to was used to record a loan fee of $90,000.  The shares were not issued as of December 31, 2005.



A supplier agreed to take our common stock in lieu of cash payments.  The liability was $3,522.  The shares were not issued as of December 31, 2005.



We purchased an operating asset in exchange for 10,000 shares of our common stock.  The value of our common stock on the day of the purchase was used to record a value of $16,400.



We acquired working interests in producing wells for 546,342 shares of our common stock.  The value of our stock on the day of the acquisition was used to value the purchase at $1,092,684.   The shares were not issued as of December 31, 2005.



Options and warrants

All values of options and warrants were determined based on the Black-Scholes pricing model.



The weighted average of the assumptions used to value options and warrants in 2005 were: Interest rate-5.62%, Days to expiration-1,797, Stock price $1.94, Strike price-$1.99, Volatility-49%, Yield-0%.



The weighted average of the assumptions used to value options and warrants in 2004 were: Interest rate-2.32%, Days to expiration-936, Stock price $1.41, Strike price-$1.39, Volatility-23%, Yield-0%.



The Board of Directors on December 16, 2002 adopted the 2002 stock option plan for 3,000,000 shares.  On December 31, 2005 the Board approved the 2006 stock option plan for 3,000,000 shares.  This plan will be presented to the shareholders at the next annual meeting.  At December 31, 2005, the options issued to Mr. Branagan are part of the 2006 plan.



Options

Fiscal 2004

On February 9, 2004, we granted Joseph Blankenship an option to purchase 50,000 shares at $2.50 per share for the first 25,000 shares and $4.00 for the remaining 25,000 shares.  The option was granted pursuant to the Research Agreement.  The term of the option is for two years.  The value of the options was $200 and was recorded as a professional and consulting fees expense.





F-15



---





On March 1, 2004, we issued 100,000 stock options with an exercise price of $1.25 per share and 200,000 stock options with an exercise price of $1.50 per share to Mr. William Burk.  Mr. Burk has performed consulting services for the Company.  The options expire in three years.  The value of the options was $38,500 and this was recorded as a professional and consulting fees expense.



In 2004 700,000 options were exercised at an average price of $.50 per share.



Fiscal 2005

On March 16, 2005, we executed an agreement with CSC Group, wherein Steve Cochennet, (an Advisory Board Member) President of CSC Group, agreed to provide the Company with services to further the Companys long-term strategy.  The term of the agreement began on January 1, 2005.  The Company agreed to pay Mr. Cochennet $5,000 per month plus grant 150,000 options to CSC Group at $2.04 per share for a period of five years.  Mr. Cochennet will also receive 3% of any debt facility or mezzanine financing he puts in place prior to December 31, 2005.  The value of the options was $138,795 and was recorded as professional fee expense.



On March 18, 2005, we executed an agreement with Robert Howell, (an Advisory Board Member) wherein Mr. Howell agreed to provide the Company with services on specified assignments as needed by the Company.  The term of the agreement is for three months and began on February 1, 2005.  We agreed to compensate Mr. Howell $10,000 for each month plus pay for all reasonable business and travel expenses, and grant Mr. Howell 125,000 options to purchase common stock at $2.33 per share.  The options are fully vested and will have five years in which to exercise them.  If Mr. Howell is involved in finding sources of debt for the Company, he will work with Mr. Cochennet and be paid an additional fee by Mr. Cochennet.  The value of the warrants was $86,825 and was recorded as professional fee expense.



On May 9, 2005, we entered into an agreement with an employee to provide services to the Company.  As part of the agreement the employee will receive 60,000 options vesting 20,000 per year at $2.33 per share expiring in five years. The value of the options was $40,200. The employee left the Company before any of the options were vested and the value was charged to wage expense.



On October 29, 2005, we entered into an employment agreement with Mr. Branagan, the CEO of the Company.  We granted Mr. Branagan 500,000 options at an exercise price of $1.75 per share.  The options have a 5-year term.  The value of the options was $509,707 and was recorded as unamortized cost of stock issued for services.  The cost will be amortized over the five-year contract period.  We also extended Mr. Branagans previously issued options (250,000 options with the following strike prices-$.50, $1.00, $1.50, $2.00, and $2.50 for a total of 1,250,000 options) for an additional five-year period.  The additional value of extending these options was $1,397,230 and recorded as Unamortized cost of



F-16



---



stock, warrants, and options issued for services that will be amortized over the five-year period of the contract.  We amortized as wage expense $63,852 in 2005.



On December 20, 2005, we entered into an agreement with Steve Cochennet whereby we granted Mr. Cochennet 150,000 options at a strike price of $1.75 and 150,000 at strike price of $2.00 for a 5 year term.  We also extended Mr. Cochennets existing $1.50 and $2.50 warrants for an additional 4 years.  The value of the options and warrants was $537,230 and was recorded as unamortized cost of stock, warrants and options issued for services and will be amortized over the six-month term of the agreement which begins in fiscal 2006.



Warrants

Fiscal 2004

On January 15, 2004, we entered into an agreement with Mr. John Haas, Mr. Mark Hass and Mr. W.B. Mitchell whereas we would be allowed six months access to approximately 10,000 acres of leased mineral rights for the purpose of exploring, and evaluating gas production.  Mr. John Haas agreed to join the Board of Directors of the Company.  Mr. Mark Hass agreed to be a project manager and consultant for the Company.  Mr. W.B. Mitchell agreed to provide consulting support for lease/land acquisitions.  Each of the three individuals received 600,000 stock warrants (1,800,000 total) to purchase shares at a price of $1.20 per share; 400,000 stock warrants (1,200,000 total) to purchase shares at a price of $1.50 per share; and 300,000 stock warrants (900,000 total) to purchase shares at a price of $2.00 per share.  The warrants expire on July 15, 2006.  The value of the warrants was $420,700 and was
recorded in January 2004 as a professional and consulting fee expense.



On February 18, 2004, we granted to CSC Group, LLC a stock warrant giving CSC the right to purchase 200,000 shares of our common stock.  The number of shares, exercise price and term of the warrants shall be: (i) 100,000 shares at $1.50 per share for a term of two years; and (ii) 100,000 shares at $2.50 per share for a term of two years.  The value of the warrants was $7,400 and was recorded as a professional fees expense.



In connection with the sale of 5,633,333 shares of common stock in 2004 each share purchased included a warrant to purchase an additional share of common stock for a price of $1.50 per share expiring on September 8, 2007.



On October 7, 2004, we issued 845,000 warrants to Energy Capital Solutions in connection with stock sales.  The warrants are for the purchase of common stock at a price of $1.35 per share and expire October 29, 2009. The value of the warrants was $447,850.  The warrants were part of the cost of the offering and therefore no entry was made to additional paid-in capital.



On October 28, 2004, we issued 5,333,333 warrants to Laurus Master Fund, Ltd., in connection with the convertible note agreement entered into on the same day.



F-17



---



Pursuant to the agreement, Laurus Master Fund was issued 3,520,000 warrants to purchase common stock for a price of $2.00 per share expiring on October 28, 2009 and an additional 1,813,333 warrants to purchase common stock at a price of $3.00 per share expiring on October 28, 2004. The value of the warrants was $2,072,534, which was offset against the long-term liability and will be accreted to interest expense over the life of the loan. We issued 100,000 warrants to Draper & Associates in connection with the financing arrangement. These warrants are for the purchase of common stock at a price of $2.00 per share and will expire on October 29, 2007. The value of the warrants was $38,860 and was recorded as capitalized loan costs and will be amortized over a three-year period.



In 2004 650,000 warrants were exercised at an average price of $.75.



Fiscal 2005

On January 28, 2005, in exchange for delaying its monthly principal payment until June 2005 on the note due to Laurus Master Fund, we issued Laurus 666,667 warrants at an exercise price of $2.50 and 333,333 warrants at an exercise price of $3.00.  The value of the warrants was $549,000 and was recorded as professional fee expense.



On October 31, 2005, we granted Laurus Master Fund 1,000,000 warrants at a strike price of $2.00 per share for a five-year period in connection with the new note.  The value of the warrants was $827,803.  The value will be accreted to interest expense over the estimated term of the loan.



In 2005, 425,000 warrants were exercised at an average price of $1.32.  Included in subscription receivable is $75,000 due on the exercise of warrants.  There were 845,000 warrants exercised on a cashless basis for 250,073 shares.  At December 31, 2005, 125,000 shares were not issued for exercised warrants.



A summary of stock options and warrants is as follows:



|                    | Options   | Weighted Average
Price | Warrants    | Weighted Average
Price
|------------------- | --------- | ---------------------- | ----------- | ----------------------
|Outstanding 1/1/04  | 2,050,000 | $1.12                  | 2,400,000   | $  .75                
|Granted             | 350,000   | 1.68                   | 16,011,666  | 1.68                  
|Cancelled           | --        | --                     | --          | --                    
|Exercised           | (700,000) | .50                    | (650,000)   | .75                   
|Outstanding12/31/04 | 1,700,000 | $1.49                  | 17,761,666  | $1.69                 
|                    |           |                        |             |                       
|Outstanding  1/1/05 | 1,700,000 | $1.49                  | 17,761,666  | $1.69                 
|Granted             | 1,135,000 | 1.92                   | 2,000,000   | 2.33                  
|Cancelled           | (60,000)  | 2.23                   | --          | --                    
|Exercised           | --        | --                     | (1,270,000) | 1.34                  





F-18



---







|Outstanding12/31/05 | 2,775,000 | $1.65 | 18,491,666 | $1.78
|------------------- | --------- | ----- | ---------- | -----
|                    |           |       |            |      



Note 3 - Commitments

On April 2, 2004, we entered into a 39-month lease for office space.  The monthly lease payment is $3,448.40.  Total rent expense for 2005 and 2004 was approximately $57,000 and $33,000 respectively.  Future minimum rent payments are 2006-$43,600 and 2007-$22,300.



Note 4 - Long-Term Debt

Long-term debt consists of the following:



|                                  | December 31,
|--------------------------------- | ------------
|                                  | 2005        
|Convertible note                  | $  6,172,942
|Secured term note                 | 10,000,000  
|Note payable to GMAC              | 16,791      
|Note payable to bank              | 26,879      
|Total                             | 16,216,612  
|Less unamortized cost of warrants | (1,740,494) 
|                                  | 14,476,118  
|Less current portion              | (2,101,111) 
|Long-term debt                    | $12,375,007 



Convertible note

In October 2004, we issued an $8,000,000 secured convertible term note ("Note") to Laurus Master Fund, Ltd. ("Laurus").   The Note is convertible into shares of our common stock at an initial conversion price of $1.50 per share. Pursuant to this agreement, we also issued to Laurus a warrant  ("Warrant") to purchase up to 5,333,333 shares of our common stock, of which 3,520,000 shares will have an exercise price of $2.00 and 1,813,333 shares will have an exercise price of $3.00.  The warrants expire on October 29, 2009.  The unamortized cost of the warrants issued to Laurus (see Note 2 Stockholders Equity) will accrete to interest expense over the period of the loan based on the interest method.  For the periods ended December 31, 2005 and 2004 the accreted amount of the unamortized cost of warrants was $943,800 and $170,054 respectively and was reported as interest expense.



There was a beneficial conversion feature to the convertible note.  On the day the note was issued the difference between the conversion price of the note and the market value based on the current trading price of our common stock was $1,103,000.  The beneficial conversion was recorded as interest expense for the year ended December 31, 2004.





F-19



---





The Laurus Note has a term of three years and accrues interest at the prime rate plus 3% per year (8.25% to10.5 % for the year ended at December 31, 2005 with the rate being 10.5% at December 31, 2005 and 8% to 8.25% for the year ended December 31, 2004 and 8.25% at December 31, 2004).  The Note is secured by substantially all our assets. As of December 31, 2004, we had restricted cash relating to the remaining $850,000 facility draw that was used in 2005 for development of our oil & gas assets.



Interest on the unrestricted principal amount is payable monthly, in arrears, on the first business day of each calendar month until the maturity date. Under the terms of the Note, the monthly interest payment and the monthly principal payment are payable either in cash at 102% of the respective monthly amortization amounts or, if certain criteria are met, in shares of our common stock. The minimum monthly principal repayment of $200,000 together with any accrued or unpaid interest, was to commence on December 1, 2004, and continues through the maturity date. The principal criteria for the monthly payments to be made in shares of our common stock include:



| | the effectiveness  of a current  registration statement covering the shares of our common stock  into  which  the  principal and interest  under the Note are convertible;
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | an average closing price of our common stock for the previous five trading days greater  than or equal to 115% of the fixed conversion price; and
|- | -------------------------------------------------------------------------------------------------------------------------------------------------



| | the amount of such conversion not exceeding 25% of the aggregate dollar-trading volume of our common stock for the previous 22 trading days.
|- | --------------------------------------------------------------------------------------------------------------------------------------------



We may prepay the non-restricted and the restricted facility of the Note at any time by paying 130% of the amortizing principal amount then outstanding, together with accrued but unpaid interest thereon. Upon an event of default under the Note, Laurus may demand repayment of the outstanding principal balance at a rate of 130% of the Note plus any accrued interest.



On a month-by-month basis, if we register the shares of common stock issuable upon conversion of the Note and upon exercise of the Warrant on a registration statement declared effective by the Securities and Exchange Commission, and the market price of our common stock for five consecutive trading days exceeds the conversion price by at least 25%, then the interest rate on the Note for the succeeding calendar month shall be reduced by 1% for every 25% increase in the market price of our common stock above the conversion price of the Note, but in no event shall the interest rate be less than 7.5%.



Laurus also has the option to convert all or a portion of the Note into shares of our common stock at any time, subject to limitations described below, at a conversion



F-20



---



price of $1.50 per share.  Laurus is limited on its ability to convert the Note or exercise the warrants if the conversion or exercise would cause the shares then held by Laurus to exceed 4.99% of our outstanding shares of common stock unless there has been an event of default or Laurus provides us with 75 days prior notice.



Secured term note

In October 2005 we borrowed $10,000,000 from Laurus on a secured term note.  The interest on the note is prime plus 3.25% (10.5% at December 31, 2005).  Principal payments will begin in May, 2006 in an amount based on 80% of net revenues as defined in the note agreement that principally consists of net revenue on new producing wells.  Based on our projections the loan will be paid off in 3 years.



As an inducement to enter into the transaction we granted Laurus 1,000,000 warrants at an exercise price of $2.00 per share expiring in five years.  The value of the warrants (see note 2) was $827,803 and this will accrete to interest over the estimated term of the loan.  In 2005 we accreted $45,989 to interest expense.



There were costs totaling $525,086 relating to securing this note and the costs will be amortized into expense over the expected three-year term of the loan.  Amounts expensed in 2005 were $43,757.



The master security agreement establishes substantially all of our assets as collateral for the convertible note as well as for this note.



We acquired a truck on September 10, 2003 and financed the purchase with a five-year loan from GMAC bearing an interest rate of 8.74%.



We financed a vehicle with Cornerstone bank in 2005 with a four-year loan at an interest rate of 7.00%.



The aggregate principal payments of long-term debt are approximately 2006-$3,005,902, 2007-$8,264,156, 2008-$4,938,551, and 2009-$8,003.



Note 5 - Income Taxes



Deferred income taxes are determined based on the tax effect of items subject to differences in book and taxable income.  We had no income tax provision for the years ended December 31, 2005 and 2004.  There are approximately $11,590,000 of net operating loss carry-forwards, which expire in 2017-2020.  The net deferred tax is as follows:



|                                              | Year ended December 31,
|--------------------------------------------- | -----------------------
|Non-current deferred tax asset (liabilities): | 2005                   
|Net operating loss carry-forward              | $3,940,000             





F-21



---







|Oil & gas properties
Valuation allowance | (1,217,000)
(2,723,000) | (839,000)
(1,307,000)
|---------------------------------------- | ----------------------- | ---------------------
|Total deferred tax, net                  | $             --        | $             --     



A reconciliation of the provision for income taxes to the statutory federal rate for continuing operations is as follows:



|                              | Year Ended December 31,
|----------------------------- | -----------------------
|                              | 2005                   
|Statutory tax rate            | 34.0%                  
|Non-deductible expense        | 9.5                    
|Oil & gas properties          | (5.8)                  
|Change in valuation allowance | (37.7)                 
|Effective tax rate            | 0.0%                   



Note 6 - Related Party Transactions



During the year ended December 31, 2004, we paid the outstanding balance due to an officer in the amount of $47,500.



Total interest paid to CDI (see note 2), a shareholder of the Company, for the year ended December 31, 2004 was $15,778.



Total fees paid to Mr. David Polay, a former officer of the Company, and his company for the year ended December 31, 2005 and 2004 were $117,450 and $13,342.



In fiscal 2004 we acquired oil and gas leases and existing wells from BTB Energy for $270,000.  This was included as an accrued liability at December 31, 2004.  We also paid $150,000 to two of our shareholders for an operating property.



Note 7 - Acquisitions



On January 15, 2004, we agreed to issue 765,000 shares of stock to Mr. John Haas, Mr. Mark Haas and Mr. W.B. Mitchell, principals of CBM Energy, Inc. in exchange for oil and gas mineral leases covering approximately 36,000 acres and title to approximately 10 existing wells. The value of the transaction is $765,000. $31,000 of value was assigned to properties not subject to amortization based on the unamortized lease cost of each leased acre.  $80,000 of value was assigned to properties subject to amortization costs based on the fair market value of the test wells on the leased property.  The remaining $654,000 was expensed.



Effective November 4, 2004 we completed the acquisition of certain assets owned by Savage Resources, LLC and Savage Pipeline, LLC for the purchase price of $10 million.  The acquisition included leasehold rights to approximately 10,000 acres and 71 producing gas wells in Southeast Kansas.



F-22



---





In accordance with the terms of the purchase agreement, the purchase price was allocated as follows:



|Proved producing properties | $8,410,000 
|--------------------------- | -----------
|Equipment and vehicles      | 90,000     
|Pipeline                    | 1,500,000  
|Total                       | $10,000,000



Note 8 - Derivatives

Description of contracts.

We utilize energy swaps to reduce exposure to unfavorable changes in natural gas prices through fixed-price contracts.  These contracts allow us to predict with greater certainty the effective natural gas prices received for hedged production.  These contracts also benefit operating cash flows and earnings when market prices are less than the fixed prices provided under the contracts.  However, we will not benefit from market prices that are higher than fixed prices in contracts for hedged production.  If we are unable to provide the quantity that we have contracted for we will have to go to the open market to purchase the required amounts that we have contracted to provide. For the year ended December 31, 2005 and 2004 fixed price contracts hedged approximately 80% and 72%, respectively, of our oil & gas production.



The following table summarizes our fixed price contracts as of December 31, 2005:



|                       | Year Ending December 31,
|---------------------- | ------------------------
|                       | 2006                    
|Gas                    |                         
|Contract volume        | 732,200                 
|Weighted-average price | $8.13                   
|                       |                         
|Oil
Contract volume    | 6,600                   
|Weighted-average price | 53.93                   
|                       |                         
|Fair value liability   | ($1,696,616)            



Accounting.

All fixed price contracts have been executed in connection with our natural gas hedging program.  The differential between the fixed price and the floating price for each contract settlement period multiplied by the associated contract volume is the contract profit or loss.  All of our contracts are considered to be cash flow hedges and there was no realized gains or losses in the years ending December 31, 2005 and 2004.  The change in the fair value is shown as an adjustment to other



F-23



---



comprehensive income with a corresponding balance sheet asset or liability recorded.



Credit risk.

The counter parties to our fixed-price contracts are the customers buying our product.  Should the counter party default on a contract there can be no assurance that we will be able to enter into a new contract with a third party on terms comparable to the original contract.  We have not experienced non-performance. Cancellation or termination of a fixed-price contract would subject a greater portion of our gas and oil production to market prices, which in a low price environment could have an adverse effect on our operating results.



Market risk.

Market risk has been significantly hedged through fixed-price contracts.



Note 9 - Asset Retirement Obligations



Our asset retirement obligations relate to the abandonment of oil and gas wells.  The amounts recognized were based on numerous estimates and assumptions, including future retirement costs, inflation rates and credit adjusted risk-free interest rates.  The following table shows the changes in asset retirement obligations for the financial statements presented.



|                                               | Years Ended December 31,
|---------------------------------------------- | ------------------------
|                                               | 2005                    
|Asset retirement obligation, beginning of year | $445,617                
|Liabilities incurred during the year           | 252,960                 
|Liabilities settled during the year            | --                      
|Accretion of expense                           | 51,041                  
|Asset retirement obligations, end of year      | $749,618                



Note 10 - Cost of Oil and Gas Properties



|(a) | General.
|--- | --------

The following information on our oil and gas development and producing activities is in accordance with SFAS No. 69, Disclosures about Oil and Gas Producing Activities.



|(b) | Results of operations from oil and gas producing activities
|--- | -----------------------------------------------------------

The following table shows the results of operations from our oil and gas producing activities during the years presented in the financial statements.  Results of operations from these activities have been determined using historical revenues, production costs, depreciation, depletion and amortization of the capitalized costs



F-24



---



subject to amortization.  General and administrative expenses and interest expense have been excluded from this determination.



|                                                                  | Years Ended December 31,
|----------------------------------------------------------------- | ------------------------
|                                                                  | 2005                    
|Production revenues                                               | $6,040,957              
|Production and pipeline costs                                     | (4,111,589)             
|Depreciation and depletion                                        | (808,138)               
|Income tax  (allocated on gross profits based
On statutory rates) | (345,000)               
|Results of operations for producing activities                    | $  775,891              



(c)  Capitalized costs for oil and gas producing activities

Our aggregate capitalized costs related to natural gas and oil producing activities are as follows:



|                                       | Years Ended December 31,
|-------------------------------------- | ------------------------
|                                       | 2005                    
|Proved                                 | $14,586,296             
|Unproved                               | 954,002                 
|                                       | 15,540,298              
|Accumulated depreciation and depletion | (923,513)               
|Net capitalized costs                  | $14,616,785             



Unproved properties not subject to amortization consisted mainly of leases, and wells that havent been completed.  We will continue to evaluate our unproved properties, however, the timing of ultimate evaluation and disposition of the properties has not been determined.



(d) Costs incurred

Capitalized costs incurred in natural gas and oil property acquisition, exploration and development activities are summarized as follows:



|                                            | Year Ended December 31,
|------------------------------------------- | -----------------------
|                                            | 2005                   
|Acquisition of properties proved & unproved | $   140,114            
|Development costs                           | 1,521,979              
|Total                                       | $1,662,093             



Note 11  Fixed Assets



Fixed assets consists of the following:



| | Year Ended December 31,
| | -----------------------
| | 2005                   





F-25



---







|                                    |            |           
|----------------------------------- | ---------- | ----------
|Land                                | $3,400     | $3,400    
|Pipeline                            | 1,500,000  | 1,500,000 
|Equipment                           | 41,560     | 18,796    
|Vehicles                            | 246,888    | 193,161   
|Construction in progress (pipeline) | 824,712    | -         
|                                    | 2,616,560  | 1,715,357 
|Less accumulated depreciation       | (171,657)  | (32,207)  
|                                    | $2,444,903 | $1,682,150



Note 12 - Subsequent Events



We issued 110,000 options on February 3, 2006 to R. Jerry Faulkner with a strike    price of $1.76 per share for a period ending January 1, 2009 pursuant to a consulting agreement.



Note 13 - Supplemental Oil and Gas Reserve Information (Unaudited)



(a) General

Our estimated net proved oil and gas reserves and the present value of estimated cash flows from those reserves are summarized below. The reserves were estimated by McCune Engineering, an independent petroleum engineer, using market prices at the end of each of the years presented in the financial statements.  Those prices were held constant over the estimated life of the reserves.  There are numerous uncertainties inherent in estimating quantities and values of proved oil and gas reserves and in projecting future rates of production and the timing of development expenditures, including factors involving reservoir engineering, pricing and both operating and regulatory constraints.  All reserves estimates are to some degree speculative, and various classifications of reserves only constitute attempts to define the degree of speculation involved.  Accordingly, oil and gas reserve
information represents estimates only and should not be construed as being exact.



|(b) | Estimated Oil and Gas Reserve Quantities
|--- | ----------------------------------------

Our ownership interests in estimated quantities of proved oil and gas reserves and changes in net proved reserves, all of which are located in the United States, are summarized below.



|                              | Gas mcf   | Oil bbls
|----------------------------- | ---------- | ---------
|Proved reserves:              |            |          
|Balance December 31, 2003     | ---        | ---      
|Purchase of reserves-in-place | 12,837,406 | 111,296  
|Production                    | (142,968)  | (306)    
|Balance December 31, 2004     | 12,694,438 | 110,990  



| | Gas mcf | Oil bbls
| | -------- | ---------





F-26



---







|Proved reserves:                |            |         
|------------------------------- | ---------- | --------
|Balance December 31, 2004       | 12,694,438 | 110,990 
|Revisions of previous estimates | (236,061)  | 33,121  
|Extensions and discoveries      | 3,486,722  | ---     
|Production                      | (812,366)  | (21,056)
|Balance December 31, 2005       | 15,132,733 | 123,055 





|                                                  | Gas-mcf   | Oil-bbls
|------------------------------------------------- | --------- | --------
|Proved developed reserves at the end of the year: |           |         
|Balance December 31, 2004                         | 5,799,463 | 110,990 
|                                                  |           |         
|Balance December 31, 2005                         | 7,583,183 | 123,051 



|(c)  Standardized measure of discounted future cash flows
|---------------------------------------------------------

The standardized measure of discounted future net cash flows from our proved reserves for each of the years presented in the financial statements is summarized below.  The standardized measure of future cash flows as of December 31, 2005 and 2004 is calculated using a price per Mcf of natural gas of $8.64 and $6.20 respectively and a price per barrel of oil at $54.15 and $49.55 respectively.  The gas price was the Southern Star spot gas price (inside FERC index) at the end of the year.  The oil price was what we were receiving at December 31, 2005 and 2004. The resulting estimated future cash inflows are reduced by estimated future costs to develop and produce the estimated proved reserves.  These costs are based on year-end cost levels.  Future income taxes are based on year-end statutory rates.



The future net cash flows are reduced to present value by applying a 10% discount rate.  The standardized measure of discounted future cash flows is not intended to represent the replacement cost or fair market value of the Companys oil and gas properties.



|                                                  | Year Ended December 31,
|------------------------------------------------- | -----------------------
|                                                  | 2005                   
|Future production revenue                         | $137,410,000           
|Future production costs                           | (50,919,000)           
|Future development costs                          | (11,027,000)           
|Future cash flows before income taxes             | 75,464,000             
|Future income taxes                               | (25,996,000)           
|Future net cash flows                             | 49,468,000             
|10% discount for estimating of future cash flows  | (14,888,000)           
|Standardized measure of discounted net cash flows | $34,580,000            



|(d) | Changes in Standardized Measure of Discounted Future Net Cash Flows
|--- | -------------------------------------------------------------------

The following table summarizes the changes in the standardized measure of discounted future net cash flows from estimated production of the Companys proved oil and gas reserves after income taxes for each of the years presented in the financial statements.  There are no revisions of quantity estimates.  There were no extensions, discoveries and improved recoveries for the year ended December 31, 2004.



|                                                          | Year Ended December 31,
|--------------------------------------------------------- | -----------------------
|                                                          | 2005                   
|Beginning Balance                                         | $23,279,000            
|Sales, net of production costs                            | (919,000)              
|Acquisition of oil and gas in place                       | - -                    
|Net changes in pricing and production costs               | 1,267,000              
|Extensions and discoveries                                | 19,016,000             
|Revisions                                                 | (652,000)              
|Development costs incurred that were previously estimated | 3,225,000              
|Net change in estimated future development costs          | (8,159,000)            
|Accretion of discount                                     | 44,000                 
|Change in income taxes                                    | (2,521,000)            
|                                                          |                        
|Ending Balance                                            | $34,580,000            





F-27