UNITED
STATES

SECURITIES
AND EXCHANGE COMMISSION

Washington,
D.C. 20549





FORM
10-KSB/A

Amendment
No. 2





[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES
EXCHANGE ACT OF 1934



For the
fiscal year ended December 31, 2004



[ ]
TRANSITION REPORT PURSUANT TO 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 including area code: (702) 454-7318



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



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



Common
Stock, $0.001 par value

(Title
of Class)

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. Yes XNo ___



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. [ ]



The issuer's revenues for its most recent fiscal year ended December 31, 2004.
$866,924

---

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 31, 2005 was $50,211,928.30 based on a share value of $2.35.



The number of shares of Common Stock, $0.001 par value, outstanding on March 31,
2005 was 24,966,778 shares.



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

---



PETROL
OIL AND GAS, INC.

FOR
THE FISCAL YEAR ENDED

DECEMBER
31, 2004



Index
to Report

on
Form 10-KSB





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



PART II

|Item 5.       | Market for
      Common Equity and Related Stockholder Matters                             | 17
|------------- | ------------------------------------------------------------------------------------------ | --
|Item
      6. | Management's
      Discussion and Analysis of Financial Condition                          | 21
|Item 7.       | Financial
      Statements                                                                 | 40
|Item 8.       | Changes in
      and Disagreements With Accountants on Accounting and Financial Disclosure | 41
|Item 8A.      | Controls and
      Procedures                                                              | 41
|Item 8B.      | Other
      Information                                                                    | 41



PART III

|Item 9.        | Directors,
      Executive Officers, Promoters and Control Persons; Compliance With Section
      16(a) of the Exchange Act | 41
|-------------- | --------------------------------------------------------------------------------------------------------------------------- | --
|Item 10.       | Executive
      Compensation                                                                                                | 47
|Item 11.       | Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters                  | 49
|Item 12.       | Certain
      Relationships and Related Transactions                                                                        | 51
|Item 13.       | Exhibits                                                                                                                    | 51
|Item
      14. | Principle
      Accountant Fees and Services                                                                                | 51



---



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;
- loss
    of customers or sales weakness;
- 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.



---



> 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.                                                                                                                                                                                                               
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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                                                                                                                                                                                                                                                                                                                                                                            
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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.                                                                                                                                                                                                                                            
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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 executed an Asset
Purchase Agreement with Petrol Energy, Inc., whereby we issued 10,918,300 shares
of our restricted common stock to Petrol Energy in exchange for certain assets
and liabilities. The assets we acquired from Petrol Energy included
approximately 289 oil and gas mineral leases.



On August 20, 2002, we amended our Articles of Incorporation to change our name
from Euro Technology Outfitters to Petrol Oil and Gas, Inc.



On August 21, 2002, our then sole officer and director tendered 5,826,240 shares
of our stock for cancellation.



The above mentioned events provide the platform for the current formation and
operation of the Company.



(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. Petrol has continued its mineral leasing efforts and as of December
31, 2004 we have acquired mineral lease agreements totaling approximately 169,000
gross acres (137,000 net acres). Last quarter of 2004 was the first quarter of
any significant income for Petrol with total revenues from oil and gas
production of approximately $866,924.



Petrol has Net Proved Gas and Oil reserves which will generate Discounted Future
Net Cash Flows of about $23.28 Million. Petrol's daily gas production at year
end from its Petrol-Neodesha project averaged about 2.90 Million cubic feet per
day (2.10 Million cubic feet per day of net production to the Company).



Petrol has drilled and tested a total of 23 CBM wells on selected leases in its
Kansas and Missouri projects. Data from these wells will help us design a future
drilling and gas gathering program for these project areas.



Continued development of Petrol's leased acreage that contains Proven reserves
will be financed primarily through revenues derived from current and ongoing oil
and gas sales and from debt related funding. Should we be successful in
acquiring debt related funding it should substantially accelerate the
development process.



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 incur 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



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.



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
- 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 near 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's producing leases known as Petrol-Neodesha, in the Neosho and Wilson
counties, account for approximately 10,000 gross (7,620 net) of the total 169,000
gross (137,000 net) leased acres. These properties are in active production with
72 CBM producing wells that produce approximately 2.9 million cubic feet of gas
per day (2.10 Million cubic feet per day of net production to the Company).
Studies to drill additional wells, improve existing wells and enhance the gas
gathering system are currently being evaluated. These studies should serve to
enhance the value of these properties and provide knowledge for development of
remaining leases in other nearby counties where the company has leases. These
properties have provided the company with a revenue stream and certain value in
proven reserves.



Currently there are some CBM wells producing in the area of Petrol's Coal Creek
project in Coffey County, Kansas. That production information, along with
drilling logs from oil exploration in and surrounding our Coal Creek project
area, typically confirm the uniformity of the coal-beds, indicating coal seams
similar to those found to the south in our Petrol-Neodesha area. Furthermore,
data derived from logs, cores and gas production tests on Petrol's exploratory
wells in Coffey County overlying the northern extent of the Cherokee basin and
the southern portion of the Forrest City basin have shown good gas content and
the ability to produce gas during the de-watering process. The rate and scope of
production and delivery for this area is currently being analyzed.



We are concentrating our efforts towards realizing value from existing
production and developmental leases, but will continue to enhance and perfect
our lease portfolio as and when opportunities arise.



Leasing
Activities



As of December 31, 2004, we have about 900 signed lease agreements totaling
approximately 169,000 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.



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



Petrol has rights to a 100% working interest in approximately 169,000 gross
acres (137,000 net acres) located in southeast Kansas and Western Missouri. 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 169,000 gross acres (137,000 net acres). In
addition, Petrol has oil producing properties covering approximately 5,620 gross
acres (4,450 net acres). On 2,560 acres of those 5,620 acres Petrol currently
receives a NRI of 80%. Petrol also is a 20% member in Petrol Oil II LLC which
receives a NRI of 80% from production covering about 680 acres. Similarly,
Petrol is a 20% member in Petrol-Paola LLC which receives a NRI of 80% from
production on 460 acres.



Until the acquisition of the Petrol-Neodesha gas producing property in Neosho
and Wilson counties, 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 form 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 hawse 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.



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 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



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 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.



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. We agreed to compensate
Mr. Finn an annual base salary of $130,000 which will be subject to an annual
review. We also agreed to award Mr. Finn with option to purchase 60,000 shares
of our common stock at $2.23 per share with a vesting plan of 33% per year for 3
years. The strike price of the award will be at a 15% discount of the average
closing price for the 15 trading days prior to May 9, 2005. We also agreed to
provide Mr. Finn with a furnished apartment, including utilities, and reasonable
travel expense for a period of eight months in Las Vegas while Mr. Finn finds
suitable housing.



---



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 anticipate commencing 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, 2004, we had estimated net reserves and future net income of:



|                               |  | Proved   
|------------------------------ |  | ---------
|                               |  | Developed
|                               |  | Producing
|Net
      Remaining Reserves   |  |          
|Oil
      (stock-tank barrels) |  | 63,251   
|Gas
      (mcf)                |  | 3,923,563
|                               |  |          
|Income
      Data              |  |          
|Future
      Net Cash Flows    |  |          
|Discounted
      FNCF @10%     |  |          



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 72 producing gas wells, 8 water disposal wells, about 56 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 2004 averaged approximately 2.90 Million cubic feet per day
(2.10 Million cubic feet per day of net production to the Company).



Coal
Creek Project



As of December 31, 2004, Petrol had drilled and tested eighteen (18) 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
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.



Based on a December 31, 2004 reserve report, Petrol has Proved Undeveloped gas
reserves on its Coal Creek Project totaling 1.08 Billion cubic feet. Various
alternatives for further development of the field and the gas gathering
infrastructure in this project are currently being evaluated.



Missouri
Project



During 2004 Petrol continued to acquire and evaluate mineral leases in Missouri.
Petrol drilled and tested five (5) exploratory wells in Cass County, Missouri
and has been acquiring 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.



Petrol
Oil Project



Petrol also owns and operates mineral leases covering about 5,620 gross acres (4,450
net acres) that are oil producing. Daily oil production from those leases as of
the end of December 2004 averaged about 73.4 barrels of oil per day (58 barrels
of oil per day net production to the Company). Two of these oil field projects,
Petrol-Rantoul and Petrol Paolo, located within our leased area are operated and
maintained by Petrol and include 209 oil wells and 62 water flood injection
wells. Petrol is the managing member of the Limited Liability Companies that
provided funding for the purchase and renovation of these oil fields. The LLC's
receive the net revenue from these producing oil wells and Petrol receives
twenty percent (20%) of that net revenue.



---



Production



The
table below represents our Net Gas Production for 2004 and 2005.



|Petrol
      -Neodesha Average Net Gas Production
|-------------------------------------------------
|                                                 
|                                                 
|Jan                                              
|Feb                                              
|Mar                                              
|Apr                                              
|May                                              
|Jun                                              
|Jul                                              
|Aug                                              
|Sep                                              
|Oct                                              
|Nov                                              
|Dec                                              



*Petrol
acquired and began operation of the Petrol-Neodesha field on November 1, 2004.



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.



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 October 27, 2004. 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 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 September 15, 2004, were entitled to vote. The
number of outstanding shares at the time was 23,570,799 held by approximately
137 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 | Abstentions
      and Broker Non-Votes
| | ------------------- | ---------- | ------- | --------------------------------------
| | Paul
      Branagan | 13,367,830 | 0       | 10,202,969                            
| | Loren Moll          | 13,367,830 | 0       | 10,202,969                            



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.



|                  | 2004
|----------------- | ----
|                  | High
|1st
      Quarter | 0   
|2nd
      Quarter | 3.75
|3rd
      Quarter | 2.30
|4th
      Quarter | 2.50
|                 
|                  | 2005
|                  | High
|1st
      Quarter | 2.65



(b)
Holders of Common Stock



As of March 31, 2005, we had approximately 128 stockholders of record of the 24,966,778
shares outstanding. As of March 31, 2005, the closing price of our shares of
common stock was $2.35 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



We currently maintain a stock option plan to which incentive stock options to
purchase shares of common stock may be granted to employees, directors and
consultants. This 2002/2003 stock option plan was adopted by our board of
directors on December 16, 2002 and has not been approved by our stockholders.
The following table sets forth information as of December 31, 2004 regarding
outstanding options granted under the plan, 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
    
    1,650,000
    
    $
      1.30
    
    650,000
      (1)Total
    
    1,650,000
    
    $
      1.30
    
    650,000




(1)
Options available for issuance under our 2002/2003 stock option plan, which we
have issued 2,350,000 options as of December 31, 2004.



In our 2002/2003 Stock Option Plan, we have reserved for issuance an aggregate
of 3,000,000 shares of common stock. This plan is 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, 2004, 650,000 shares remain available for issuance under the stock
option plan.



---



Recent
Sales of Unregistered Securities



On October 7, 2004, we completed a unit offering of 5,633,333 units, each unit
consisting of 1 share of common stock and 1 warrant, resulting in cash net of
offering costs of $6,141,200. Each warrant entitles the investor the right to
purchase 1 share of our common stock at $1.50 per share at any time through
September 8, 2007. We believe that the issuance and sale 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. 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
under the unit offering. As of the date of this report, the registration
statement has not been declared effective. 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 have used commercially reasonable best
efforts in an attempt to have the registration statement declared effective and
therefore will not be subject to payment of the liquidated damages. However, in
the event we are required to pay the liquidated damages, the impact on our
operations could be material.



On December 2, 2004, we issued 35,000 shares of our restricted common stock to
Fidelity Insurance Company, Ltd. in accordance with Consulting Solutions'
request pursuant to its consulting agreement dated January 14, 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 December 2, 2004, we issued 90,000 shares of our restricted common stock to
Hard Funding Inc. pursuant to its consulting agreement dated January 14, 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 December 16, 2004, we issued a total of 90,000 shares of our restricted
common stock to CEOcast, Inc. 40,000 shares were issued pursuant to its
consulting agreement dated August 7, 2004 and 50,000 shares were issued as a
finder's fee for the Laurus transaction. 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).



Subsequent
Issuances



On January 11, 2005, we issued 10,000 shares of our restricted common stock in
lieu of cash compensation to Anthony LoCascio for land and other services
rendered to the Company. 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 January 11, 2005, we issued 60,000 shares of our restricted common stock in
lieu of cash compensation to Russell A. Frierson for land and administrative
support rendered to the Company. 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 January 11, 2005, we issued 50,000 shares of our restricted common stock in
lieu of a cash bonus to David Polay for past CFO services rendered to the
Company. 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 January 11, 2005, we issued 100,000 shares of our restricted common stock to
Gary Bridwell for completing one year of employment with the Company pursuant to
his employment agreement dated November 1, 2003. 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 1, 2005, we entered into an agreement with Robert Howell wherein we
agreed to grant 125,000 options to him at $2.33 per share. The options expire in
5 years. 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 7, 2005, we entered into a Consulting Agreement with CEOcast, Inc.,
wherein we agreed to issue 40,000 shares of our common stock to CEOcast. 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). As of the date of this filing the shares have not been issued.



On March 16, 2005, we entered into an agreement with CSC Group, wherein we
agreed to grant 150,000 options to CSC at $2.04 per share of our common stock.
The options expire in 5 years. 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 March 23, 2005, Laurus Master Fund, Ltd. converted $190,677.37 of accrued
interest due under the Convertible Term Note. Pursuant to the conversion rate of
$1.50 we issued 127,118 shares of our restricted common stock to Laurus on March
31, 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).



On April 13, 2005, Laurus Master Fund, Ltd. converted $52,819.75 of accrued
interest due under the Convertible Term Note. Pursuant to the conversion rate of
$1.50 we will issue 35,213 shares of our restricted common stock to Laurus. 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). As of the date of this filing the shares have not been issued.



On April 29, 2005, Laurus Master Fund, Ltd. converted $112,500 of the principle
amount of the Convertible Term Note. Pursuant to the conversion rate of $1.50 we
issued 75,000 shares of our restricted common stock to Laurus. 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 May 12, 2005, Laurus Master Fund, Ltd. converted $115,882.28 of principal and
$54,346.47 of accrued interest due under the Convertible Term Note. Pursuant to
the conversion rate of $1.50 we issued 113,486 shares of our restricted common
stock to Laurus on May 17, 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, the date of introduction or completion of our
products, 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.



The following review of operations for the year ended December 31, 2004 should
be read in conjunction with our Financial Statements and Notes included in this
Form 10-KSB.



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
and conventional gas.



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 would provide ready sales market for our produced gas.
Our focus now turns to developing and producing those leases so as to realize
the value held in them. With 169,000 gross (137,000 net) leased acres the task
of developing the properties with wells on 160 acre spacing will involve in
excess of 1,000 wells.



The last quarter of 2004 was our first quarter to generate any significant
income with total revenues from oil and gas production amounting to
approximately $822,739. The revenues generated were primarily derived from the
$10 million acquisition of certain assets owned by Savage Resources, LLC and
Savage Pipeline, LLC (the "Petrol-Neodesha"). The acquisition includes
leasehold rights to approximately 10,000 gross acres (7,620 net acres) and 72
producing gas wells in the Thayer Gas Field, in Southeast Kansas, 8 water
disposal wells, about 56 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 2004 averaged 2.90
Million cubic feet per day (2.10 Million cubic feet per day of net production to
the Company). This purchase provides an ongoing source of revenue and cash for
the company, and moves us to the next stage of value creation. A copy of the
audited statement of combined revenues and direct operating expenses and pro
forma condensed financial statements for the purchase of the assets from Savage
Resources, LLC and Savage Pipeline, LLC are attached to the Form 8-K/A filed on
April 14, 2005.



---



During the latter half of 2004 we acquired several oil producing properties with
financing primarily from outside investors that formed LLC's. These properties
included mineral leases, oil producing and water injection flood wells. We own
the mineral leases and operate the wells on behalf of the LLC's. In total we
operate about 318 oil wells and 120 water flood wells on about 5,620 gross acres
(4,450 net acres). Daily oil production as of the end of December 2004 averaged
73.4 barrels of oil per day (58.0 barrels of oil per day net production to the
Company).



We intend to continue seeking acquisition opportunities which compliment our
current production. We intend to fund our development activity primarily through
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.



Our revenue, profitability and future growth rate depend substantially on
factors beyond our control, such as economic, political and regulatory
developments and competition from other sources of energy. Oil and natural gas
prices historically have been volatile and may fluctuate widely in the future.
Sustained periods of low prices for oil or natural gas could materially and
adversely affect our financial position, our results of operations, the
quantities of oil and natural gas reserves that we can economically produce and
our access to capital.



Results
of Operations



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 cost                                                |  | 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:

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 cost for 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 fees were $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 expense for 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 income for 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 Expense for 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 the
sustained development and production of CBM on our existing properties, pursuing
strategic acquisitions of producing properties and creating value by furthering
our business plan.



We intend to fund portions of our field operations and development program
through, capital raised in our unit offering, from revenues obtained from sales
of our CBM gas and oil production, from outside lenders, and from proceeds of
exercised 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.



Until late in 2004, we financed cash flow requirements through debt financing
and the issuance of common stock for cash and services. 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 operational
activities, we will weigh the pace of further drilling and development against
the availability of internal and external funding.



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.



Our net proceeds from the financing, after payment of fees and expenses to
Laurus Funds and its affiliates, were $7,652,500. We utilized $7.0 million of
the proceeds for the Petrol-Neodesha acquisition. In addition, we paid finders'
fees of: (i) $345,000 in cash; (ii) 50,000 shares of restricted common stock;
and (iii) issued a warrant to purchase 100,000 shares of our common stock at
$2.00 per share for a period of three years.



---

On January 28, 2005, we amended the Laurus Funds Secured Convertible Term 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, we are required to file a registration statement covering the new
warrant on or before August 1, 2005.



Cash Flows. Since inception, we have financed cash flow requirements through
debt financing and the issuance of common stock for cash and services. As we
expand operational activities, we may continue to experience net negative cash
flows from operations, pending receipt of sales or development fees, and will 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 our unit offering completed on October 7, 2004, we sold 5,633,333 units for a
total purchase price of $6,760,000, which net of the offering costs totaled $6,141,200,
all of which was paid in cash. Each unit consisted of 1 share of restricted
common stock and 1 warrant.



The following summarizes private placement offerings completed during 2004 and
2003:



|Date    | Description                       | Shares    | Price
      per Share | Net
      Cash Proceeds | Warrants                  | Exercise
      Price
|------- | --------------------------------- | --------- | --------------------- | ----------------------- | ------------------------- | --------------------
|        |                                   |           |                       |                         |                           |                     
|4/2003  | Miscellaneous
      Sales         | 450,000   | $0.75                 | $337,500                | N/a                       | N/a                 
|        |                                   |           |                       |                         |                           |                     
|12/2003 | IPO -Common
      Stock           | 2,350,473 | $1.00                 | $2,286,098              | N/a                       | N/a                 
|        |                                   |           |                       |                         |                           |                     
|10/2004 | Unit
      Offering -Common Stock | 5,633,333 | $1.20                 | $6,141,200              | 5,633,333                 | $1.50               
|        |                                   |           |                       |                         |                           |                     
|10/2004 | Convertible
      Note            | n/a       | n/a                   | $8,000,000              | 4,186,667
      2,146,666 | $2.00
      $3.00   



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 the Savage acquisition, 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 significantly curtail our
operations. This would materially impact our ability to continue operations.



We believe that with the proceeds of our unit offering, combined with the funds
remaining in the Laurus restricted account, we are able to proceed with the next
phase of our operations which is large field scale development. However, we
anticipate the need for a significant amount of funds in order to fully develop
our leased acreage.



---



Over the next twelve months we believe that existing capital combined with cash
flow from operations will be sufficient to sustain operations and planned
expansion.



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.



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.



As of December 31, 2004, we had assets of $17,832,354, and $7,803,727 in
liabilities (total current liabilities of $2,588,433). Resulting in a
stockholder's equity of $10,028,627.



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



Field
Development



Our original plan of operation 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 enough land to move
forward with our field development and with the proceeds of our unit offering,
combined with approximately $850,000 being held in a restricted account by
Laurus, we are proceeding with the next phase of our operations which is large
field scale development.



Our Petrol-Neodesha project has spacing for at least another 50 wells to fully
develop this existing leased acreage. As part of our agreement with Laurus
Master Funds during the purchase of this property approximately $850,000 was set
aside to continue developing and improving Petrol-Neodesha. With those available
funds, Petrol expects to begin drilling new infill wells, during the second
quarter of 2005. In addition we are in the process of enhancing our gas
gathering system with the addition of a set of new booster pumps and larger
diameter trunk lines. Finally, we have instituted a well remediation program for
some older producing wells that is anticipated to also enhance production.



During our two year exploration and development phase of our plan of operation
for the Coal Creek and Missouri projects, we drilled and tested a total of 23
CBM wells. These drilling and testing efforts have provided our geologists and
engineers with data that support the quantitative determination concerning the
gas content and commercially produceable amounts of CBM or other types of
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 and one is already included in a recent gas
sales contract. The total drilling depth for our Kansas project wells is
approximately 1,700 ft.



---

Our Reserve Report dated December 31, 2004 indicates Petrol has Proven
Undeveloped gas reserves on its leases in the Coal Creek Project totaling 1.08
Billion cubic feet and Probable Net reserves of approximately 1.01 Billion cubic
feet. Various alternatives for further development of the field and the gas
gathering infrastructure in this project are currently being evaluated



The remaining five exploratory/test wells were drilled on our Missouri Project
in Cass County Missouri. Again most were located in close proximity to an
interstate gas pipeline system. Since the Cherokee basin dips to the west the
CBM formations in Missouri are considerably shallower than in Kansas, with total
depths being about 700 ft.



In the field development stages of our plan, each new well will be drilled and
tested individually. The well, upon a favorable evaluation of its producing
capabilities, will be fully completed and connected to our local gas gathering
and water disposal pipelines.



When we have 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.



---



All aspects of this described development process are in fact similar if not
identical to those we employ in our Petrol-Neodesha project that currently
produces about 2.9 Million cubic feet of gas per day (2.10 Million cubic feet
per day of net production to the Company) from 72 wells. In total Petrol
operates in excess of 500 wells, with 375 wells being oil or gas producing and
the remaining 125 wells being injection/flood wells or salt water disposal
wells.



We amended our agreement with Mr. William Stoeckinger, a Certified Petroleum
Geologist, from Bartlesville, Oklahoma to extend the term of his agreement to
November 1, 2006. Mr. Stoeckinger provides geological services both in the
assessment process and in the development program. To date, Mr. Stoeckinger has
reported good gas shows in a number of the coal seams contained in the Cherokee
Group, the primary source of CBM production in the area.



Kansas Geologic Society (KGS) joined us in our scientific effort designed to
assess the gas reserves from our CBM exploratory/test wells in eastern Kansas.
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 other counties to the south. Woodson county being adjacent to
Coffey county.



Based on our first series of exploratory/test wells we anticipate that each well
in our targeted area will cost approximately $30,000 to locate, drill and test,
an additional $105,000 to complete, plus an additional $1,000 per month per well
to pay for electricity, pulling and repairs, pumping 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.



Along with the drilling and completion of our CBM production wells Petrol 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 two of 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.



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.



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



Description of
contracts.



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 contracts 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. For the year ended December 31, 2004 our fixed price
contracts hedged approximately 72% of our natural gas production. There was no
production in 2003.



---



The
following table summarizes our fixed price contracts as of December 31, 2004:



|                               | Year
      ended December 31,
|------------------------------ | -----------------------------
|                               | 2005                         
|Contract
      volume          | 480,000                      
|Weighted-ave
      fixed price | $5.85                        
|Fixed-price
      sales        | $2,810,250                   
|Fair value
      liability     | ($157,960)                   



Accounting.



All of our 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 year ending December 31, 2004. For the contracts that were open at December
31, 2004, the change in the fair value is shown as an adjustment to other
comprehensive income with a corresponding balance sheet asset or liability
recorded.



Credit risk.



The counter party to our fixed-price contracts is the customer 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 by our counter party. Cancellation or termination of a
fixed-price contract would subject a greater portion of our natural gas
production to market prices, which in a low price environment, could have an
adverse effect on our operating results.



Market risk.



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



Critical
Accounting Policies and Estimates



Our discussion of financial condition and results of operations is based upon
the information reported in our financial statements. The preparation of these
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 at the date of our financial
statements. 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. Our significant accounting policies are detailed in Note 1 to our
financial statements included in this Annual Report. We have outlined below
certain of these policies as being of particular importance to the portrayal of
our financial position and results of operations and which require the
application of significant judgment by our management.



---

Revenue Recognition.    It is our policy to recognize revenue
when production is sold to a purchaser at a fixed or determinable price.



Full Cost Method of Accounting.    The Company follows 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 including 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 developments
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.



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.



Income Taxes.    The Company accounts for income taxes under
SFAS 109, Accounting for Income Taxes. 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.



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. Typically, as prices for oil and natural gas increase, so
do all associated costs, and this proved to be the case in 2004 as oil and gas
prices rose significantly.  Costs for oilfield services and materials
increased during 2004 due to higher demand as a result of the higher oil and gas
prices.  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.



---



Asset Retirement
Obligations



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



|                                                     | Year
      ended December 31,
|---------------------------------------------------- | -----------------------------
|                                                     | 2004                         
|Asset
      retirement obligation, beginning of year | $
      6,200                
|Liabilities
      incurred during the year           | 432,760                      
|Liabilities
      settled during the year            | --                           
|Accretion of
      expense                           | 6,657                        
|Asset
      retirement obligations, end of year      | $
      445,617              



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 current long term debt with Laurus Funds has a floating interest rate, with
a floor of 7.5%.  Therefore, interest rate changes will impact future
results of operations and cash flows.



FACTORS
THAT MAY AFFECT OUR RESULTS OF OPERATION



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



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.



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 2005. 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.



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.



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
- 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.



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



We intend to 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.



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.



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.



---

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,
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.



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, 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.



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;
- 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
unavailability or 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.



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.



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
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.



Risks
Associated with Laurus Funds Financing



We
have substantial indebtedness to Laurus Master Fund, Ltd. which is secured by
certain assets acquired from Savage Resources, LLC and Savage Pipeline, LLC. If
an event of default occurs under the secured note issued to Laurus Funds, Laurus
Funds may foreclose on these assets and we may be forced to curtail our
operations or sell some of these assets to repay the note.



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. 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 the acquired 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.



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 Funds has no obligation to cause us to issue common stock if the market
price is less than the applicable conversion price. On October 28, 2004, the
closing price of our stock was $1.69. The convertible note has a conversion
price of $1.50. Thus the conversion rights granted to Laurus Funds was at a
discount to the recent closing price of the common stock. Laurus Funds 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 Funds is subject to certain limitations based
on price, volume and/or the inventory of our common stock held by Laurus Funds.



ITEM
7. FINANCIAL STATEMENTS



See
Index to Financial Statements and Financial Statement Schedules appearing on
page F-1 through F-23 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, our Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of our disclosure controls and procedures. Based on
the evaluation, which disclosed no significant deficiencies or material
weaknesses, our Chief Executive Officer and Chief 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 following table sets forth the names and positions of our executive officers
and directors. Directors will be elected at our annual meeting of stockholders
and serve for one year or until their successors are elected and qualify.
Officers are elected by the Board and their terms of office are, except to the
extent governed by employment contract, at the discretion of the Board.



Resignation and
Appointment of Officer



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.



|NAME                   | AGE | POSITION                                           
|---------------------- | --- | ---------------------------------------------------
|Paul T.
      Branagan | 61  | President,
      CEO, Chairman, Secretary/Treasurer
|Loren Moll             | 48  | Director                                           
|Lawrence
      Finn    | 60  | Chief
      Financial Officer                      



Duties,
Responsibilities and Experience



Paul Branagan, president, CEO and chairman of the Company.
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.



---



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, a director of the Company,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 the University of Kansas Law Review. 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.



Lawrence J. Finn is Vice President and Chief Financial
Officer of the Company and has over 32 years of financial and accounting
experience in the petroleum industry, with 19 years as a financial officer.
Prior to joining Petrol, Mr. Finn worked for CDX Gas, LLC, a private natural gas
company with operations in the U.S. and Canada, concentrating in coal bed
methane extraction since 2001. At CDX, Mr. Finn worked was the Vice President of
Finance and then as Manager of Shale Projects. As Vice President of Finance, Mr.
Finn was responsible for all financial reporting, accounting, and compliance
with all financial obligations. As Manager of Shale Projects, Mr. Finn was
responsible for identifying and attracting partners in development projects in
Michigan, Indiana and Northern Kentucky. Prior to CDX, he served as Vice
President Finance and Chief Financial Officer of The Wiser Oil Company for seven
years. At Wiser, Mr. Finn was directly responsible for commercial and investment
banking, corporate planning, investor relations, corporate communications and
tax reporting for operations in the United States, Canada, and South America.
Prior to Wiser, Mr. Finn was President and CFO of CWF Energy, Inc., an
independent oil and gas exploration and production company who had operations in
Texas, Oklahoma and Mississippi. Mr. Finn was also the Senior Vice President and
CFO of May Petroleum Inc. and President of May Securities Corp. where he managed
the financial, accounting, and administrative activities for May Petroleum; 50
public drilling partnerships; and May Energy Partners, a Master Limited
Partnership. He is certified Public Accountant and has a B.B.A. from the
University of Houston.



Neither Mr. Branagan nor Mr. Moll are considered independent directors.



---



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.



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.



Strategic
Advisory Board



We have established a Strategic Advisory Board to provide our management with
assistance as the Company grows, with support, strategy, advice, debt facility
and insight on how best to position the Company. We entered into agreements with
the two members of the board that provide for expense reimbursements and stock
and cash compensation. The following is a discussion of our advisory board
members' background:



Robert Howell has effectively managed corporate growth efforts in both
start-up companies and Fortune 100 companies for 35 years. Since 1988 his
efforts have been directed to the oil and gas, power and utility sectors in the
energy industry. As Executive Vice President for Duke Energy, he implemented
various programs that drove several of the growth efforts for the fastest
growing portion of the company for 4 years. As a Senior Vice President of
UtiliCorp United (Aquila), Mr. Howell directed the Corporate Development efforts
of the Company for 11 years. He now operates RL Howell & Associates, Inc.
from which he provides business organization, growth, financing and business
operations consulting services to a host of start up and mid size organizations.
Prior to 1988, Mr. Howell's activities included corporate and venture capital
work in the high tech industry. During his career Mr. Howell has successfully
executed over 75 acquisitions, joint ventures and divestitures throughout the
U.S., Australia and Europe. Mr. Howell's development programs have been
responsible for over $10 Billion of asset growth. Mr. Howell received a BSEE
degree from Iowa State University (Tau Beta Pi and Eta Kappa Nu honor
societies). Mr. Howell also holds an MBA degree from the University of
Minnesota.



---



Steve
Cochennet has spent over 18 years in corporate and operational roles in
the energy sector. From 1985 to 2002, Mr. Cochennet held several executive
positions with UtiliCorp United (Aquila) in Kansas City. His responsibilities
included finance, administration, operations, human resources, corporate
development, gas/energy marketing, and managing several start up operations.
Prior to his experience at UtiliCorp United, Mr. Cochennet served 6 years with
the Federal Reserve System. Mr. Cochennet formed the CSC Group, LLC through
which he supports a number of clients that include Fortune 500 corporations,
international companies, gas/electric utilities, outsource service providers, as
well as various start up organizations. The services provided include strategic
planning, capital formation, corporate development, executive networking and
transaction structuring. He also serves on several advisory boards. Mr.
Cochennet graduated from the University of Nebraska in Lincoln with a bachelor's
degree in economics and finance.



Advisory
Board Member Agreements



On March 16, 2005, we executed an agreement with CSC Group, wherein Steve
Cochennet, President of CSC Group, agreed to provide us with services to further
our long term strategy. The term of the agreement began on January 1, 2005. We
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.



On March 18, 2005, we executed an agreement with Robert Howell, wherein Mr.
Howell agreed to provide us 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 our common stock at a price equal to the average of the last
22 trading days ending April 29, 2005. The options will be 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.



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 during the year ended 2004 there were no delinquent filers.



---

Audit
Committee



We do not have an Audit Committee, our board of directors during 2004, performed
some of the same 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. The Company does not currently have
a written audit committee charter or similar document.



Code
of Ethics



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

> (1)
>   Honest and ethical conduct, including the ethical handling of actual or
>   apparent conflicts of interest between personal and professional
>   relationships;
>   (2)
>   Full, fair, accurate, timely and understandable disclosure in reports and
>   documents that are filed with, or submitted to, the Commission and in other
>   public communications made by an issuer;
>   (3)
>   Compliance with applicable governmental laws, rules and regulations;
>   (4)
>   The prompt internal reporting of violations of the code to an appropriate
>   person or persons identified in the code; and
>   (5)
>   Accountability for adherence to the code.

We have not adopted a corporate code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions in that of our officers and
directors serves in all the above capacities.



Our decision to not adopt such a code of ethics results from our having only two
officers and two directors operating as the sole management for the Company in
2004. We believe that as a result of the limited interaction which occurs with
having only two officers and two directors for the Company eliminates the
current need for such a code, in that violations of such a code would be
reported to the party generating the violation.



Nominating
Committee







---

Stock Option and
Non-Employee Directors' Plan



The following description applies to the stock option plan which we adopted in
December of 2002; 2,350,000 options have been granted as of December 31, 2004.



In December of 2002 reserved for issuance an aggregate of 3,000,000 shares of
common stock under our 2002/2003 Stock Option Plan and Non-Employee Directors'
Plan. 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 efforts, and to assist in attracting the best available
individuals to the Company in the future. As of December 31, 2004, 650,000
shares remain available for issuance.



Stock
Option 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 plan and the directors' plan) and other employees
and consultants and its subsidiaries (if established) will be eligible to
receive options under the planned stock option plan. The committee will
administer the stock option plan 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 plan.



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 plan 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 plan 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 this plan when some awards may be exercised. In
the event of a change of control (as defined in the stock option plan), the date
on which all options outstanding under the stock option plan may first be
exercised will be accelerated. Generally, all options terminate 90 days after a
change of control.



Option Grants



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, 2004, 650,000 shares remain available for issuance under the
stock option plan. Pursuant to the plan, stock options were granted as follows:



---

|Date
      Granted      |  | Exercise
      Price Per Share |  | Number
      of Shares
|----------------------- |  | ------------------------------ |  | ----------------------
|                        |  |                                |  |                       
|December 19,
      2002 |  |                                |  |                       
|Granted                 |  | $0.50
      to $2.50           |  | 1,350,000             
|Exercised               |  | -                              |  | -0-                   
|Cancelled               |  | -                              |  | -0-                   
|Expired                 |  |                                |  | 100,000               
|                        |  |                                |  |                       
|December 27,
      2002 |  |                                |  |                       
|Granted                 |  | $0.50                          |  | 700,000               
|Exercised               |  | $0.50                          |  | 700,000               
|Cancelled               |  | -                              |  | -0-                   
|                        |  |                                |  |                       
|March 1,
      2004     |  |                                |  |                       
|Granted                 |  | $1.25
      to $1.50           |  | 300,000               
|Exercised               |  | -                              |  | -0-                   
|Cancelled               |  | -                              |  | -0-                   
|                        |  |                                |  |                       
|November 1,
      2004  |  |                                |  |                       
|Granted                 |  | $0.50
      - $1.00            |  | 100,000               
|Exercised               |  | -                              |  | -0-                   
|Cancelled               |  | -                              |  | -0-                   
|                        |  |                                |  |                       
|Total
      outstanding |  | $0.50
      to $2.50           |  | 1,650,000             



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



|                                              |      | Annual
      Compensation | Long
      Term Compensation
|--------------------------------------------- | ---- | ------------------------- | ----------------------------
|                                              |      |                           |                             
|Name
      and
      Principal
      Position | Year | Salary                    | Bonus                       

|Paul Branagan,
      President                     | 2004
      2003
      2002 | $166,666.75
      $145,417
      $35,000 | -0-
      -0-
      -0- | -0-
      -0-
      -0- | -0-
      -0-
      -0- | -0-
      -0-
      1,250,000(2) | -0-
      -0-
      -0- | $10,725(1)(3)
      -0-
      -0-
|-------------------------------------------------- | -------------------------- | ---------------------------------------- | ----------------------- | ----------------------- | ----------------------- | -------------------------------- | ----------------------- | ---------------------------------
|Gary Bridwell
      Field Operations
      Manager | 2004                       | $125,000                                 | -0-                     | -0-                     | 100,000                 | -0-                              | -0-                     | -0-                              

> (1) In 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 $.50 to $2.50 per share,
>   pursuant to Mr. Branagan's Employment Agreement.
>   (3)
>   As of December 31, 2004, $8,940 of the $10,725 over riding royalties has not
>   been paid to Mr. Branagan.

Employment
Agreements



Paul
Branagan



On December 19, 2002, we entered into an employment agreement with Paul Branagan.
The term of employment is three (3) years. Mr. Branagan serves as President, CEO,
Chairman, Secretary/Treasurer and Director. We agreed to pay Mr. Branagan a base
salary of $135,000 per annum for the first year of employment, increasing to
$160,000 per annum for the second and third year of his employment. In addition
to the cash compensation earned by Mr. Branagan, we granted Mr. Branagan an
option to purchase shares of our common stock as follows:



|Number
      of Shares Purchasable |  | Price
      Per Share
|---------------------------------- |  | ---------------------
|250,000                            |  | $0.50                
|250,000                            |  | $1.00                
|250,000                            |  | $1.50                
|250,000                            |  | $2.00                
|250,000                            |  | $2.50                



The options are exercisable at any time and expire on the third anniversary of
issuance or the termination of Mr. Branagan's employment agreement.

On November 20, 2003, we amended Mr. Branagan's employment agreement to add a
royalty provision as follows:

> 1.
>     Mr. Branagan shall receive a 1/100 Over Riding Royalty on any wells
>     completed.
>     2.
>     The Over Riding Royalty shall be paid as determined by our Board of
>     Directors.
>     3.
>     The term of the payment of the Over Riding Royalty shall be for the
>     remaining term of the employment agreement and may be changed and/or
>     extended at any time by our Board of Directors.
>     4.
>     The term "Over Riding Royalty" shall be defined as a fractional
>     interest in the gross production of oil and gas, in addition to the usual
>     royalties paid to any lessor.

On April 20, 2004, we further amended Mr. Branagan's Employment Agreement to
amend the royalty provisions as follows:

> 1.
>     Mr. Branagan shall receive a 1/100 Over Riding Royalty on production from
>     any wells completed on Petrol's leased acreage.
>     2.
>     The term of payment of the Over Riding Royalty shall be in perpetuity.

John
C. Garrison



On July 18, 2004, we executed an Employment Agreement with John C. Garrison,
wherein Mr. Garrison agreed to serve as our Chief Financial Officer. Mr.
Garrison agreed to work part time until his position requires a full time
effort. We agreed to pay Mr. Garrison an hourly rate of $150.00 with the
expectation that the total monthly efforts on behalf of the Company will require
about 40 hours. Effective 9, 2005, Mr. Garrison resigned as Chief Financial
Officer of the Company.



---



Non-Executive
Employment Agreement



On November 1, 2003, Petrol executed an Employment Agreement with Gary Bridwell,
wherein Mr. Bridwell agreed to serve as the Company's Field Operations Manager.
We agreed to pay Mr. Bridwell a starting salary of $10,000.00 per month and he
is entitled to participate in the Company'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.



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



Our Directors 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.



Termination
of Employment



There are no compensatory plans or arrangements, including payments to be
received from the Company, 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 the Company, or any change in control of the Company,
or a change in the person's responsibilities following a change in control of
the Company.



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 31, 2005, 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 24,966,778 shares of common stock outstanding as of
March 31, 2005.



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 31, 2005 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                                    |  | 1,750,000
      (3)          |  | 7%                                                     
|Loren
      Moll, Director                                        |  | 3,100,000                    |  | 12%                                                    
|John C.
      Garrison, Chief Financial Officer (4)               |  | 0                            |  | 0%                                                     
|Lawrence
      Finn, Vice President & Chief Financial Officer (4) |  | 0                            |  | 0%                                                     
|Directors
      and Officers as a Group                           |  | 4,850,000                    |  | 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., thepower
>     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 1,250,000 options to purchase our restricted common stock at prices
>     ranging from $0.50 to $2.50 per share.
>     (4)
>     Effective 9, 2005, John Garrison resigned as Chief Financial Officer of the
>     Company and concurrently, the board of directors appointed Lawerence Finn as
>     Vice President and Chief Financial Officer of the Company.

Security Ownership
of Certain Beneficial Owners

|Name
      of Beneficial Owner (1)                                                                 |  | Number
      of
      Shares |  | Percent
      of
      Class
      (2)
|-------------------------------------------------------------------------------------------------- |  | ---------------------------- |  | --------------------------------------
|Wellington
      Management Company, LLP (3)
      75
      State St.
      Boston,
      MA 02109 |  | 2,500,000                    |  | 10%                                   
|Beneficial
      Owners as a Group                                                                 |  | 2,500,000                    |  | 10%                                   

> (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., thepower to dispose of, or to direct the disposition of, a security).
>         (2)
>         Figures are rounded to the nearest whole percent.
>         (3)
>         The 2,500,000 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.

*
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                                                                            
|-------------------- | ---------------------------------------------------------------------------------------
|(31-1)*              | Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act for Paul Branagan
|(31-2)*              | Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act for Lawrence Finn
|(32-1)*              | Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act for Paul Branagan
|(32-2)*              | Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act for Lawrence Finn

________________________

* 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 2004 and 2003 were $98,127
>     and $38,996, 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 2004 and 2003 were $5,000 and $805,
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 2004 and 2003 were $20,426
and $15,000, respectively. There were no other fees to be billed by Weaver &
Martin LLC for the fiscal years 2004 and 2003 other than the fees described
herein and above.



(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.



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:
June 8, 2005



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.





|/s/Paul
Branagan | President, CEO,                           | June
8, 2005
|---------------- | ----------------------------------------- | ------------
|Paul
Branagan    | Chairman, Secretary                       |             
|                 | Officer
                    and Treasurer |             



|/s/Loren
Moll | Director | June
8, 2005
|------------- | -------- | ------------
|Loren
Moll    |          |             
|              |          |             



|/s/Lawrence
      Finn | Chief
Financial Officer | June
8, 2005
|---------------------- | ----------------------- | ------------
|Lawrence
Finn          |                         |             
|1                      |                         |             





---



Petrol
Oil and Gas, Inc.

Index
To Financial Statements



|Report of
      Independent Certified Public Accountants                     | F-1      
|---------------------------------------------------------------------------- | ---------
|                                                                             |          
|Balance
      Sheets, December 31, 2004 and 2003                             | F-2      
|                                                                             |          
|Statement of
      Operations for the Years Ended December 31, 2004 and 2003 | F-3      
|                                                                             |          
|Statement of
      Stockholders' Equity from January 1, 2003 to              |          
|December 31,
      2004                                                      | F-4      
|                                                                             |          
|Statement of
      Cash Flows for the Year Ended December 31, 2004 and 2003  | F-5      
|                                                                             |          
|Notes to
      Financial Statements                                          | F-6 -F-23







---









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, 2004 and 2003 and the related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 2004. 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, 2004 and 2003 and the results of its operations and cash flows for
each of the two years in the period ended December 31, 2004 in conformity with
U.S. generally accepted accounting principles.







Weaver
& Martin, LLC

Kansas
City, Missouri

April 15, 2005



---





Petrol
Oil and Gas, Inc.

Balance
Sheet



|                                                                                                                                                   | December
      31,
      2004 | December
      31,
      2003
|-------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | -----------------------------
|Assets                                                                                                                                             |                               |                              
|Current
      assets:                                                                                                                              |                               |                              
|Cash                                                                                                                                               | $
      1,792,885             | $
      1,059,838            
|Cash,
      restricted                                                                                                                             | 852,346                       | -                            
|Accounts
      receivable                                                                                                                          | 312,982                       | -                            
|Prepaid
      expenses                                                                                                                             | 11,526                        | -                            
|Investments                                                                                                                                        | 15,778                        | 200,000                      
|Total
      current assets                                                                                                                         | 2,985,517                     | 1,259,838                    
|                                                                                                                                                   |                               |                              
|Fixed assets,
      net                                                                                                                            | 1,682,151                     | 28,036                       
|                                                                                                                                                   |                               |                              
|Other
      assets:                                                                                                                                |                               |                              
|Oil and gas
      properties using full cost accounting:                                                                                           |                               |                              
|Properties
      not subject to amortization                                                                                                       | 1,614,599                     | 1,289,573                    
|Properties
      subject to amortization                                                                                                           | 10,813,087                    | -                            
|Capitalized
      loan costs, net                                                                                                                  | 737,000                       | -                            
|Total other
      assets                                                                                                                           | 13,164,686                    | 1,289,573                    
|                                                                                                                                                   |                               |                              
|                                                                                                                                                   | $
      17,832,354            | $
      2,577,447            
|                                                                                                                                                   |                               |                              
|Liabilities
      and Stockholders' Equity                                                                                                         |                               |                              
|                                                                                                                                                   |                               |                              
|Current
      liabilities:                                                                                                                         |                               |                              
|Accounts
      payable                                                                                                                             | $
      462,153               | $
      268,071              
|Accrued
      liabilities                                                                                                                          | 276,129                       | 25,116                       
|Short-term
      derivative liability                                                                                                              | 157,960                       | -                            
|Asset
      retirement obligation                                                                                                                  | 445,617                       | 6,200                        
|Accrued
      payable -related party                                                                                                               | 270,000                       | -                            
|Note payable
      -related party                                                                                                                  | -                             | 47,500                       
|Current
      portion of long term debt                                                                                                            | 976,574                       | 4,000                        
|Total
      liabilities                                                                                                                            | 2,588,433                     | 350,887                      
|                                                                                                                                                   |                               |                              
|Long-term
      derivative liability                                                                                                               | 71,475                        | -                            
|Long-term
      debt, less current portion                                                                                                         | 5,143,819                     | 22,923                       
|                                                                                                                                                   | 5,215,294                     | 22,923                       
|                                                                                                                                                   |                               |                              
|Commitments
      and contingencies                                                                                                                |                               |                              
|                                                                                                                                                   |                               |                              
|Stockholders'
      equity:                                                                                                                        |                               |                              
|Preferred
      stock, $.001 par, authorized 10,000,000 shares; no shares issued                                                                   | -                             | -                            
|Common stock,
      $.001 par, authorized 100,000,000 shares; 24,619,660 and 17,247,466 issued
      and outstanding at December 31, 2004 and 2003 | 24,620                        | 17,247                       
|Stock for
      services not issued 175,500 and 160,000 shares at December 31, 2004 and
      2003                                                 | 175                           | 160                          
|Unamortized
      cost of stock issued for services                                                                                                | (50)                          | (1,000)                      
|Additional
      paid in capital                                                                                                                   | 17,200,707                    | 4,630,713                    
|Other
      comprehensive (loss)                                                                                                                   | (229,435)                     | -                            
|Accumulated
      (deficit)                                                                                                                        | (6,967,390)                   | (2,443,483)                  
|                                                                                                                                                   | 10,028,627                    | 2,203,637                    
|                                                                                                                                                   |                               |                              
|                                                                                                                                                   | $
      17,832,354            | $
      2,577,447            



See
notes to financial statements.





---



Petrol
Oil and Gas, Inc.

Statement
of Operations



|                                                                                                | For
      the Years Ended
      December
      31,
|----------------------------------------------------------------------------------------------- | --------------------------------------------------
|                                                                                                | 2004                                              
|                                                                                                |                                                   
|Revenue                                                                                         | $
      866,924                                   
|                                                                                                |                                                   
|Expenses:                                                                                       |                                                   
|Direct costs                                                                                    | 221,339                                           
|General and
      administrative                                                                | 1,000,029                                         
|Professional
      and consulting fees                                                          | 1,906,036                                         
|Depreciation,
      depletion and amortization                                                  | 213,475                                           
|Acquisition
      costs                                                                         | 654,000                                           
|Total
      expenses                                                                            | 3,994,879                                         
|                                                                                                |                                                   
|Net
      operating (loss)                                                                      | (3,127,955)                                       
|                                                                                                |                                                   
|Other income
      (expense):                                                                   |                                                   
|Interest and
      other income                                                                 | 39,417                                            
|Interest
      expense                                                                          | (1,435,369)                                       
|Total other
      income (expense)                                                              | (1,395,952)                                       
|                                                                                                |                                                   
|Net (loss)                                                                                      | $
      (4,523,907)                               
|                                                                                                |                                                   
|                                                                                                |                                                   
|                                                                                                |                                                   
|Weighted
      average number of common shares
      Outstanding -basic
      and fully diluted | 20,647,542                                        
|                                                                                                |                                                   
|Net (loss)
      per share -basic and fully diluted                                             | $
      (0.22)                                    













See
notes to financial statements.



---



Petrol
Oil and Gas, Inc.

Statements
of Changes in Stockholders' Equity



|                                                  | Common Stock | Additional
		Paid-in Capital | Unamortized Cost
		of Stock Issued for Services | Stock for
		Services Not Issued | Other
		Comprehensive Loss | Accumulated
		Deficit | Total
		Stockholder' Equity
|------------------------------------------------- | ------------ | ---------------------------- | ----------------------------------------------- | ------------------------------- | -------------------------- | --------------------- | ---------------------------
|                                                  | Shares       | Amount                      
|                                                  |              |                              |                                                 |                                 |                            |                       |                            
|Balance,
      January 1, 2003                    | 13,151,993   | $
      13,152               | $
      1,006,155                               | $
      215                     | $
      -                  | $
      -             | $
      (709,699)          
|                                                  |              |                              |                                                 |                                 |                            |                       |                            
|Shares
      issued for services                  | 80,000       | 80                           | 89,880                                          | 40                              | -                          | -                     | -                          
|Shares
      issued for services not yet received | -            | -                            | 119,880                                         | 120                             | -                          | -                     | -                          
|Shares
      issued for cash                      | 450,000      | 450                          | 337,050                                         | -                               | -                          | -                     | -                          
|Shares
      issued for services                  | 215,000      | 215                          | -                                               | (215)                           | -                          | -                     | -                          
|Shares
      issued as collateral                 | 1,000,000    | 1,000                        | -                                               | -                               | (1,000)                    | -                     | -                          
|Warrants
      issued for services                | -            | -                            | 794,000                                         | -                               | -                          | -                     | -                          
|Shares
      issued for cash                      | 2,350,473    | 2,350                        | 2,283,748                                       | -                               | -                          | -                     | -                          
|                                                  |              |                              |                                                 |                                 |                            |                       |                            
|Net (loss)                                        |              |                              |                                                 |                                 |                            |                       |                            
|For the year
      ended December 31, 2003        | -            | -                            | -                                               | -                               | -                          | -                     | (1,733,784)                
|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)                                        |              |                              |                                                 |                                 |                            |                       |                            
|For the year
      ended December 31, 2004        | -            | -                            | -                                               | -                               | -                          | -                     | (4,523,907)                
|Balance,
      December 31, 2004                  | 24,619,660   | $
      24,620               | $
      17,200,707                              | $
      175                     | $
      (50)               | $
      (229,435)     | $
      (6,967,390)        



See
notes to financial statements.





---



Petrol
Oil and Gas, Inc.

Statement
of Cash Flows



|                                                                                | For
      the Years Ended
      December
      31,
|------------------------------------------------------------------------------- | --------------------------------------------------
|                                                                                | 2004                                              
|Cash flows
      from operating activities                                      |                                                   
|Net loss                                                                        | $
      (4,523,907)                               
|Depreciation,
      depletion and amortization                                  | 383,987                                           
|Shares
      issued for services                                                | 972,000                                           
|Shares
      issued for asset acquisitions                                      | 654,000                                           
|Warrants
      issued for services                                              | 585,598                                           
|Beneficial
      conversion                                                     | 1,013,000                                         
|Adjustments
      to reconcile net (loss) to cash used in operating activities- |                                                   
|(Increase)
      in accounts receivable                                         | (312,982)                                         
|(Increase)
      in prepaid expenses                                            | (11,526)                                          
|Increase in
      accounts payable                                              | 194,081                                           
|Increase in
      accrued liabilities                                           | 251,013                                           
|Increase
      (decrease) in due to officer                                     | (47,500)                                          
|Increase in
      due to related party                                          | 270,000                                           
|Net cash
      (used) by operating activities                                   | (572,236)                                         
|                                                                                |                                                   
|Cash flows
      from investing activities                                      |                                                   
|Purchase of
      proven properties                                             | (8,410,000)                                       
|Purchase of
      oil and gas equipment                                         | (1,590,000)                                       
|Purchase of
      other property and equipment                                  | (95,214)                                          
|Purchase of
      oil and gas leases                                            | (367,506)                                         
|Investment                                                                      | 184,222                                           
|Addition to
      restricted cash                                               | (852,346)                                         
|Additions to
      capitalized oil and gas costs                                | (1,831,023)                                       
|Net cash
      (used) by investing activities                                   | (12,961,867)                                      
|                                                                                |                                                   
|Cash flows
      from financing activities                                      |                                                   
|Amortized
      loan fees                                                       | (707,500)                                         
|Payments on
      note payable                                                  | (4,050)                                           
|Proceeds
      from loans payable                                               | 8,000,000                                         
|Proceeds
      from sale of common stock                                        | 6,978,700                                         
|Net cash
      provided from financing activities                               | 14,267,150                                        
|                                                                                |                                                   
|Net increase
      in cash                                                      | 733,047                                           
|Cash -beginning                                                                 | 1,059,838                                         
|Cash -ending                                                                    | $
      1,792,885                                 
|                                                                                |                                                   
|Supplemental
      cash flow information:                                       |                                                   
|Interest
      paid                                                             | $ 26,685                                          
|Income taxes
      paid                                                         | $
      -                                         
|                                                                                |                                                   
|Non-cash
      transactions                                                     |                                                   
|Shares
      issued for asset purchase                                          | $
      860,000                                   
|Shares
      issued for services and loan fees                                  | $
      1,653,923                                 
|Warrants and
      options issued for services and financing                    | $
      2,621,134                                 
|Shares for
      services and acquisition not issued                            | $ 175                                             
|Beneficial
      conversion                                                     | $ 1,013,000                                       
|                                                                                |                                                   

See
notes to financial statements.



---



1. Significant
Accounting Policies



Basis of
Presentation



We are no longer a
development stage enterprise.



Nature of Business



The
Company was originally 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. 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.



The
Company is 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. The Company has
focused its efforts to eastern Kansas and western Missouri where leases were
acquired that appeared geologically suitable for CBM exploration.



Use of Estimates



The
preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and accompanying
notes. Actual results could differ from those estimates.





Investment in
Unconsolidated Companies



The
Company uses the equity method of accounting for its investments in which its
interest is over 20% but is non-controlling and less than 50% ownership. Under
the equity method, the Company records its share of the net income or loss as an
increase or decrease in the investment less its share of distributions.



Stock-Based
Compensation



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



The
Company accounts for its stock option plan in accordance with the provisions of
SFAS No. 123, "Accounting for Stock Based Compensation". SFAS No. 123
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of the grant.



---



Income Taxes



The
Company accounts for income taxes under SFAS 109, Accounting for Income Taxes.
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 value of the
Company's debt obligations reasonably approximates their fair value at the
stated interest rate approximates current market interest rates of debt with
similar terms that is available to the Company.



Earnings per
common share



SFAS
No. 128, Earnings Per Share requires presentation of "basic" and
"diluted" 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 the Company's policy to recognize revenue when production is sold to a
purchaser at a fixed or determinable price.



Debt issue costs



Costs
related to securing the Company's long-term convertible debt are recorded as an
asset and are amortized over the life of the debt.



Depreciation



Depreciation
is provided by the straight-line method using an estimated life of the asset.
Depreciation periods range from 5 to 30 years.



Oil and gas
properties



The
Company follows 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 including 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 developments
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 required to be 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



The
Company reviews the carrying value of long-lived assets at each balance sheet
date if indication of impairment exists. Recoverability is assessed using
undiscounted cash flows based upon historical results and current projections of
earnings before interest and taxes. Impairment is measured using discounted cash
flows of future operating results based upon a rate that corresponds to the cost
of capital. Impairments are recognized in operating results to the extent that
carrying value exceeds discounted cash flows of future operations.



Asset retirement
obligations



The
Company accrues for asset retirement obligations, primarily for assets on leased
sites, in the period in which the obligations are incurred. The Company accrues
these costs at estimated fair value. When the related liability is initially
recorded, the Company capitalizes 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 over the useful life of the
related asset. Upon settlement of the liability, the Company recognizes a gain
or loss for any difference between the settlement amount and the liability
recorded. The Company has identified asset retirement obligations pertaining to
the closure of wells on its land leases. The Company has estimated the fair
value of its asset retirement obligations, based in part on the terms of quoted
agreements.



Concentration of
credit risk



The
Company substantially sells all oil and gas production to two customers. In 2004,
the two largest customers accounted for 83% and 16% of sales and accounts
receivable.



---



Accounting for
Derivative Instruments and Hedging Activities



The
Company seeks to reduce its exposure to unfavorable changes in natural gas
prices by utilizing energy swap contracts (effectively fixed price contracts).
The Company has adopted SFAS 133, as amended by SFAS 138, Accounting for
Derivative 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
the Company's fixed price contracts may not qualify for special hedge accounting
treatment from time to time under specific guidelines of SFAS 133, the Company
refers 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 the Company expects the contracts to
continue to mitigate its commodity price risk in the future. The accounting for
the contracts is consistent with the requirements of SFAS 133.



Accounting for
Derivative Instruments and Hedging Activities - continued



The
Company has 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
January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51" (the
Interpretation). The Interpretation requires the consolidation of variable
interest entities in which an enterprise absorbs a majority of the entity's
expected losses, receives a majority of the entity's expected residual returns,
or both, as a result of ownership, contractual or other financial interests in
the entity. Currently, entities are generally consolidated by an enterprise that
has a controlling financial interest through ownership of a majority voting
interest in the entity. The Interpretation was originally immediately effective
for variable interest entities created after January 31, 2003, and effective in
the fourth quarter of fiscal 2003 for those created prior to February 1, 2003.
However, in October 2003, the FASB deferred the effective date for those
variable interest entities created prior to February 1, 2003, until the first
quarter of fiscal 2004. This interpretation did not affect the Company's
financial statements.



In
November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4,
Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handing costs, and spoilage. This statement requires
that those items be recognized as current period charges regardless of whether
they meet the criterion of "so abnormal" which was the criterion
specified in ARB No. 43. In addition, this Statement requires that allocation of
fixed production overheads to the cost of production be based on normal capacity
of the production facilities. This pronouncement is effective for the Company
beginning October 1, 2005. The Company does not believe adopting this new
standard will have a significant impact to its financial statements.



---



In
December 2004, the FASB issued SFAS No. 123 (revised 2004). Share-Based Payment,
which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees and amends SFAS No. 95, Statement of Cash Flows. Generally, the
approach in SFAS No. 123(R) is similar to the approach described in SFAS No.
123. However, SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative. The new standard will be effective for the Company in the first
interim or annual reporting period beginning after December 15, 2005. The
Company expects the adoption of this standard will have a material impact on its
financial statements assuming employee stock options are granted in the future.



Reclassifications



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



2. Stockholders'
Equity



Common stock



As
of December 31, 2004 and 2003, there was an additional 75,500 and 160,000 shares,
respectively, that we needed to issue. The 2003 shares were issued in 2004.



Stock Transactions



The
Company entered into a geologist/technical advisor consulting agreement on
December 1, 2002 with Mr. William Stoeckinger. The agreement was for a one year
term (amended to a thirteen month term) and Mr. Stoeckinger received 160,000
shares upon signing the agreement, 20,000 shares per month for thirteen months
(as amended in a subsequent agreement). At December 31, 2002 Mr. Stoeckinger had
earned 180,000 shares that weren't issued. The shares were issued in 2003.
During 2003 Mr. Stoeckinger earned 240,000 shares of stock that was valued at
$210,000. He was issued 80,000 shares and at December 31, 2003 was due 160,000
shares. The shares that were due to him were recorded at the par value of $160
as stock earned but not issued at December 31, 2003 and were issued in 2004. At
December 31, 2004, Mr. Stoeckinger earned an additional 20,000 shares of stock
with a fair market value of $20,000. All shares were issued in January 2004. The
fair market value of the stock was determined by the price that we were selling
shares to our investors as the shares were earned. Professional and consulting
expense was charged $20,000 and $210,000 in 2004 and 2003 respectively.



The
Company sold 450,000 shares of stock at a price of $.75 per share and 2,350,473
shares at a price of $1.00 per share in 2003. The costs associated with the sale
of these shares totaled $60,000 for professional fees and $4,375 for other
costs. These costs were netted against the additional paid in capital associated
with the sale of the stock.



---



On
April 18, 2003, the Company issued 1,000,000 shares of its common stock to
Cornerstone Bank as collateral for a note payable to the bank. On July 7, 2003,
the Company paid off the note and the bank returned the shares. On July 2, 2003
the Company entered into a loan agreement with CPA Directed Investments (CDI).
As part of that agreement the Company was required to issue 1,000,000 shares of
Company stock in CDI's name. The par value of the shares of $1,000 was recorded
as common stock with an offsetting amount recorded as a reduction of equity in
the account unamortized cost of stock issued for collateral. The loan was repaid
and the stock was returned to the Company on January 26, 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 Company 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 the Company to exchange 765,000 shares of its 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 was $765,000. $31,000
of value was assigned to capitalized mineral leases based on the unamortized
lease cost of each leased acre. $80,000 of value was assigned to capitalized oil
& gas costs 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, the Company 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. Stock earned but not issued was
recorded at par value at December 31, 2004.



On
April 13, 2004, Goran Blagojevic exercised 250,000 warrants at a price of $.75
per share. On August 1, 2004 Mr. Blagojevic exercised 400,000 warrants at a
price of $.75 per share.



On
May 3, 2004, the Company issued 100,000 shares of its common stock to CPA
Directed Investments (CDI) pursuant to a $250,000 secured promissory note dated
May 5, 2004. CDI was to return 50,000 shares for cancellation at such time as
the loan and interest are paid in full. On October 8, 2004, the Company repaid
the loan and 50,000 shares of our stock were issued to CDI for extending the
payment period three months. This fee was determined based on the market value
of our stock on the date of the agreement and totaled $132,500. The par value of
$50 which represented the 50,000 shares held as collateral was recorded as
unamortized cost of stock issued for collateral until such time as the shares
are returned.



On
June 17, 2004, the Company issued 120,000 shares of its common stock to XXR
Consulting Inc. pursuant to a consulting agreement 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 this was recorded as professional and consulting
fee expense.



The
Company sold 5,633,333 shares of its common stock during the third quarter. 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.



On
June 15, 2004 the Company entered into a consulting agreement with ECON Investor
Relations, Inc. The monthly fee is $10,000 of which $6,000 is payable in stock
and the agreement is for one year with either party able to terminate the
agreement based on 30 days written notice. On October 27, 2004, we issued 8,861
shares of common stock to ECON valued at $21,000. Stock earned but not yet
issued of to the consultant at December 31, 2004 was recorded at par value.



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



On
August 7, 2004, the Company entered into a consulting agreement with CEOcast,
Inc., wherein we agreed to issue 40,000 shares of its common stock. The 40,000
shares were issued on December 16, 2004 and the expense was recorded based on
the value of our common stock on the date of issue.



On
December 2, 2004, we issued 35,000 shares of common stock to Fidelity Insurance
Company, Ltd., in accordance with Consulting Solutions request pursuant to a
consulting agreement. The expense was recorded based on the value of our common
stock on the date of issue.



On
December 2, 2004 the Company issued 90,000 shares of its 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 was determined by the
market price of our stock on the day of issue.



On
December 16, 2004 the Company issued 50,000 shares of its common stock to
CEOcast, Inc. as a finder's fee resulting from the successful execution of
financing arrangements valued at $84,500. The value was determined by the
underlying value of the stock at the time of issuance and recorded as
amortizable loan fees.



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 at December 31, 2004 and the par
value of the stock was recorded as stock for services not issued.



Options
and warrants



The
Board of Directors on December 16, 2002 adopted the 2002 stock option plan for 3,000,000
shares.



---



On
November 21, 2003, the Company entered into an agreement with NIO Fund Ltd.
whereby NIO received 1,500,000 warrants to purchase shares of the Company's
common stock at a price of $.875 per share with a three-year life. The value of
the options using the Black-Scholes pricing model was $461,000 and this was
recorded as professional and consulting expense.



On
November 24, 2003, NIO assigned 1,000,000 warrants to Mr. Paolo Simoni and 500,000
warrants to Mr. Goren Blagojevic.



Mr.
Blagojevic received 900,000 warrants on September 1, 2003. The warrants had a
strike price of $.75 and expiration date of August 31, 2006. The value of the
warrants, using the Black-Scholes pricing model, was $333,000 and this was
recorded as a professional and consulting expense.



The
weighted average of the assumptions used to value the warrants in 2003 were:
Interest rate-2.10%, Days to expiration-1,095, Stock price $1.00, Strike
price-$.92, Volatility-32.75%, Yield-0%.



On
January 15, the Company entered into an agreement with Mr. John Haas, Mr. Mark
Hass and Mr. W.B.Mitchell whereas the Company would be allowed access to
approximately 10,000 acres of leased mineral rights for the purpose of exploring,
and evaluating gas production for 6 months. Mr. John Haas agreed to join the
Board of Directors of the Company. Mr. Mark Haas 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, using the Black-Scholes pricing model, is $420,700 and this was
recorded in January 2004 as a professional and consulting fees expense.



On
February 9, 2004 the Company 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,
using the Black-Scholes pricing model, of $200 was recorded as a professional
and consulting fees expense.



On
February 18, 2004, we granted to CSC Group LLC (owned by Mr. Steve Cochennet an
advisory board member) a stock warrant giving CSC the right to purchase 200,000
shares of its common stock. The term and exercise price of the warrant shares
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 period of two years. The value of
the warrants, using the Black-Scholes pricing model, was $7,400 and this was
recorded as a professional fees expense.



On
March 1, 2004 the Company 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, using the
Black-Scholes pricing model, was $38,500 and this was recorded as a professional
and consulting fees expense.



---



In
connection with the sale of 5,533,333 shares of common stock during the third
quarter 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.



We
issued 845,000 warrants to Energy Capital Solutions in connection with the stock
sales. The warrants are for the purchase of common stock at a price of $1.35 per
share and the warrants expire October 29, 2009. The value of the warrants issued
to Energy Capital Solutions, using the Black-Scholes pricing model, was $447,850.
Since these warrants were part of the cost of the offering there was no entry
into additional paid-in capital.



On
October 28, 2004 the Company issued 5,333,333 warrants to Laurus Master Fund,
Ltd., in connection with the convertible note agreement entered into on the same
day. 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 using
the Black-Scholes pricing model was $2,072.534, which was off set against the
long-term liability. The Company also issued 100,000 warrants to Draper &
Associates in connection with the financing arrangement. The warrants are for
the purchase of common stock at a price of $2.00 per share and will expire on
October 29, 2007. As of December 31, 2004, the warrants have not been issued.
The value of the warrants using the Black-Scholes pricing model was $12,000 was
recorded as professional and consulting fees.



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



On
April 13, 2004, Goran Blagojevic exercised 250,000 warrants at a price of $.75
per share. On August 1, 2004 Mr. Blagojevic exercised 400,000 warrants at a
price of $.75 per share.



On
March 19, 2004, Mr. Kehoe exercised 325,000 options at a price of $.50 per share,
Mr. Felton exercised 325,000 options at a price of $.50 per share and Mr.
Frierson exercised 50,000 options at a price of $.50 per share.

A summary of stock
options and warrants is as follows:



|                         | Options   | Average
      Price | Warrants   | Average
      Price
|------------------------ | --------- | ------------------- | ---------- | -------------------
|Outstanding
      1/1/03 | 2,050,000 | $1.12               | 500,000    | $.75               
|Granted                  | 2,050,000 | $1.12               | 2,400,000  | $.83               
|Cancelled                | --        | --                  | (500,000)  | $.75               
|Exercised                | -         | -                   | --         | --                 
|Outstanding12/31/03      | 2,050,000 | $1.12               | 2,400,000  | $.83               
|                         |           |                     |            |                    
|Outstanding
      1/1/04 | 2,050,000 | $1.12               | 2,400,000  | $.83               
|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 | $1.49              
|                         |           |                     |            |                    



---



4. Commitments



On
July 1 2003 the Company entered into an agreement with Enutroff LLC (Enutroff)
whereby Enutroff would be paid for introductions that result in completed
transactions as follows: 1). Debt financing, notes, loans- for any introductions
made by Enutroff a $10,000 fee would be paid plus 12% of the total value of the
financing. 2). Mergers and acquisitions-for any introductions made by Enutroff a
fee of 7.5% of the total value of the merger or acquisition. 3). Sale or
purchase of real property or mineral rights- a fee of up to 1/32 overriding
royalty interest on those mineral rights involved in a transaction. 4). Working
interest partners-a fee of up to 1/32 overriding royalty interest on any mineral
rights involved with a working interest partner and a fee of 10% of the ultimate
value of the transaction. 5). A fee of $40,000 to retain the services of
Enutroff for a period of one year was due on July 1, 2003. Enutroff introduced
the Company to CPA Directed Investments (CDI) and received a $58,000 fee based
on the $400,000 the Company borrowed from CDI. Total fees paid to Enutroff for
the year ended December 31, 2003 was $98,000. The fees were recorded as a
professional and consulting fee expense.



On
January 21, 2003, the Company entered into a lease agreement for office space.
The term of the agreement is one year and rent is $300 per month. The rent is
currently month- to- month. On April 2, 2004, the Company entered into a
39-month lease for office space. The monthly lease payment is $3,448.40. The
lease amount increases each year based on the Consumer Price Index as defined
within the lease with a minimum annual increase of 3%. For the year ended
December 31, 2004 and 2003 rent expense was approximately $33,290 and $3,600
respectively. Future rent payments on non-cancelable operating leases with an
initial or remaining term of greater than one year is as follows- 2005 $42,300
2006 $43,600 and 2007-$22,300.



On
May 19, 2004 the Company entered into a consulting agreement with Tom Bibiyan of
Florence Equity, LLC. The agreement was for 90 days and we paid a fee of $50,000.



5. Short-Term
Notes Payable



The
Company borrowed $240,000 from Cornerstone Bank under a note that was due August
3, 2003. Interest was 2% over the corporate base rate (6.25%). The note was
repaid on July 7, 2003.



In
July 2003, the Company borrowed $400,000 from CDI. The interest rate on the loan
was 10%. 1,000,000 shares of common stock were issued to CDI as collateral that
was held until the loan was paid. The loan was for 180 days. Pursuant to the
loan agreement, upon the occurrence and during a continuance of default, all
remaining amounts of the loan shall, at the option of CDI, become immediately
due and payable, and CDI may exercise at any time any rights and remedies
available to it under applicable law of the State of Nevada. The loan is due and
payable upon the earlier of: (i)180 days from the date of the agreement, or (ii)
within 30 days from closing of the Company's registered offering. The loan was
repaid by December 31, 2003. Interest paid to CDI was $13,501.



On
May 3, 2004, we issued 100,000 shares of our common stock to CPA Directed
Investments (CDI) pursuant to a $250,000 secured promissory note dated May 5,
2004. CDI was to return 50,000 shares for cancellation at such time as the loan
and interest are paid in full. On October 8, 2004, we repaid the loan and we
issued 50,000 shares of common stock to CDI for extending the payment period
three months. The expense was determined based on the market value of our stock
on the date of the stock issue and totaled $132,500.



---



6. Long-Term Debt



Long-term
debt consists of the following:



|                                                   |  | December
      31,
|-------------------------------------------------- |  | ------------------
|                                                   |  | 2004              
|Convertible
      Note payable -Laurus Master Fund |  | $                 
|Note
      payable -GMAC                           |  |                   
|Total                                              |  |                   
|                                                   |  |                   
|Less
      unamortized cost of warrants            |  |                   
|                                                   |  |                   
|                                                   |  |                   
|Less
      current portion                         |  |                   
|Total
          long-term debt                     |  | $                 



In
October 2004, the Company issued an $8,000,000 secured convertible term note
("Note") to Laurus Master Fund, Ltd. ("Laurus"). The Note is
convertible into shares of the Company's common stock at a fixed conversion
price of $1.50 per share. Pursuant to this agreement, the Company also issued to
Laurus a warrant ("Warrant") to purchase up to 5,333,333 shares of its
common stock, of which 3,520,000 shares have an exercise price of $2.00 and 1,813,333
shares have an exercise price of $3.00. The warrants expire on October 29, 2009.
The unamortized cost of the warrants issued to Laurus of $1,902,530 (see Note 2,
Stockholders' Equity) will accrete to interest expense over the period of the
loan based on interest method. For the period ended December 31, 2004 the
accreted amount unamortized cost of warrants was $170,054 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 price the note could be converted to based
on the price our common stock was trading and the conversion price for Laurus
totaling $1,013,000. The beneficial conversion was recorded as interest expense
for the year ended December 31, 2004.

The
Note has a term of three years and accrues interest at the prime rate plus 3%
per year (8.0% as of December 31, 2004). The Note is secured by all of the
assets the Company acquired from Savage Resources and Savage Pipeline. The Note
consists of a non-restricted facility of $7,000,000 and a restricted facility of
$1,000,000. The non-restricted facility was used as part of the acquisition of
Savage Resources, LLC and Savage Pipeline, LLC. The remaining million facility,
after expenses, was reduced to approximately $850,000 and is restricted for
future development of the Savage assets. These funds are under the sole dominion
and control of Laurus as security for our obligations under the Securities
Purchase Agreement and other related agreements.



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 the Company's
common stock. The minimum monthly principal repayment of $200,000 together with
any accrued or unpaid interest, commences on December 1, 2004, and continues
through the maturity date. The principal criteria for the monthly payments to be
made in shares of the Company's common stock include:



---



- the
    effectiveness of a current registration statement covering the shares of the
    Company's common stock into which the principal and interest under the Note
    are convertible;
- an
    average closing price of the Company's 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 the Company's common stock for the previous 22 trading days.

The
Company 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 the Company registers 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 its 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 its 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 the
Company's common stock at any time, subject to limitations described below, at a
conversion price of $1.50 per share, subject to adjustment as described below.
The Note is currently convertible into 5,333,333 shares of the Company's common
stock, excluding the conversion of any accrued interest. Laurus is limited on
its ability to convert if the conversion of the Note or the exercise of the
Warrant would cause the shares then held by Laurus to exceed 4.99% of the
Company's outstanding shares of common stock unless there has been an event of
default or Laurus provides the Company with 75 days prior notice.



The
Company is obligated to file a registration statement with the Securities and
Exchange Commission ("SEC") registering the resale of shares of its
common stock issuable upon conversion of the Note and exercise of the Warrant by
December 12, 2004, and to have such Statement declared effective by the SEC by
no later than February 5, 2005. The Company timely filed the registration
statement, but it has not yet been declared effective. If the registration
statement is not declared effective within the timeframe described, or the
registration statement is suspended other than as permitted in the Registration
Rights Agreement, or if the Company's common stock is not listed for three
consecutive trading days, the Company is obligated to pay Laurus additional cash
fees. The cash fees are 2.0% of the original principal amount of the Note for
each 30-day period in which the Company fails to correct these issues.



The
Company 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%. The amount owed to
GMAC at December 31, 2004 and 2003 is $22,923 and $26,923, respectively.



---



The aggregate
principal payments of long-term debt are approximately as follows:



|Year |  |   | Amount                     
|---- |  | - | ---------------------------
|     |  |   |                            
|2005 |  | $ | 1,605,574                  
|2006 |  |   | 2,405,600                  
|2007 |  |   | 4,006,109                  
|2008 |  |   | 5,640                      
|     |  | $ | 8,022,923
      ===========

7. Income Taxes



Deferred
income taxes are determined based on the tax effect of items subject to
differences in book and taxable income. The Company had no income tax provision
for the years ended December 31, 2004 and 2003. There is approximately $6,815,000
of net operating loss carry-forwards, which expires in 2017-2019. The net
deferred tax is as follows:



|                                                           | Year
      ended December 31,
|---------------------------------------------------------- | -----------------------------
|Non-current
      deferred tax asset (liabilities):        | 2004                         
|Net
      operating loss carry-forward                     | $
      2,522,000            
|Oil &
      gas properties
      Valuation
      allowance | (1,096,000)
      (1,426,000)
|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, 
|------------------------------------------------------------------------------------------------------------- | ------------------------------
|Statutory
      tax rate                                                                                      | 34.0%                         
|Non-deductible
      expense
      Oil &
      gas property expense
      Change in
      valuation allowance | 40.0
      (40.0)
      <34.0>
|Effective
      tax rate                                                                                      | 0.0%                          



8. Related Party
Transactions



During
the year ended December 31, 2004, we paid the outstanding payable due to our
President in the amount of $47,500. At December 31, 2004 the amounts due to
Officers was $0. In 2004 we paid $9,000 in rent to an entity owned by our
President. In 2004 our President earned overriding royalties on properties owned
by us of $10,725.



Total
fees to Mr. Stoeckinger for the years ended December 31, 2004 and 2003 were $61,159
and $244,699, respectively.



Total
fees to Mr. Blagojevic for the years ended December 31, 2004 and 2003 were $3,500
and $469,302, respectively.



---



Total
interest paid to CPA Directed Investments (see note 5), a shareholder of the
Company, for the years ended December 31, 2004 and 2003 was $10,592 and $13,501
and additional fees in 2004 of $132,500 relating to stock issued for an
extension of a note. We invested $200,000 in a fund that is being managed by CPA
Directed Investments in 2003. In 2004 we liquidated $200,000 of that investment
and at December 31, 2004, the remaining investment was $15,778.



Total
fees to Mr. Frierson for the year ended December 31, 2004 and 2003 were $0 and
$5,900, respectively.



Total
fees paid to Mr. David Polay (a former officer) and his company for the year
ended December 31, 2004 and 2003 were $13,342 and $55,134.



In
2004 we acquired oil leases and existing wells on properties from BTB Energy
Partners for $270,000 (owned by a stockholder and consultant). This is included
as an accrued payable-related party at December 31, 2004.



We
issued 200,000 stock options to CSC Group LLC (owned by Mr. Cochennet)- see note
2 options and warrants.



In
2004, we paid $150,000 ($75,000 to a company that is a shareholder and $75,000
to a company that is owned by one of our contract laborers) for oil leases and
existing wells. We utilized the services of Mallard Management Inc., a
shareholder, for consulting and paid $32,200.



9. Acquisitions



On
January 15, 2004, the Company agreed to exchange 765,000 shares of common 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 gross acres (30,750
net 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, the Company completed the acquisition of certain assets owned
by Savage Resources, LLC and Savage Pipeline, LLC for the purchase price of $10
million. The acquisition includes leasehold rights to approximately 10,000 gross
acres (7,620 net acres) and 71 producing gas wells in Southeast Kansas.



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



The
following pro forma summary data for the year ending December 31, 2004 and 2003
presents the results of operations as if the Savage acquisition had occurred on
January 1, 2003. The pro-forma detail for the year ended December 31, 2004 only
contains the activity for Savage for January 1, 2004 through September 30, 2004,
as information was not available to the Company for the period of October 1,
2004 through November 4, 2004. These pro-forma results have been made for
comparative purposes only and do not purport to be indicative of what would have
occurred had the acquisitions been made at January 1, 2003 or of results that
may occur in the future.



---





|                              | Year
      ended December 31,
|----------------------------- | -----------------------------
|                              | 2004                         
|Proforma
      revenue        | $7,470,786                   
|Proforma
      loss           | (4,652,126)                  
|Proforma
      loss per share | $(.23)                       



10. Derivatives



Description of
contracts.



To
reduce its exposure to unfavorable changes in natural gas prices the Company
utilizes energy swaps in order to have a fixed-price contract. These contracts
allow the Company 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, the Company will not benefit from market
prices that are higher than fixed prices in contracts for hedged production. If
the Company is unable to provide the quantity that it has contracted for it will
have to go to the open market to purchase the required amounts that it has
contracted to provide. For the year ended December 31, 2004 fixed price
contracts hedged approximately 72% of the Company's natural gas production.
There was no production in 2003.



The
following table summarizes the Company's fixed price contracts as of December 31,
2004:



|                               | Year
      ended December 31,
|------------------------------ | -----------------------------
|                               | 2005                         
|Contract
      volume          | 480,000                      
|Weighted-ave
      fixed price | $5.85                        
|Fixed-price
      sales        | $2,810,250                   
|Fair value
      liability     | ($157,960)                   



Accounting.



All
fixed price contracts have been executed in connection with the Company's
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 the Company's contracts
are considered to be cash flow hedges and there were no realized gains or losses
in the year ending December 31, 2004. For contracts that were open at December
31, 2004 the change in the fair value is shown as an adjustment to other
comprehensive income with a corresponding balance sheet asset or liability
recorded.



---



Credit risk.



The
counter party to the Company's fixed-price contracts is the customer buying the
Company's product. Should the counter party default on a contract there can be
no assurance that the Company will be able to enter into a new contract with a
third party on terms comparable to the original contract. The Company has not
experienced non-performance by its counter party. Cancellation or termination of
a fixed-price contract would subject a greater portion of the Company's natural
gas production to market prices, which in a low price environment, could have an
adverse effect on its operating results.



Market risk.



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



11. Asset
Retirement Obligations



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



|                                                     | Year
      ended December 31,
|---------------------------------------------------- | -----------------------------
|                                                     | 2004                         
|Asset
      retirement obligation, beginning of year | $
      6,200                
|Liabilities
      incurred during the year           | 432,760                      
|Liabilities
      settled during the year            | --                           
|Accretion of
      expense                           | 6,657                        
|Asset
      retirement obligations, end of year      | $
      445,617              



12. Cost of Oil
and Gas Properties



(a) General.



This following is
information on the Company's oil and gas development and producing activities 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 the Company's oil and gas
producing activities during the years presented in the financial statements.
Results of operations from these activities are determined using historical
revenues, production costs and depreciation, depletion and amortization of the
capitalized costs subject to amortization. General and administrative expenses
and interest expense is excluded from this determination.



|                                                                                   | Year
      ended December 31,
|---------------------------------------------------------------------------------- | -----------------------------
|                                                                                   | 2004                         
|Production
      revenues                                                          | $866,924                     
|Production
      costs                                                             | (221,339)                    
|Depreciation
      and depletion                                                   | (134,568)                    
|Income tax
      (allocated on gross profits based
      On statutory
      rates) | (145,000)                    
|Results of
      operations for producing activities                               | $337,492                     



---



(c) Capitalized
costs for oil and gas producing activities

The Company's
aggregate capitalized costs related to natural gas and oil producing activities
are as follows:



|                                             | December 31,
      2004
|-------------------------------------------- | -----------------------
|Proved                                       | $10,921,805            
|Unproved                                     | 1,621,256              
|                                             | 12,543,061             
|Accumulated
      depreciation and depletion | (115,375)              
|Net
      capitalized costs                  | $12,427,686            



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



(d) Costs incurred



Costs incurred in
natural gas and oil property acquisition, exploration and development activities,
which have been capitalized, are summarized as follows:



|                                                  | Year
      ended December 31,
|------------------------------------------------- | -----------------------------
|                                                  | 2004                         
|Acquisition
      of properties proved & unproven | $8,912,126                   
|Development
      costs                           | 1,911,023                    
|Total                                             | $10,823,149                  



13. Subsequent
Events



On
January 4, 2005, the Company awarded Mr. David Polay 50,000 shares and Mr.
LoCascio 10,000 shares of its common stock for services.



On
January 11, 2005, the Company issued 60,000 shares of our restricted common
stock in lieu of cash compensation to Russell A. Frierson for land and
administrative support rendered to the Company.



On
January 11, 2005, the Company issued 100,000 shares of its restricted common
stock to Gary Bridwell.



On
January 28, 2005, in exchange for delaying the Company's monthly principal
payment until May, 2005 on the note due to Laurus the Company issued to Laurus
666,667 warrants at an exercise price of $2.50 and 333,333 warrants at an
exercise price of $3.00.



---



The
Company entered into various 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.



On
February 7, 2005, the Company entered into a Consulting Agreement with CEOcast,
Inc., wherein they agreed to issue 40,000 shares of its common stock to CEOcast.



On
March 23, 2005, Laurus Master Fund, Ltd. converted $190,677.37 of accrued
interest due under the Convertible Term Note. Pursuant to the conversion rate of
$1.50 the Company issued 127,118 shares of its restricted common stock to Laurus
on March 31, 2005.



On
March 16, 2005, the Company 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 its 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.



On
March 18, 2005, the Company 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. The Company 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
its common stock at a price equal to the average of the last 22 trading days
ending April 29, 2005. The options will be 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.



On
April 13, 2005, Laurus Master Fund, Ltd. converted $52,819.75 of accrued
interest due under the Convertible Term Note. Pursuant to the conversion rate of
$1.50 the Company will issue 35,213 shares of its restricted common stock to
Laurus. As of the date of this filing the shares have not been issued.



14. Supplemental
Oil and Gas Reserve Information (Unaudited)



(a) General



The
Company's 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, independent petroleum engineers, 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



The Company's
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  



There were no
extensions and discoveries during the year. Since this was the first year that
the Company had reserves there was no revision of previous estimates of
reserves.



|                                                                                 | Gas-mcf   | Oil-bbls
|-------------------------------------------------------------------------------- | --------- | --------
|Proved
      developed reserves at the end of the year Balance December 31, 2003 | ----      | ----    
|                                                                                 |           |         
|Balance
      December 31, 2004                                                  | 5,799,463 | 110,990 



(c) Standardized
measure of discounted future cash flows



The
standardized measure of discounted future net cash flows from the Company's
proved reserves for each of the years presented in the financial statements is
summarized below. There were no proved reserves for the year ended December 31,
2003. The standardized measure of future cash flows as of December 31, 2004 is
calculated using a price per Mcf of natural gas of $6.20 and a price per barrel
of oil at $49.55. The gas price was the Williams/Southern Star Central spot gas
price (inside FERC index) at the end of the year. The oil price was what the
Company was receiving at December 31, 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.

There were no
proved reserves at the year ended December 31, 2003.



---



|Year ended
      December 31, 2004                            |             
|------------------------------------------------------------- | ------------
|Future
      production revenue                               | $84,195,000 
|Future
      production costs                                 | (24,012,000)
|Future
      development costs                                | (6,093,000) 
|Future cash
      flows before income taxes                   | 54,090,000  
|Future
      income taxes                                     | (17,613,000)
|Future net
      cash flows                                   | 36,477,000  
|10% annual
      discount for estimating of future cash flows | (13,198,000)
|Standardized
      measure of discounted net cash flows       | $23,279,000 



(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 were no proved reserves at December 31, 2003. The proved
reserves were purchased in the final quarter of fiscal 2004 therefore there are
no revisions of quantity estimates. There were no extensions, discoveries and
improved recoveries for the year ended December 31, 2004. In future periods it
is expected that there will be extensions, discoveries and improved recovery,
changes in prices and production costs, accretion of discount and changes in
future income taxes.





|Balance
      December 31, 2003           | $
      ---
|----------------------------------------- | -----------
|Sales, net
      of production costs      | (645,585)  
|Acquisition
      of oil and gas in place | 23,924,585 
|Balance
      December 31, 2004           | $23,279,000