UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 20-F

(Mark one)

[ ]  Registration Statement Pursuant to Section 12(b) or (g) of the Securities
     Exchange Act of 1934
                                       or

[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934
                     FOR THE FISCAL YEAR ENDED MAY 31, 2002

                                       or

[ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934
              For the transition period from _________ to _________


                         COMMISSION FILE NUMBER: 0-30920

                           CALIFORNIA EXPLORATION LTD.
             (Exact name of Registrant as Specified in its Charter)

                           CALIFORNIA EXPLORATION LTD.
                 (Translation of Registrant's Name Into English)

                             YUKON TERRITORY, CANADA
                 (Jurisdiction of Incorporation or Organization)

 #1305 - 1090 WEST GEORGIA STREET, VANCOUVER, BRITISH COLUMBIA, CANADA, V6E 3V7
                    (Address of Principal Executive Offices)


Securities registered or to be registered pursuant to Section 12(b) of the Act.
                                      NONE

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

                           COMMON STOCK, NO PAR VALUE
                                (Title of Class)

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

                                 NOT APPLICABLE
                                (Title of Class)

Indicate the number of  outstanding  shares of each of the  issuer's  classes of
capital  or common  stock as of the close of the  period  covered  by the annual
report.

                   7,591,085 COMMON SHARES AS OF MAY 31, 2002


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

Yes    X        No
    -------        -------

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

Item 17    X     Item 18
        -------          -------
                                                                    Page 1 of 81

<PAGE>

GENERAL INFORMATION:

UNLESS OTHERWISE INDICATED, ALL DOLLAR AMOUNTS ARE EXPRESSED IN UNITED STATES
DOLLARS UNLESS OTHERWISE INDICATED.

                                    GLOSSARY

The following is a glossary of oil and gas terms used in this annual report:


anticline                Underground mountain-shaped strata covered with caprock
                         or an impervious layer.

BBL or barrel            34.972 Imperial  gallons or 42 U.S.  gallons.

farm-out                 Transfer  of all or part of the  operating  rights from
                         the working interest owner to an assignee,  who assumes
                         all or some of the burden of  development in return for
                         an  interest  in the  property.  The  assignor  usually
                         retains an  overriding  royalty but may retain any type
                         of interest.

gross acres              The total number of acres in which the Company  holds a
                         working  interest  or  the  right  to  earn  a  working
                         interest.

gross wells              The total  number of wells in which the  Company  has a
                         working interest.

liquids                  Crude oil and natural gas liquids.

MCF                      One thousand cubic feet.

MCFE                     One thousand cubic feet equivalent.

net acres                The gross acres  multiplied by the  percentage  working
                         interest therein owned or to be owned by the Company.

net reserves             The Company's lessor royalty,  overriding royalty,  and
                         working interest share of reserves from the properties,
                         after   deduction  of  all  freehold,   and  overriding
                         royalties payable to others.

net revenue interest     The  percentage  interest  in which the  lessor has the
                         right to receive a  specified  fractional  share of the
                         mineral produced from the property or value thereof.

net wells                The gross wells  multiplied by the  percentage  working
                         interest therein owned or to be owned by the Company.

present value            The  present  value of  estimated  future net  revenues
                         computed  by  applying  current  prices  of oil and gas
                         reserves to estimated  future  production of proved oil
                         and gas  reserves as of the date of the latest  balance
                         sheet  presented,  less estimated  future  expenditures
                         (based on current  costs) to be incurred in  developing
                         and  producing  the proved  reserves  computed  using a
                         discount   factor   of   ten   percent   and   assuming
                         continuation of existing economic conditions.


                                      - 2 -

<PAGE>



proved oil and gas       Proved  oil  and  gas   reserves   are  the   estimated
reserves                 quantities  of crude oil,  natural gas, and natural gas
                         liquids   which   geological   and   engineering   data
                         demonstrate with reasonable certainty to be recoverable
                         in future years from known  reservoirs  under  existing
                         economic  and  operating  conditions,  i.e.  prices and
                         costs  as of the  date the  estimate  is  made.  Prices
                         include  consideration  of changes in  existing  prices
                         provided only by contractual  arrangements,  but not on
                         escalations based upon future conditions.

                         (i)  Reservoirs  are  considered   proved  if  economic
                              producibility   is  supported  by  either   actual
                              production or conclusive  formation test. The area
                              of a reservoir considered proved includes:

                              (A)  that  portion   delineated  by  drilling  and
                                   defined by gas-oil and/or oil-water contacts,
                                   if any; and

                              (B)  the  immediately  adjoining  portions not yet
                                   drilled,  but which can be reasonably  judged
                                   as  economically  productive  on the basis of
                                   available geological and engineering data. In
                                   the absence of information on fluid contacts,
                                   the lowest  known  structural  occurrence  of
                                   hydrocarbons  controls the lower proved limit
                                   of the reservoir.

                       (ii)   Reserves   which  can  be  produced   economically
                              through    application   of   improved    recovery
                              techniques  (such as fluid injection) are included
                              in the  "proved"  classification  when  successful
                              testing by a pilot project, or the operation of an
                              installed  program  in  the  reservoir,   provides
                              support for the engineering  analysis on which the
                              project or program was based.

                      (iii)   Estimates  of proved  reserves  do not include the
                              following:

                              (A)  oil  that may  become  available  from  known
                                   reservoirs  but is  classified  separately as
                                   "indicated additional reserves",

                              (B)  crude  oil,  natural  gas,  and  natural  gas
                                   liquids,  the recovery of which is subject to
                                   reasonable doubt because of uncertainty as to
                                   geology,   reservoir   characteristics,    or
                                   economic factors,

                              (C)  crude  oil,  natural  gas,  and  natural  gas
                                   liquids,   that  may   occur   in   undrilled
                                   prospects, and

                              (D)  crude  oil,  natural  gas,  and  natural  gas
                                   liquids,  that  may  be  recovered  from  oil
                                   shales,   coal,   gilsonite  and  other  such
                                   sources.

proved developed oil     Reserves  that can be expected to be recovered  through
and gas reserves         existing  wells with  existing  equipment and operating
                         methods. Additional oil and gas expected to be obtained
                         through the  application  of fluid  injection  or other
                         improved  recovery  techniques  for  supplementing  the
                         natural  forces  and  mechanisms  of  primary  recovery
                         should be included as "proved developed  reserves" only
                         after testing by a pilot project or after the operation
                         of  an   installed   program  has   confirmed   through
                         production  response  that  increased  recovery will be
                         achieved.


                                      - 3 -

<PAGE>



proved undeveloped       Reserves  that are  expected to be  recovered  from new
reserves                 wells on  undrilled  acreage,  or from  existing  wells
                         where a relatively  major  expenditure  is required for
                         recompletion.  Reserves on undrilled  acreage  shall be
                         limited to those drilling units  offsetting  productive
                         units that are  reasonably  certain of production  when
                         drilled.  Proved reserves for other undrilled units are
                         claimed  only  where  it  can  be   demonstrated   with
                         certainty  that there is continuity of production  from
                         the   existing   productive    formation.    Under   no
                         circumstances  are  estimates  for  proved  undeveloped
                         reserves  attributable  to any  acreage  for  which  an
                         application  of  fluid   injection  or  other  improved
                         recovery   technique  is   contemplated,   unless  such
                         techniques  have been proved  effective by actual tests
                         in the  area  and in the  same  reservoir.

undeveloped acreage      Lands on which there are no current reserves assigned.

working interest         The interest held by a company in an oil or natural gas
                         property,    which   interest    normally   bears   its
                         proportionate   share  of  the  costs  of  exploration,
                         development,  and operation as well as any royalties or
                         other production burdens.


FORWARD LOOKING STATEMENTS

Pursuant to the "safe harbor"  provisions of the Private  Securities  Litigation
Reform Act of 1995 (the "PSLRA"), the Company cautions readers regarding forward
looking  statements  found in the  following  discussion  and  elsewhere in this
annual  report  and in any  other  statement  made by,  or on the  behalf of the
Company,  whether  or not in  future  filings  with  the  SEC.  Forward  looking
statements are statements not based on historical  information  and which relate
to future  operations,  strategies,  financial  results  or other  developments.
Forward looking  statements are necessarily based upon estimates and assumptions
that are inherently  subject to significant  business,  economic and competitive
uncertainties and contingencies,  many of which are beyond the Company's control
and many of which,  with respect to future  business  decisions,  are subject to
change.  These  uncertainties  and  contingencies  can affect actual results and
could cause  actual  results to differ  materially  from those  expressed in any
forward  looking  statements  made by or on behalf of the  Company.  The Company
disclaims any obligation to update forward  looking  statements.  Readers should
also understand  that under Section  27A(b)(2)(D) of the Securities Act of 1933,
as amended,  and Section 21E(b)(2)(D) of the Securities Exchange Act of 1934, as
amended,  the "safe  harbor"  provisions of the PSLRA do not apply to statements
made in connection with an initial public offering.


                                     - 4 -

<PAGE>


                                     PART I

ITEM 1.   DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.
--------------------------------------------------------------------------------
Not applicable.


ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE.
--------------------------------------------------------------------------------
Not applicable.


ITEM 3.   KEY INFORMATION.
--------------------------------------------------------------------------------
SELECTED FINANCIAL DATA

The  selected  financial  data of the Company for the years ended May 31,  2002,
2001 and 2000 was derived from the  financial  statements  of the Company  which
have been audited by D&H Group, independent Chartered Accountants,  as indicated
in their report which is included elsewhere in this annual report.

The  information  in the following  table was  extracted  from the more detailed
financial  statements  and related notes  included  herein and should be read in
conjunction  with such financial  statements and with the information  appearing
under the heading "Item 5. Operating and Financial Review and Prospects."

Reference  is made to Note 12 of the  Company's  financial  statements  included
herein for a discussion of the material  differences  between  Canadian GAAP and
U.S. GAAP, and their effect on the Company's financial statements.
<TABLE>
<CAPTION>
                                                                     YEAR ENDED MAY 31,
                                                         -------------------------------------------
                                                          2002(1)          2001(1)        2000(1)(2)
                                                             $                $                $
<S>                                                     <C>              <C>             <C>
Revenues                                                    -0-              -0-              -0-
General and Administrative Expenses                       244,179          108,249          85,865
Net Earnings (Loss)                                      (408,713)        (248,035)         106,130
Total Assets                                              801,156          912,505         1,057,049
Net Assets                                                552,205          877,434          961,149
Capital Stock                                            1,102,823        1,019,339         855,019
Weighted Average Number of Shares                        6,509,418        3,233,755        2,038,016
Dividends per Share                                         Nil              Nil              Nil
Basic and Fully Diluted Earnings (Loss) Per Share         $(0.06)          $(0.08)           $0.05
</TABLE>

(1)  On September  27, 2001,  the Company  completed a  reorganization  with the
     shareholders of California Exploration Inc. ("CalEx").  This reorganization
     was treated for accounting purposes as a reverse takeover, whereby CalEx is
     deemed to be the purchaser  and parent  company.  Accordingly,  CalEx's net
     assets are included in the consolidated  balance sheets at their historical
     book  value and the net  assets  and  business  of the  Company,  the legal
     parent,  were  recorded  at their fair values on  September  27,  2001.  In
     addition,  the  consolidated  statements of operations and deficit and cash
     flow for the year ended May 31, 2002 include  CalEx's results of operations
     and cash flow for the year ended May 31, 2002 and the Company's  results of
     operations and cash flow from September 27, 2001. The  comparative  figures
     for the years ended May 31, 2001 and 2000 are those of CalEx.

(2)  CalEx was incorporated on October 6, 1999, therefore, the fiscal year ended
     May 31, 2000 is for the period from October 6, 1999 through May 31, 2000.


                                      - 5 -

<PAGE>

ADJUSTMENT TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The  consolidated  financial  statements  of  the  Company  have  been  prepared
according to Canadian  GAAP which differ in certain  material  respects  from US
GAAP. Material  differences between Canadian and US GAAP and their effect on the
Company's consolidated financial statements are summarized in the tables below.
<TABLE>
<CAPTION>
                                                                                                        October 6,
                                                                         Year Ended      Year Ended       1999 to
                                                                           May 31,         May 31,        May 31,
                                                                            2002            2001           2000
                                                                              $               $              $
<S>                                                                     <C>            <C>           <C>
Consolidated Statements of Operations and Comprehensive Income
Earnings (loss) for the period
     Canadian GAAP                                                          (408,713)      (248,035)       106,130
     Write-down of investment (i)                                             38,500        100,000              -
     Other compensation expense (iv)                                               -       (160,000)             -
                                                                        ------------   ------------   ------------
                                                                            (370,213)      (308,035)       106,130
Other Comprehensive Income
     Unrealized holding gain (loss) on
       available-for-sale marketable securities (i)                          (27,317)      (129,576)        18,393
                                                                        ------------   ------------   ------------
Comprehensive earnings (loss) for the period                                (397,530)      (437,611)       124,523
                                                                        ============   ============   ============
     Earnings (loss) per share basic and fully diluted - US GAAP             $(0.06)         $(0.14)         $0.06
                                                                        ============   ============   ============
</TABLE>

<TABLE>
<CAPTION>

                                                                                            2002           2001
                                                                                              $              $
<S>                                                                                    <C>            <C>
Consolidated Balance Sheets

Total Assets
     Canadian GAAP                                                                          801,156        912,505
     Available for sale securities (i)                                                            -        (11,183)
                                                                                       ------------   ------------
     US GAAP                                                                                801,156        901,322
                                                                                       ============   ============
Total Liabilities
     Canadian GAAP                                                                          248,951         35,071
                                                                                       ------------   ------------
     US GAAP                                                                                248,951         35,071
                                                                                       ============   ============
Shareholders' Equity
     Canadian GAAP                                                                          552,205        877,434
     Available for sale securities (i)                                                            -        (11,183)
                                                                                       ------------   ------------
     US GAAP                                                                                552,205        866,251
                                                                                       ============   ============
</TABLE>

(i)  Marketable securities

     US GAAP requires  marketable  securities  which are classified as available
     for sale to be carried at fair value,  as  determined  by quoted  published
     market  prices,  with  unrealized  losses and gains on  available  for sale
     securities to be included as a separate component of shareholders'  equity.
     In addition,  net realized gains and losses on security  transactions would
     be determined on the specific identification cost basis and included in the
     determination of earnings for the year.


                                      - 6 -

<PAGE>



(ii) Stock option plan for employees and directors

     The  Company  has a stock  option  plan which  reserves  common  shares for
     issuance to employees and directors. The Company has adopted the disclosure
     only  provisions of SFAS No. 123 for stock options granted to employees and
     directors.  Accordingly,  no compensation  cost has been recognized for the
     stock option plan. Had  compensation  costs for the Company's  stock option
     plan been  determined  based on the fair value at the grant date for awards
     during the periods ended May 31, 2002,  2001 and 2000  consistent  with the
     provisions  of SFAS No. 123,  the  Company's  earnings  (loss) and earnings
     (loss)  per  share  would  have  been  increased  to the  proforma  amounts
     indicated below:
<TABLE>
<CAPTION>
                                                                              2002         2001        2000
                                                                                $            $           $

    <S>                                                                   <C>           <C>         <C>
     Earnings (loss) - as reported under US GAAP                            (397,530)    (437,611)    124,523
     Earnings (loss) - proforma                                             (447,800)    (437,611)    124,523

     Earnings (loss) per share - as reported under US GAAP                   $(0.06)      $(0.14)      $0.06
     Earnings (loss) per share - proforma                                    $(0.07)      $(0.14)      $0.06
</TABLE>

     The fair market value of each option  granted to an employee or director is
     estimated  on the date of grant  using the Black - Scholes  Option  Pricing
     Model with the  following  assumptions  used for grants  during the periods
     ended May 31, 2002, 2001 and 2000:

                                             2002            2001           2000

     Risk-free interest rate                 3.14%            N/A            N/A
     Expected volatility                      125%            N/A            N/A
     Expected lives                        3 years            N/A            N/A

(iii)Private Placements of Common Stock with Related Parties

     US GAAP requires disclosure of private placements  conducted by the Company
     where  directors and officers of the Company are  participants.  During the
     year ended May 31, 2002,  directors,  officers and companies  controlled by
     the  directors or officers  acquired  nil shares (2001 - 1,600,000  shares;
     2000 - 843,500  shares) of the  Company,  pursuant  to  private  placements
     conducted by the Company, for cash proceeds of $nil (2001 - $160,000;  2000
     - $506,100);

(iv) Private Placements of Common Stock

     The Company  conducts  the  majority of its equity  financings  pursuant to
     private  placements.  US GAAP does not permit a discount from the estimated
     fair value,  or the market  price,  as  appropriate.  US GAAP  requires the
     recognition  of the  estimated  fair value or market value of the Company's
     common stock as a credit to share capital,  with a charge to operations for
     the portion of the discount  relating to equity  financings  conducted with
     officers and directors of the Company and a charge to shareholders' equity,
     as a capital  distribution,  for the  discount  relating  to the  remaining
     portion of the equity financings.

     Under US GAAP,  loss and capital  distributions  for the year ended May 31,
     2002 would increase by $nil (2001 - $160,000; 2000 - $nil) and $nil (2001 -
     $40,000; 2000 - $nil), respectively,  and share capital, as at May 31, 2002
     would increase by $200,000 (2001 - $200,000;  2000 - $nil). There is no net
     change to shareholders' equity.


                                      - 7 -

<PAGE>



(v)  Reverse Take-over Accounting

     Under  Canadian  GAAP,  a  reverse  takeover  of a  publicly  listed  shell
     corporation is presently considered to be a business combination.  Under US
     GAAP,  such a reverse  takeover of a publicly  listed shell  corporation is
     considered  to be a capital  transaction  in  substance  and not a business
     combination.  In this particular  transaction there is no difference in the
     underlying accounting for the transaction.

(vi) Income Tax

     Under Canadian GAAP,  deferred tax assets relating to the potential benefit
     of income tax loss carryforwards are not recognized unless there is virtual
     certainty  of  realization  of  the  benefit.   US  GAAP  provides  similar
     treatment, but requires the benefit be recognized and a valuation allowance
     be recognized to fully offset the deferred tax asset.

     As at August 31,  2002,  the Company has fully  reserved  the  $167,000 tax
     benefit of operating loss  carryforwards,  by a valuation  allowance of the
     same  amount,  because the  likelihood  of  realization  of the tax benefit
     cannot be determined.  Of the total tax benefit, $85,000 is attributable to
     the year ended May 31, 2002.

The Company's consolidated statements of cash flow comply with US GAAP.

NEW TECHNICAL PRONOUNCEMENTS

In June 2001, the Financial  Accounting  Standards Board  ("FASB"),  issued SFAS
143, "Accounting for Asset Retirement Obligations." SFAS 143 addresses financial
accounting  and  reporting for  obligations  associated  with the  retirement of
tangible  long-lived  assets and the associated asset retirement costs. SFAS 143
generally  requires   obligations   associated  with  asset  retirements  to  be
recognized  earlier and displayed as liabilities  rather than as contra- assets.
The pronouncement is effective for financial  statements issued for fiscal years
beginning after June 15, 2002.  Management does not believe that the adoption of
SFAS  143  will  have  any  impact  on its  financial  position  or  results  of
operations.

In August 2001, FASB issued SFAS 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived  assets.  SFAS 144 establishes a single
accounting  model  for  long-lived  assets  to  be  disposed  of  by  sale.  The
pronouncement  is effective  for  financial  statements  issued for fiscal years
beginning after December 15, 2001. Management does not believe that the adoption
of SFAS 144 will  have any  impact  on its  financial  position  or  results  of
operations.

In June 2002, FASB issued SFAS 146,  "Accounting for Costs  Associated with Exit
or Disposal  Activities." SFAS 146 addresses financial  accounting and reporting
for costs  associated  with exit or disposal  activities and nullifies  Emerging
Issues Task Force Issue No. 94-3,  "Liability  Recognition for Certain  Employee
Termination  Benefits and Other Costs to Exit an  Activity."  SFAS 146 generally
requires a liability for a cost associated with an exit or disposal  activity to
be  recognized  and measured  initially at its fair value in the period in which
the liability is incurred.  The  pronouncement is effective for exit or disposal
activities  initiated after December 31, 2002.  Management does not believe that
the  adoption  of SFAS 146 will have any  impact on its  financial  position  or
results of operations.



                                      - 8 -

<PAGE>



EXCHANGE RATE HISTORY

The following table sets forth the average exchange rate for one Canadian dollar
expressed  in terms of one U.S.  dollar for the fiscal years ended May 31, 2000,
2001 and 2002.


                 Period                                       Average
     ------------------------------                           -------
     April 1, 2001 - May 31, 2002                              0.6377
     April 1, 2000 - May 31, 2001                              0.6596
     October 6, 1999 - May 31, 2000                            0.6834

The following  table sets forth the high and low exchange rates for one Canadian
dollar  expressed  in terms of one U.S.  dollar for the  six-month  period ended
October 31, 2002.


     Month                              High                    Low
     --------------                    ------                  ------
     June 2002                         0.6619                  0.6452
     July 2002                         0.6603                  0.6297
     August 2002                       0.6442                  0.6264
     September 2002                    0.6433                  0.6304
     October 2002                      0.6407                  0.6272
     November 2002                     0.6440                  0.6288

Exchange  rates are based upon the noon  buying  rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York.

The noon rate of exchange on November  29, 2002,  reported by the United  States
Federal  Reserve Bank of New York for the  conversion  of Canadian  dollars into
United States dollars was CDN$1.5658 (US$0.6387 = CDN$1.00).

RISK FACTORS

On September  27, 2001,  the Company  completed an Agreement  and Plan of Merger
with CalEx whereby the  shareholders of CalEx acquired control of the Company in
a reverse acquisition and CalEx became a wholly-owned subsidiary of the Company.
The  following  risk  factors  pertain to the combined  current  business of the
Company and CalEx.

Conflicts of  Interest
----------------------
All directors and officers of the Company will not be devoting all their time to
the  affairs of the  Company,  but will be  devoting  such time as  required  to
effectively  manage the  Company.  Some of the  directors  and  officers  of the
Company are engaged and will  continue to be engaged in the search for  property
or assets or business prospects on their own behalf or on behalf of others. Such
associations  may give rise to  conflicts  of  interest  from time to time.  The
directors  of the Company are  required by law to act honestly and in good faith
with a view to the best  interests  of the Company and to disclose  any interest
which they may have in any project or opportunity of the Company.  If a conflict
of interest  arises at a meeting of the board of  directors,  any  director in a
conflict will disclose his interest and abstain from voting on such matter.  The
Company  does  not  currently  have a  right  of  first  refusal  pertaining  to
opportunities that come to management's  attention insofar as such opportunities
may relate to the  Company's  proposed  business  operations.  The  officers and
directors are, so long as they are officers or directors of the Company, subject
to the restriction that all opportunities  contemplated by the Company's plan of
operation  which come to their  attention,  either in the  performance  of their
duties or in any other manner, will be considered  opportunities of, and be made
available to the Company and the companies that they are  affiliated  with on an
equal basis. If the Company or the companies in which the officers and directors
are affiliated with both desire to take advantage of an  opportunity,  then said
officers  and  directors  would  abstain  from  negotiating  and voting upon the
opportunity.  However,  all directors may still  individually  take advantage of
opportunities  if the Company  declines to do so. Except as set forth above, the
Company has not adopted any other  conflict of interest  policy with  respect to
such transactions. In determining whether or not the Company will participate in
any project or opportunity,  the director will primarily  consider the degree of
risk to which the Company may be exposed and its financial position at the time.


                                      - 9 -

<PAGE>



No members of management have  enteredinto  non-competition  agreements with the
Company. See "Item 6. Directors, Senior Management and Employees - Directors and
Senior Management" below.

Business Plan
-------------
The  Company's  initial  business  plan was based  upon  entering  into  partner
agreements with other persons and/or  entities  whereby such partners would fund
the Company's prospect generation costs. The lack of drilling success has caused
all of the initial partners to withdraw from these arrangements.  The Company is
assessing its ongoing plan of operations, seeking new partners for its remaining
oil and gas prospects  and reviewing  other  business  opportunities  within and
outside the oil and gas industry.  The Company has identified and entered into a
letter  of  intent  with  Optimal  Power  Systems  Ltd.  ("OPS").  See  "Item 4.
Information on the Company - Business Overview".  In light of the current market
conditions,  both the Company and OPS recognize that a restructuring  of the OPS
business  plan is required  before the proposed  acquisition  can  proceed.  The
extent of the  changes and the  amendments,  if any, to the letter of intent are
not known at this time.  The Company cannot predict if OPS will be successful in
its restructuring.  However,  the Company feels that the restructuring must take
place by the end of 2002.

Additionally,  the  acquisition of OPS would be subject to TSX Venture  Exchange
(the "TSX Venture") approval and shareholder approval.

Dependence on Key Personnel
---------------------------
The success of the  operations  and  activities of the Company is dependent to a
significant  extent on the efforts and abilities of its management.  The loss of
services of any of its  management  could have a material  adverse effect on the
Company. The Company has not entered into employment  agreements with any of its
officers and is not expected to do so in the foreseeable future. The Company has
not  obtained  key-man  life  insurance  on any of its  officers  or  directors.
Notwithstanding   the  combined  limited   experience  and  time  commitment  of
management,  loss of the services of any of these  individuals  would  adversely
affect  development  of the Company's  business and its likelihood of continuing
operations.

On October 7, 2002, Mr. Ted Carlsen  submitted his  resignation as the President
and a Director of the Company. Mr. Desmond O'Kell was appointed as the President
of the  Company  in  addition  to his  positions  as  Chief  Financial  Officer,
Secretary and a Director of the Company.

Lack of Liquidity
-----------------
To date,  there has been extremely  limited  trading of the Company's  shares of
common stock on the  Over-the-Counter  Bulletin  Board system and trading of our
shares on the TSX Venture was halted in December of 2001. See "Item 9. The Offer
and Listing." Therefore, persons purchasing shares of the Company's common stock
may not be  able  to  resell  the  shares  and  may  have  to  hold  the  shares
indefinitely.  In addition,  purchasers  may not be able to use their shares for
collateral or loans and may not be able to liquidate at a suitable  price in the
event of an emergency.

"Penny" Stock Regulation of Broker-Dealer Sales of Company Securities
---------------------------------------------------------------------
The  Securities  and  Exchange  Commission  (the "SEC") has  adopted  rules that
regulate  broker-dealer  practices in  connection  with  transactions  in "penny
stocks". Generally, penny stocks are equity securities with a price of less than
$5.00 (other than securities registered on certain national securities exchanges
or quoted on the NASDAQ  system).  If the  Company's  shares are traded for less
than $5.00 per share,  the shares will be subject to the SEC's penny stock rules
unless (1) the  Company's  net  tangible  assets  exceed  $5,000,000  during the
Company's  first three years of continuous  operations  or $2,000,000  after the
Company's first three years of continuous operations; or (2) the Company has had
average revenue of at least $6,000,000 for the last three years. The penny stock
rules  require a  broker-dealer,  prior to a  transaction  in a penny  stock not
otherwise  exempt  from the rules,  to deliver a  standardized  risk  disclosure
document prescribed by the SEC that provides  information about penny stocks and
the nature and level of risks in the penny stock market.  The broker-dealer also
must provide the customer  with current bid and offer  quotations  for the penny
stock,  the  compensation  of  the  broker-dealer  and  its  salesperson  in the
transaction  and monthly  account  statements  showing the market  value of each
penny stock held in the customer's account.  In addition,  the penny stock rules
require that prior to a transaction  in a penny stock not otherwise  exempt from
those rules, the broker-dealer  must make a special written  determination  that
the penny  stock is a suitable  investment  for the  purchaser  and  receive the
purchaser's  written agreement to the transaction.  These  requirements may have

                                     - 10 -

<PAGE>


the effect of reducing the level of trading activity in the secondary market for
a stock that becomes subject to the penny stock rules.  Management  believes the
Company's  common  stock will be subject to the penny  stock rules and, as such,
holders of the common  stock may find it  difficult  to sell the common stock of
the Company.

Financing Risks
---------------
The Company has limited financial resources, no significant revenues, and has no
assurance that  additional  funding will be available to it for  exploration and
development  of the Company's  projects or to fulfil its  obligations  under any
applicable agreements.  The only significant source of funds presently available
to the Company is the sale of its equity capital. There can be no assurance that
the Company will be able to obtain adequate  financing in the future or that the
terms of such  financing  will be favorable.  Failure to obtain such  additional
financing   could  result  in  delay  or  indefinite   postponement  of  further
exploration  and  development  of its projects  with the  possible  loss of such
properties. In addition, failure to obtain additional financing could also delay
or nullify the proposal by the Company to acquire OPS. See "Item 4.  Information
on the Company - Business Overview."

Exploration and Production Risks
--------------------------------
The business of exploring  for and  producing oil and gas involves a substantial
risk of investment  loss which even a combination of  experience,  knowledge and
careful  evaluation  may not be able to  overcome.  Drilling  oil and gas  wells
involves  the risk  that  the  wells  will be  unproductive  or  that,  although
productive,  the wells do not  produce  oil and/or gas in  economic  quantities.
Other hazards, such as unusual or unexpected geological  formations,  pressures,
fires, blowouts,  loss of circulation of drilling fluids or other conditions may
substantially   delay  or  prevent  completion  of  any  well.  Adverse  weather
conditions  can  also  hinder  drilling  operations.  A  productive  well may be
unmarketable if it is impregnated with water or other deleterious substances. As
with any petroleum property,  there can be no assurance that oil and gas will be
produced from the  properties in which the Company has  interests.  In addition,
the  marketability  of oil and gas which may be acquired or discovered,  will be
affected by numerous  factors  beyond the control of the Company.  These factors
include the  proximity  and  capacity of oil and gas  pipelines  and  processing
equipment,  market  fluctuations  of  prices,  taxes,  royalties,  land  tenure,
allowable production and environmental  protection.  The extent of these factors
cannot be accurately predicted,  but the combination of these factors may result
in the Company not receiving an adequate return on invested capital. There is no
assurance that additional crude oil or natural gas in commercial quantities will
be discovered by the Company.

Uninsurable Risks
-----------------
Although the Company will  maintain  appropriate  insurance  for  liability  and
property  damage in  connection  with its  business,  it may suffer  losses from
uninsurable  hazards or from hazards  which the Company may choose not to insure
against  because of high premium costs or other reasons.  The Company intends to
engage in  participating  in the drilling of both  exploratory  and  development
wells. Exploratory wells have much greater dry hole risk than do wells which are
drilled,  offsetting established  production.  The Company may become subject to
liability for pollution,  fire, explosion,  blow-outs,  cratering and oil spills
against which it cannot insure or against which it may elect not to insure. Such
events  could  result  in  substantial  damage to oil and gas  wells,  producing
facilities and other property,  personal injury and loss of life. The payment of
such liabilities may have a material,  adverse effect on the Company's financial
condition.

No Assurance of Titles
----------------------
It is the  Company's  practice  in  acquiring  oil and gas  leases or  undivided
interests in oil and gas leases not to undergo the expense of retaining  lawyers
to examine the title to the mineral interest to be placed under lease or already
placed under lease.  Rather,  the Company will rely upon the judgment of oil and
gas lease brokers or landmen who perform the field work in examining  records in
the  appropriate  governmental  office before  attempting to place under lease a
specific mineral  interest.  This practice is widely followed in the oil and gas
industry.  Prior to the  drilling  of an oil and gas  well,  however,  it is the
normal  practice in the oil and gas industry for the person or company acting as
the  operator  of the well to hire a lawyer to examine  the title to the spacing
unit within which the proposed oil and gas well is to be drilled to ensure there
are no obvious  deficiencies in title to the well, however,  neither the Company
nor the person or company  acting as operator of the well will obtain counsel to
examine  title  to  such  spacing  unit  until  the  well  is  about  to go into
production.  It  frequently  happens,  as a result  of such  examinations,  that
certain curative work must be done to correct  deficiencies in the marketability
of the title,  and the curative  work entails  expense.  The work might  include
obtaining  affidavits  of heirship or causing an estate to be  administered.  It
does happen,  from time to time, that the examination  made by the title lawyers
reveals  that  the oil and gas  lease  or  leases  are  worthless,  having  been
purchased  in error from a person who is not the owner of the  mineral  interest
desired. In such instances, the amount paid for such oil and gas lease or leases
is generally lost.

                                     - 11 -

<PAGE>



Environmental Regulations
-------------------------
In general, the Company's  exploration and production  activities are subject to
certain federal,  state and local laws and regulations relating to environmental
quality and pollution control.  Such laws and regulations  increase the costs of
these  activities and may prevent or delay the  commencement or continuance of a
given  operation.  Compliance  with  these  laws and  regulations  has not had a
material  effect on the  Company's  operations  or financial  condition to date.
Generally,  environmental  requirements  do not appear to affect the Company any
differently  or to any  greater or lesser  extent  than other  companies  in the
industry.

The Company believes that its operations comply, in all material respects,  with
all applicable environmental regulations.

The Company maintains insurance coverage customary to the industry,  however, it
is not fully insured against all environmental risks.

Governmental Regulations
------------------------
Oil and gas exploration, development and production are subject to various types
of regulation by local,  state and federal agencies.  Legislation  affecting the
oil and gas industry is under constant review for amendment and expansion. Also,
numerous  departments  and agencies,  both federal and state,  are authorized by
statute to issue and have issued  rules and  regulations  binding on the oil and
gas  industry  and its  individual  members,  some of  which  carry  substantial
penalties  for  failure  to  comply.  The  regulatory  burden on the oil and gas
industry  increases the  Company's  cost of doing  business  and,  consequently,
effects its profitability.  However,  since these regulations generally apply to
all oil  and gas  producers,  management  of the  Company  believes  that  these
regulations  should not put the Company at a material  disadvantage to other oil
and gas producers.

Natural Gas Prices
------------------
In recent decades, there have been periods of both worldwide  overproduction and
underproduction of hydrocarbons and periods of both increased and relaxed energy
conservation  efforts. Such conditions have resulted in periods of excess supply
of, and reduced demand for,  crude oil on a worldwide  basis and for natural gas
on a domestic basis. These periods have been followed by periods of short supply
of, and increased  demand for, crude oil and, to a lesser  extent,  natural gas.
The excess or short  supply of crude oil has placed  pressures on prices and has
resulted in dramatic price  fluctuations even during relatively short periods of
seasonal  market  demand.  The price of natural gas has also  exhibited  similar
market demand fluctuations.

Competition
-----------
The oil and gas industry is intensely  competitive and the Company competes with
other  companies which have greater  resources.  Many of such companies not only
explore  for and  produce  crude oil and  natural gas but also carry on refining
operations and market petroleum and other products on a worldwide  basis.  There
is also  competition  between the oil and gas industry and other industries with
respect  to the  supply  of  energy  and  fuel  to  industrial,  commercial  and
individual consumers.

Forward Looking Statements
--------------------------
This annual report contains  estimates of the Company's oil and gas reserves and
the estimated  future cash flows  therefrom that rely upon various  assumptions,
including assumptions as to oil and gas prices, drilling and operating expenses,
capital expenditures, taxes and availability of funds. The process of estimating
oil and gas reserves is complex, requiring significant decisions and assumptions
in the evaluation of available geological, geophysical, engineering and economic
data for each reservoir.  As a result, such estimates are inherently  imprecise.
Actual  future  production,  oil and gas prices,  revenues,  cash flows,  taxes,
development  expenditures,  operating expenses and quantities of recoverable oil
and gas reserves may vary  substantially  from those estimated in the respective
reserve reports.  Any significant variance in these assumptions could materially
affect the estimated  quantities and present value of reserves set forth in this
report.  In  addition,  such  reserves  may be  subject  to  downward  or upward
revisions  based upon  production  history,  results of future  exploration  and
development,  prevailing oil and gas prices and other factors, many of which are
beyond  the  control  of  the  Company.  Actual  production,   revenues,  taxes,
development  expenditures  and operating  expenses with respect to reserves will
likely vary from the estimates used, and such variances may be material.

In general,  the volume of production  from oil and gas  properties  declines as
reserves are depleted. The decline rates depend on reservoir characteristics and
vary from steep declines to the relatively slow declines characteristic of long-
lived fields.  Except to the extent the Company acquires  properties  containing
proved reserves or conducts successful  development and exploration  activities,
or both, the reserves of the Company will decline as reserves are produced.  The
Company's future natural gas and oil production is, therefore,  highly dependent
upon its level of  success  in finding or  acquiring  additional  reserves.  The

                                     - 12 -

<PAGE>


business  of  exploring  for,   developing  or  acquiring  reserves  is  capital
intensive.  To the extent  cash flow from  operations  is reduced  and  external
sources of capital become limited or unavailable,  the Company's ability to make
the necessary capital investment to maintain or expand its asset base of oil and
gas reserves would be impaired. In addition,  there can be no assurance that the
Company's future development, acquisition and exploration activities will result
in  additional  reserves  or that the Company  will be able to drill  productive
wells at acceptable costs.

Availability
------------
The timing of oil and gas exploration and development activities is dependent on
the availability of drilling and related equipment in the particular areas where
such  activities are to be conducted.  Demand for such limited  equipment by the
Company's competitors or access restrictions imposed by an area's surface and/or
weather conditions may affect such equipment availability to the Company and may
delay exploration and development activities.


ITEM 4.   INFORMATION ON THE COMPANY
--------------------------------------------------------------------------------

HISTORY AND DEVELOPMENT OF THE COMPANY

The Company was  incorporated  under the Company  Act  (British  Columbia)  (the
"Company  Act") on December 10, 1999 under the name "Buck  Ventures Ltd." On May
10,  2000,  the  Company  changed  its  name to "QDM  Ventures  Ltd."  With  the
acquisition  of CalEx as described  below,  on September  25, 2001,  the Company
changed its name to "California Exploration Ltd.", filed Articles of Continuance
under the  Business  Corporations  Act (Yukon)  (the  "Corporations  Act"),  and
changed its domicile from British Columbia to the Yukon Territory. On October 1,
2001,  the Company  commenced  trading on the TSX Venture  under its new name of
California  Exploration Ltd. and with a new trading symbol of "CAX". On December
21, 2001, the Company  requested the halt in trading of its common shares on the
TSX Venture in conjunction with a proposed  acquisition.  As of the date of this
annual report, the trading of the Company's common shares remain halted.

The Company's  registered  office is located at 3081 Third  Avenue,  Whitehorse,
Yukon, Canada, Y1A 4Z7 (telephone number 867-668-4405).  The Company's principal
executive  office  and  corporate  office is  located  at Suite 1305 - 1090 West
Georgia Street, Vancouver,  British Columbia,  Canada, V6E 3V7 (telephone number
604-685-9316).  See "Item 4. Information on the Company - Principal  Properties"
and "Item 7. Major Shareholders and Related Party Transactions."

The Company does not have a registered agent in the United States.

The  Company  was  initially  formed to operate as a capital  pool  company,  in
accordance with the policies of the TSX Venture.

With the introduction of the Capital Pool Company Policy in November,  1999 (the
"CPC Policy"),  the TSX Venture  created a new category of listing,  the capital
pool company,  pursuant to which a company formed by  individuals  acceptable to
the TSX  Venture  could  complete  an  initial  public  offering  earlier in its
development  than  may be  possible  with a  regular  initial  public  offering.
Proceeds from the initial public  offering must be used primarily to investigate
business opportunities for acquisition by the capital pool company. Only certain
acquisitions  can be made by the capital pool company to satisfy the CPC Policy.
Such an acquisition is referred to as a qualifying transaction.

During  the  period  ended May 31,  2000,  the  Company  completed  its  initial
financing and sold 2,200,001  common shares at a price of CDN$0.10 per share for
proceeds of CDN$220,000.  During December 2000, the Company completed an initial
public  offering  and sold  1,000,000  common  shares at a price of CDN$0.20 per
share, for gross proceeds of CDN$200,000.

In  connection  with the public  offering,  the  Company  and  Research  Capital
Corporation  ("Research Capital"),  an unaffiliated company,  executed an Agency
Agreement dated September 27, 2000, pursuant to which Research Capital agreed to
act as the  Company's  agent  in  the  offering.  Research  Capital  was  paid a
corporate finance fee of CDN$7,500 in connection with the offering.  The Company
also granted Research Capital a warrant  entitling  Research Capital to purchase


                                     - 13 -

<PAGE>


up to 100,000  common shares at CDN$0.20 per share  expiring June 21, 2002.  The
proceeds from these financings were used to investigate business opportunities.

Pursuant  to an  Agreement  and Plan of Merger  dated July 3, 2001,  between the
Company, CalEx and QDM Acquisition Corporation (a wholly-owned subsidiary of the
Company formed for the purpose of merging into CalEx), the shareholders of CalEx
acquired control of the Company in a reverse acquisition completed September 27,
2001. CalEx is an oil and gas company incorporated in the State of Nevada.

The  acquisition  constituted  a  qualifying  transaction  under the CPC Policy.
Pursuant to the terms of the Agreement and Plan of Merger,  each  shareholder of
CalEx  received one share of the Company's  common stock for each share of CalEx
common stock held. Additionally, all of the issued and outstanding shares of QDM
Acquisition  Corporation  (which were held by the Company) were  converted  into
shares of CalEx.  As a result,  CalEx became a  wholly-owned  subsidiary  of the
Company.

Since its  incorporation on October 6, 1999,  CalEx has principally  operated in
California where it has acquired,  explored and developed  petroleum and natural
gas prospects in California.  As a prospect generator,  CalEx obtained financial
support from joint venture partners. In addition,  CalEx raised equity financing
through the sale of its common stock.

BUSINESS OVERVIEW

As a result of the  reverse  acquisition,  the  Company's  operations  currently
consist solely of the operations of CalEx.

The Company is a development  stage  independent oil and gas company and has, to
date,  not earned  any  production  revenue,  nor found any  significant  proved
reserves on any of its properties.

The Company's goal is to identify,  acquire, explore and develop oil and natural
gas  reserves  in  the  Western  United  States,  principally  in the  State  of
California. The Company's original business plan contemplated that joint venture
partners would reimburse the Company for 100% of its prospect costs to acquire a
100% capital  interest (75% working  interest) in the drilling of the first well
on each prospect  resulting in the Company retaining up to a 25% interest in the
prospect with the remaining 75% interest in the prospect  being divided  amongst
the joint venture partners. Upon completion of the first well on a prospect, the
Company  would be  required  to fund its pro rata share of  further  development
costs.

In conjunction with the qualifying  transaction,  the Company proceeded with the
first stage of the exploration and  development  program  prescribed for its oil
and gas interests.  As at May 31, 2002, the Company had drilled eight wells.  Of
the eight  wells,  six were  abandoned  as dry holes,  one, the Suisun #25 well,
required  side-tracking to reach the target zone and one well was completed as a
producing well although it was shut-in shortly after commencement of production.
This well was subsequently  abandoned.  In addition,  the joint venture partners
informed the Company that they  terminated  their joint venture  agreements  and
agreed to pay  maintenance  costs with  respect to the  prospect  they retain an
interest  in. It was  therefore  determined  by  management  of the  Company  to
consider other  opportunities in the oil and gas industry.  Throughout the first
half of calendar 2002, the Company worked towards finding  partners to drill the
side-track well to the Suisun #25 well.

In August 2002, the Company commenced the side-track of the Suisun #25 well. The
side-track was completed in September 2002. Case hole logs and perforations were
accomplished  to test several  zones within the shallow  objective of the Suisun
Sands.  Gas was flowed to the surface at very low  pressures.  It was determined
that there was  insignificant  pressure and volume to be economic.  The well was
then  plugged and  abandoned.  As at May 31,  2002,  the  Company  had  recorded
$268,396  associated  with the acquisition and exploration on the Basil Prospect
and the Suisun #25 well. A further  $58,620 has been paid by the Company for its
share of the side-track costs.

In an attempt to diversify the Company's operations,  management began reviewing
other  business  opportunities  during late calendar 2001. In December 2001, the
Company   identified  and  began   negotiations  with  OPS,  a  private  company
incorporated  under the laws of  Alberta.  On  December  21,  2001,  the Company
requested a halt in the trading of its common  shares.  On January 14, 2002, the
Company signed a letter of intent whereby it agreed,  subject to shareholder and

                                     - 14 -

<PAGE>

regulatory  approvals,  to acquire  100% of the issued  and  outstanding  common
shares of OPS. Under the terms of the letter of intent,  the Company proposes to
issue up to 4.8 million common shares of the Company to the shareholders of OPS.
No shares will be issued until OPS generates CDN $4 million in revenue, at which
time 800,000 shares will be issued. An additional  800,000 shares will be issued
when a further CDN $4 million in revenue is achieved.  Thereafter 800,000 shares
will be issued for each incremental CDN $5 million in revenue is achieved, until
all 4.8 million shares are issued.


OPS is a  privately-owned,  software  development  company  based  in  Edmonton,
Alberta.  The  primary  purpose  of the  business  combination  is to change the
primary  business  focus  of the  Company  from  oil  and  gas  exploration  and
development to the development and utilization of software technology for use in
the oil and gas industry and in particular for  optimization  of oil and gas and
power energy resources.

In light of the current  market  conditions,  both the Company and OPS recognize
that a  restructuring  of the OPS business plan is required  before the proposed
acquisition can proceed.  The extent of the changes and the amendments,  if any,
to the letter of intent are not known at this time.  The Company  cannot predict
if OPS will be successful in its restructuring.  However, the Company feels that
the restructuring must take place by the end of calendar 2002.

DISPOSITIONS

As a prospect  generator,  the  Company's  business  is to  acquire  oil and gas
prospects  and farm-out its  properties  with industry  joint venture  partners.
During fiscal 2001, the Company had farmed out various  interests in its oil and
gas properties for $405,740 cash. No dispositions  or farm-outs  occurred during
fiscal 2002.

EXPLORATION EXPENDITURES

During  fiscal  2001 and 2002,  the  Company  incurred  $309,841  and  $287,045,
respectively, on the acquisition and exploration of its petroleum interests. The
majority of these properties were farmed out to joint venture partners.

2002 - 2003 EXPLORATION BUDGET

Subsequent to May 31, 2002, the Company incurred  approximately $100,000 for its
share of costs on the drilling of the  side-track  to the Suisun #25 well at the
Basil Prospect. With the unsuccessful drilling results, the Company is assessing
its business plan. No exploration budgets have been determined for the remainder
of fiscal 2003.

PRINCIPAL PRODUCTS OR SERVICES AND MARKETS

To date, the Company has participated in exploration  activities to locate crude
petroleum  and natural  gas. The  principal  markets for these  commodities  are
refining companies,  natural gas transmission pipeline companies,  utilities and
private  industry  end-users,  which  purchase  the crude oil,  and  natural gas
pipeline companies, which purchase the gas.

SALES AND REVENUE DISTRIBUTION

To date, the Company has not generated any petroleum and natural gas revenues.

ADMINISTRATION

As  at  October  31,  2002,  the  Company  had  a  working  capital  deficit  of
approximately $152,000.

In light of its  unsuccessful  drilling  results at Regional  California and the
uncertainty of the proposed acquisition of OPS, the Company has made significant
changes  to reduce  its  administration  costs to a minimum  until it  completes
additional  financings to either  complete its acquisition of OPS and/or acquire
additional petroleum property interests.  The office in Bakersfield,  California
has been  closed  and all  administrative  and  accounting  functions  have been
contracted out to Chase  Management Ltd.  ("Chase"),  a private company owned by
Mr.  Nick  DeMare,   a  Director  of  the  Company.   The  Company's   aggregate

                                     - 15 -

<PAGE>


administration  costs for the twelve  month  period  following  the date of this
report are  estimated  at $27,600  with an average  monthly  cost of $2,300.  An
estimated breakdown of these costs is as follows:

                     TABLE OF ESTIMATED ADMINISTRATIVE COSTS

                                                   Monthly               Yearly
                                                     ($)                   ($)

   Administration                                   1,000                12,000
   Legal, Audit and other Professional Fees           500                 6,000
   Office Supplies                                    100                 1,200
   Telephone Costs                                    100                 1,200
   Travel                                             100                 1,200
   Transfer Agent Fees                                500                 6,000
                                                  -------               -------
   Total                                            2,300                27,600
                                                  =======               =======

ORGANIZATIONAL STRUCTURE

The  following  organization  chart  sets forth the name of the  Company's  sole
subsidiary, CalEx, its jurisdiction of incorporation and the Company's ownership
interests  therein as of the date of this  report.  Unless  otherwise  indicated
herein, the term "Company" means collectively the Company and its subsidiary.

                               ORGANIZATION CHART

                         ------------------------------
                           California Exploration Ltd.
                                (Yukon Territory)
                         ------------------------------
                                       |
                                       |
                                       |
                         ------------------------------
                           California Exploration Inc.
                                    (Nevada)
                                      100%
                         ------------------------------

COMPETITIVE  BUSINESS  CONDITIONS,  COMPETITIVE  POSITION  IN THE  INDUSTRY  AND
METHODS OF COMPETITION

The Company's  petroleum and natural gas exploration  activities in the state of
California are being undertaken in a highly competitive and speculative business
atmosphere.  In seeking any other suitable  petroleum and natural gas properties
for  acquisition,  the  Company is  competing  with a number of other  companies
located in the state of California  and elsewhere,  including  large oil and gas
companies and other  independent  operators  with greater  financial  resources.
Management does not believe that the Company's initial  competitive  position in
the petroleum and natural gas industry will be significant.

Management does not foresee any  difficulties in procuring  drilling rigs or the
manpower to run them in the area of its operations;  however,  several  factors,
including  increased  competition  in the area,  may limit the  availability  of
drilling rigs, rig operators and related  personnel  and/or  equipment;  such an
event  may  have  a  significant  adverse  impact  on the  profitability  of the
Company's operations.

Competition in the petroleum and natural gas exploration  industry exists in the
form of competition  to acquire the most promising  acreage blocks and obtaining
the most  favorable  prices for  transporting  the  product.  The  Company,  and
ventures  in  which it  participates,  is  relatively  small  compared  to other
petroleum  and  natural  gas  exploration  companies  and  may  have  difficulty
acquiring   additional   acreage   and/or   projects  and   arranging   for  the
transportation  of product,  in the event the  Company,  or ventures in which it
participates, is successful in its exploration efforts.



                                     - 16 -

<PAGE>

GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL LAWS

The  Company  and any  venture in which it  participates,  is required to obtain
permits for drilling oil or gas wells.

Exploration and production activities relating to oil and gas leases are subject
to numerous  environmental laws, rules and regulations.  The Federal Clean Water
Act requires the Company to construct a fresh water containment  barrier between
the surface of each drilling site and the underlying water table.

Various federal,  state and local laws and regulations covering the discharge of
materials into the environment,  or otherwise  relating to the protection of the
environment,  may affect the Company's operations and costs through their effect
on oil and gas exploration, development and production operations. Environmental
laws and  regulations  have changed  substantially  and rapidly over the last 20
years, and the Company anticipates that there will be continuing  changes.  Laws
and regulations  protecting the environment have generally become more stringent
in recent years,  and may in certain  circumstances  impose "strict  liability,"
rendering a  corporation  liable for  environmental  damages  without  regard to
negligence or fault on the part of such  corporation.  Such laws and regulations
may expose the Company to liability  for the conduct of operations or conditions
caused by others,  or for acts of the Company which were in compliance  with all
applicable  laws at the time  such  acts  were  performed.  Increasingly  strict
environmental  restrictions and limitations have resulted in increased operating
costs for the Company and other businesses  throughout the United States, and it
is possible that the costs of compliance with environmental laws and regulations
will continue to increase.  The  modification of existing laws or regulations or
the adoption of new laws or regulations relating to environmental  matters could
have a material  adverse effect on the Company's  operations.  In addition,  the
Company's existing and proposed  operations could result in liability for fires,
blowouts,  oil  spills,  discharge  of  hazardous  materials  into  surface  and
subsurface  aquifers  and other  environmental  damage,  any one of which  could
result in personal  injury,  loss of life,  property  damage or  destruction  or
suspension of operations.

The  Comprehensive  Environmental  Response,   Compensation  and  Liability  Act
("CERCLA"),  also known as the "Superfund" law, requires payments for cleanup of
certain  abandoned  waste  disposal  sites,  even  though  such  waste  disposal
activities were undertaken in compliance with regulations applicable at the time
of disposal.  Under the  Superfund  legislation,  one party may,  under  certain
circumstances,  be required to bear more than its proportional  share of cleanup
costs at a site where it has  responsibility  pursuant  to the  legislation,  if
payments cannot be obtained from other  responsible  parties.  Other legislation
mandates  cleanup of  certain  wastes at  facilities  that are  currently  being
operated.  States also have regulatory  programs that can mandate waste cleanup.
CERCLA  authorizes  the  Environmental  Protection  Agency  ("EPA") and, in some
cases, third parties to take actions in response to threats to the public health
or the  environment  and to seek to  recover  from the  responsible  classes  of
persons the costs they incur. The scope of financial  liability under these laws
involves inherent uncertainties.

It is not  anticipated  that the Company  will be required in the near future to
expend  amounts that are material in relation to its total capital  expenditures
program by reason of environmental  laws and  regulations,  but inasmuch as such
laws and  regulations are frequently  changed,  the Company is unable to predict
the ultimate cost of compliance.

The Company believes it is presently in compliance with all applicable  federal,
state or local  environmental  laws,  rules or regulations;  however,  continued
compliance  (or  failure to comply) and future  legislation  may have an adverse
impact on the Company's present and contemplated business operations.

The  foregoing  is only a brief  summary of some of the  existing  environmental
laws,  rules and  regulations  to which the Company's  business  operations  are
subject,  and there are many others,  the effects of which could have an adverse
impact on the Company.  Future legislation in this area will no doubt be enacted
and revisions will be made in current laws. No assurance can be given as to what
effect these  present and future laws,  rules and  regulations  will have on the
Company's current and future operations.

                                     - 17 -

<PAGE>


PRINCIPAL PROPERTIES

Principal Oil and Gas Properties
--------------------------------
The Company's oil and natural gas prospects  were located in the San Joaquin and
Sacramento  Basins of  California.  Each of the prospects  differed in scope and
character  and  consisted  of working  interests  in  petroleum  and natural gas
leases.  During the fiscal year ended May 31, 2002, the Company,  through CalEx,
conducted  various  exploration  activities  on its  properties.  Based upon the
results  of  those  activities,  the  Company  decided  to  not to  conduct  any
exploration  of its  properties  and abandoned or returned to the vendor most of
its property  interests.  As of the date of this annual report, the Company does
not hold any material interests in petroleum and natural gas leases.  During the
fiscal year ended May 31, 2002, the Company spent approximately  $287,045 on the
exploration of its  properties.  As at May 31, 2002, the Company had capitalized
$268,396  associated  with the exploration and development of its properties and
subsequent to May 31, 2002, the Company  incurred an additional  $105,000 on the
exploration  and  development  of its  properties.  All of these amounts will be
written off during the quarter ended November, 2002.

Production History
------------------
The Company's initial production from the Brown Sugar well commenced in May 2001
however,  the Company has, to date, no  significant  production.  During October
2001, the well was shut-in and, as of November 21, 2001,  the Company  abandoned
its interest in this well.

Drilling Activity
-----------------
As at May 31,  2002,  the Company had drilled  eight  wells.  Of the eight wells
drilled,  six were abandoned as dry holes,  one required  side-tracking to reach
the target zone and one was completed as a producing well although  subsequently
shut-in for  reworking  and was  subsequently  abandoned.  Subsequent to May 31,
2002, the Company  participated  in the drilling of the  side-track  well on the
Basil Prospect and an exploration well on the Michigan Prospect.

Oil and Gas Reserves

As at the date of this annual report,  the Company has not acquired or developed
any oil and gas reserves.

Acreage

As of the date of this annual report, the Company does not hold any developed or
undeveloped oil and gas acreage.

Productive Oil and Gas Wells

As at the  date  of this  annual  report,  the  Company  has no past or  current
productive oil and gas wells.

Proposed Exploration and Development Program

Subsequent  to May 31, 2002,  the Company has incurred  $58,620 for its share of
costs  on the  drilling  of the  side-track  at the  Basil  Prospect.  With  the
unsuccessful  drilling  results,  the Company is assessing its business plan. No
exploration budgets have been determined for the remainder of fiscal 2003.

Other Assets

The Company has  provided OPS a bridge loan of  CDN$150,000.  The bridge loan is
non-interest  bearing.  OPS has agreed to pledge its assets as security  for the
bridge loan and in addition,  the principals of OPS have pledged their shares of
OPS as security.

                                     - 18 -

<PAGE>

Principal Offices

The  Company's  principal  executive  and  corporate  office  is  provided  on a
month-to-month basis by Chase as part of its agreement with the Company. Chase's
office is located at Suite 1305 - 1090 West Georgia Street,  Vancouver,  British
Columbia, V6E 3V7, Canada.


ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS
--------------------------------------------------------------------------------

The  following  discussion  of the  financial  position,  changes  in  financial
position  and results of operation of the Company for the fiscal years ended May
31,  2002,  2001 and 2000 should be read in  conjunction  with the  accompanying
Audited Financial Statements of the Company and related notes included therein.

The Company's  financial  statements  are prepared in  accordance  with Canadian
GAAP,  the  application  of which,  in the case of the Company,  conforms in all
material   respects  for  the  period   presented  with  U.S.  GAAP  except  for
thedifferences  noted to in Note 12 of the  financial  statements of the Company
included herein. The noon rate of exchange on November 29, 2002, reported by the
United States  Federal  Reserve Bank of New York, for the conversion of Canadian
dollars into United States  dollars was CDN$1.5658  (US$0.6387 = CDN$1.00).  The
effects of inflation  and price  changes  have not had a material  impact on the
Company's operations since its incorporation.

The Company's financial  statements were prepared on a going concern basis which
assumes  that the  Company  will be able to realize  its  assets  and  discharge
liabilities in the normal course of business.

OVERVIEW

On  September  27,  2001,  the  Company  completed  a  reorganization  with  the
shareholders of CalEx, whereby the Company issued 4,346,084 common shares of its
share capital for 100% of the issued and outstanding share capital of CalEx.

Since this  transaction  resulted in the former  shareholders of CalEx acquiring
control of the Company, the exchange has been treated for accounting purposes as
a reverse takeover. In accounting for this transaction:

     i)   CalEx is deemed to be the purchaser and parent  company for accounting
          purposes. Accordingly, its net assets are included in the consolidated
          balance sheets at their historical book value;

     ii)  control of the net assets and  business of the  Company  was  acquired
          effective  September 27, 2001. The  transaction has been accounted for
          as a purchase of the assets and  liabilities  of the Company by CalEx,
          with the assets and liabilities of the Company  recorded at their fair
          values; and

     iii) the  consolidated  statements of operations  and deficit and cash flow
          for the year ended May 31, 2002 include  CalEx's results of operations
          and cash  flow  for the  year  ended  May 31,  2002 and the  Company's
          results of  operations  and cash flow from the  effective  date of the
          business acquisition.  The comparative figures for the years ended May
          31, 2001 and 2000 are those of CalEx.

RESULTS OF OPERATIONS

Fiscal Year Ended May 31, 2002 Compared to Fiscal Year Ended May 31, 2001
-------------------------------------------------------------------------
During the year ended May 31, 2002 the  Company  reported a net loss of $408,713
compared  to a net loss of  $248,035  for the  comparable  period  in 2001.  The
increase  in loss in 2002 was  attributed  to a number of  factors.  General and
administration expenses increased by $135,930, from $108,249 in 2001 to $244,179
in 2002.  During  2001,  the  majority  of the  Company's  overhead  costs  were
reimbursed  by its joint  venture  partners.  During  2002,  the  joint  venture
partners   informed  the  Company  that  they  terminated  their  joint  venture
agreements.  As a result,  the  Company  was not able to  recover a  significant
portion of its overhead costs in 2002.


                                     - 19 -

<PAGE>

With the unsuccessful drilling of the regional California prospects, the Company
has written-off  $39,346 of costs. In addition,  as at May 31, 2002, the Company
had incurred $268,396  associated with the acquisition of the Basil Prospect and
the drilling of the Suisun #25 well. A further  $58,620 was paid by the Company,
subsequent to May 31, 2002, for its share of the side-track. These costs will be
recorded as impairment charges during fiscal 2003.

During  2002,  a write-off  of $74,293 was made to the  receivable  from Westone
Ventures Inc. and Hutton Creek Resources Inc., former joint venture partners. In
addition, the Company wrote-down its portfolio investments by a further $123,375
to its estimated $11,500 fair market value.

Fiscal Year Ended May 31, 2001 Compared to Fiscal Year Ended May 31, 2000
-------------------------------------------------------------------------
During the year ended May 31, 2001, the Company had incurred a loss of $248,035,
compared  to earnings of  $106,130  reported  during the period from  inception,
October 6, 1999 to May 31, 2000.

When  operations  commenced in October 1999, the Company  charged certain of its
joint venture partners an up front fee. This fee, a portion of which was settled
with common shares of the joint venture partners, gave rise to the $252,833 gain
on sale recorded during 2000. No gain on sale was recorded  during 2001.  During
2001, the Company  reviewed the carrying  values of its investment in the common
shares  received  in 2000 and  determined  to make a  write-down  of $100,000 to
reflect an  impairment.  In  addition,  due to changes in the oil and gas sector
during 2001, the Company  agreed that $123,406  would not be charged  through to
its joint  venture  partners but would be absorbed.  These two items account for
substantially  all of the loss  which was  incurred  for 2001.  Interest  income
decreased during 2001 principally due to reduction in interest rates.

Given the nature of the Company's business there are not a substantial amount of
expenditures being borne by the Company; $108,249 for 2001 and $85,865 for 2000.
Each individual expense item, in and of itself, is not a significant cost item.

LIQUIDITY AND CAPITAL RESOURCES

The Company has funded its  operations  from the sale of its  securities and the
joint venture of its oil and gas prospects. With the unsuccessful outcome at the
Basil Prospect, the Company no longer holds any significant interests in oil and
gas properties and is not generating  operating cash flow to acquire  additional
oil and gas  properties  and/or meeting its ongoing  obligations.  As at May 31,
2002, the Company had a working  capital  deficiency of $71,300 and  non-current
indebtedness of $58,920.  The future  viability of the Company is dependent upon
the continued financial support of the Company's creditors and shareholders, the
ability to generate  additional  financing  to satisfy  future  working  capital
requirements and, in the longer term, the generation of profit and positive cash
flow from business operations.  There are no assurances that the Company will be
able to obtain adequate financings,  complete its proposed acquisition of OPS or
generate sufficient cash flows.

EXPLORATION EXPENDITURES

During  fiscal  2001 and 2002,  the  Company  incurred  $309,841  and  $287,045,
respectively, on the acquisition and exploration of its petroleum interests. The
majority of these properties were farmed out to joint venture partners.


ITEM 6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
--------------------------------------------------------------------------------

DIRECTORS AND SENIOR MANAGEMENT

The following  table sets forth the name,  position with the Company,  principal
occupation  and period of service of the Company's  officers and directors as at
the date of this annual report:



                                     - 20 -

<PAGE>

The names, positions held with the Company and terms of office of each director
and officer of the Company as of the date of this report, are as follows:

                      POSITION WITH               TERM OF OFFICE
NAME                  THE COMPANY                (for each office held)
-----------------     -----------------------    -------------------------------
Desmond O'Kell(1)     President                  October 27, 2002 to present
                      Chief Financial Officer    September 27, 2001 to present
                      Director                   September 27, 2001 to present
                      Corporate Secretary        September 27, 2001 to present

John Behr(1)          Director                   September 27, 2001 to present

Nick DeMare(1)        Director                   Dec. 10, 1999 to Sept. 27, 2001
                                                 and
                                                 October 27, 2002 to present

(1)  Member of the Audit Committee.

There are no family relationships between any directors or executive officers of
the Company. To the best of the Company's  knowledge,  there are no arrangements
or understandings  with major  shareholders,  customers,  suppliers,  or others,
pursuant to which any of the Company's  officers or directors was selected as an
officer or director of the Company.

Set forth  below are  brief  descriptions  of  recent  employment  and  business
experience of the Company's officers and directors.

Desmond O'Kell
--------------
Desmond  O'Kell,  age 36, has been the  Managing  Partner of Eland  Jennings,  a
public relations firm located in Edmonton,  Alberta,  Canada,  since March 1998.
Mr. O'Kell is responsible  for public  relations and financing  activities,  and
communications  with  analysts,  brokers and  institutions  for Eland  Jennings'
clients.  From  September  1995 until February 1998, Mr. O'Kell was the Canadian
Manager of Brocker  Technology  Group,  a  communications  company with its main
office in Auckland,  New Zealand.  Mr. O'Kell was  responsible  for managing the
day-to-day  operations of Brocker's  Canadian office.  From August 1989 to March
1995,  Mr.  O'Kell was the  President  and a director of Telesis Ind.  Group,  a
manufacturing  company  located in Edmonton,  Alberta,  Canada.  Mr.  O'Kell was
responsible for supervising Telesis' manufacturing, sales and distribution.

John M. Behr
------------
John M.  Behr,  age 42,  has  over 16  years of  experience  in the  exploration
industry.  In 1984,  he  started  his  career  as a  research  assistant  at the
University of Western  Ontario.  Following his work at the University of Western
Ontario, he was employed by Geo-X Systems, Ltd., Calgary, Alberta, Canada, where
he helped design and build one of the first seismic interpretation workstations.
He joined Shell Canada Ltd. in 1989, where he worked on geophysical  processing,
system  analysis  and  structural  interpretation  projects.  He  authored  many
internal technical papers,  including original work on time and depth migration.
Since  1997,  Mr.  Behr has been  employed by Renata  Resources  Inc.,  Calgary,
Alberta, Canada. Mr. Behr is a Senior Geophysicist for Renata and is involved in
all aspects of the exploration process.

Mr. Behr graduated from the University of Western Ontario with a H.B. Sc. degree
in  Geophysics  in  1984.  He  is  a  member  of  the  Society  for  Exploration
Geophysicists  and the  Association of  Professional  Engineers,  Geologists and
Geophysicists of Alberta.

Nick DeMare
-----------
Nick DeMare,  age 47, holds a Bachelor of Commerce degree from the University of
British  Columbia and is a member in good standing of the Institute of Chartered
Accountants  of British  Columbia.  Since  May,  1991,  Mr.  DeMare has been the
President  of  Chase,  a  private  company  which  provides  a  broad  range  of
administrative,   management  and  financial  services  to  private  and  public
companies  engaged  in  mineral  exploration  and  development,  gold and silver
production,  oil and gas  exploration  and production and venture  capital.  Mr.
DeMare  indirectly owns 100% of Chase. Mr. DeMare currently serves as an officer
and director of other public reporting companies.

                                     - 21 -

<PAGE>

The  Company  has  not  entered  into  any   non-competition  or  non-disclosure
agreements with any of the directors or officers of the Company.

BOARD PRACTICES

Each officer's and director's  term of office shall expire at the Company's next
annual general  meeting.  The Company does not have an executive  committee or a
compensation  committee.  The  Company's  audit  committee  is  responsible  for
reviewing the  Company's  financial  statements  before they are approved by the
Company's directors.

There are no contracts  between the Company and any of the directors which would
provide benefits to any director upon termination of employment.

Audit Committee
---------------
The Company's Audit Committee must be comprised of at least three directors, the
majority of whom are not employees,  control persons or members of management of
the Company or any of its  associates or  affiliates.  The board of directors of
the Company,  after each annual shareholders' meeting must appoint or re-appoint
an audit  committee.  As of the date of this annual  report,  the members of the
audit committee were Desmond O'Kell, John Behr and Nick DeMare.

The Audit Committee must review the annual  financial  statements of the Company
before they are approved by the board of directors of the Company.  The board of
directors of the Company must review, and if considered appropriate, approve the
annual  financial   statements  of  the  Company  before   presentation  to  the
shareholders of the Company.

Compensation Committee
----------------------
The Company does not have a compensation committee.

COMPENSATION

The Company does not compensate its directors in their capacities as such.

During the fiscal year ended May 31,  2002,  the  directors  and officers of the
Company,  as a group, had received or charged the Company a total of $90,817 for
services  rendered  by the  directors  and  officers or  companies  owned by the
individuals.

The Company is required,  under applicable securities  legislation in Canada, to
disclose to its shareholders  details of compensation  paid to its directors and
officers.  The  following  fairly  reflects all material  information  regarding
compensation  paid by the Company to its  directors  and officers for its fiscal
year ended May 31, 2002.

Executive Compensation
----------------------
Compensation of Named Executive Officers

The Company is required,  by the Proxy and Information  Circular  Regulations to
the Business  Corporations  Act (Yukon)  ("Yukon  Regulations")  and  applicable
securities legislation in British Columbia ("B.C. Regulations"),  to disclose to
its  shareholders  details of  compensation  paid to its  directors and officers
under applicable Canadian Law.

The following table  discloses,  to the extent required by the B.C.  Regulations
and Yukon Regulations,  information with respect to executive  compensation paid
by the Company to the Named Executive  Officers indicated for the fiscal periods
ended May 31, 2000, 2001 and 2002.

"Named  Executive  Officers"  include  the CEO,  despite the amount of the CEO's
compensation and each of the four most highly  compensated  executive  officers,
other than the CEO,  who were  serving as  executive  officers at the end of the
most recently  completed  financial year and whose total salary and bonus during
the most recently completed financial year was CDN$40,000 or more as required by

                                     - 22 -

<PAGE>

the Yukon  Regulations.  In addition,  disclosure is required for any individual
whose  salary  and  bonus  during  the  most  recent  fiscal  year  was at least
CDN$40,000, whether or not they were executive officers at the end of the fiscal
year.  During the fiscal  year ended May 31,  2002,  the  Company  had two Named
Executive  Officers,  Ted  Carlsen,  the former  President  and  Director of the
Company  and Donald W.  Busby,  the former  President,  CEO and  Director of the
Company.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                           ANNUAL COMPENSATION                        LONG TERM COMPENSATION
                                    ----------------------------------       ---------------------------------------
                                                                                       AWARDS                PAYOUTS
                                                                             ---------------------------     -------
                                                                OTHER         SECURITIES     RESTRICTED                    ALL
                                                                ANNUAL          UNDER         SHARES OR                   OTHER
       NAME AND                                                COMPEN-       OPTIONS/SARS    RESTRICTED       LTIP       COMPEN-
  PRINCIPAL POSITION     YEAR(1)      SALARY         BONUS      SATION         GRANTED       SHARE UNITS     PAYOUTS     SATION
                                        ($)           ($)        ($)             (#)             ($)           ($)         ($)
--------------------     -------    ----------       -----     -------       ------------    -----------     -------     -------
<S>                     <C>       <C>              <C>         <C>        <C>                  <C>           <C>         <C>
Ted Carlsen(2)            2002      $90,817(3)        Nil        Nil         250,000/Nil         N/A           N/A         Nil
former President          2001          N/A           N/A        N/A             N/A             N/A           N/A         N/A
                          2000          N/A           N/A        N/A             N/A             N/A           N/A         N/A

Donald W. Busby(2),       2002          Nil           Nil        Nil           Nil/Nil           N/A           N/A         Nil
former  President         2001          Nil           Nil        Nil         160,000/Nil         N/A           N/A         Nil
and Chief Executive       2000          Nil           Nil        Nil           Nil/Nil           N/A           N/A         Nil
Officer
</TABLE>

(1)  Fiscal years ended May 31.
(2)  On September 27, 2001, the Company  completed the  acquisition of CalEx, on
     which date Mr.  Busby  resigned  as the  President  and a  Director  of the
     Company and Mr.  Carlsen was  appointed the President and a Director of the
     Company.  On October 7, 2002, Mr.  Carlsen  resigned as the President and a
     Director of the Company.
(3)  Includes  $33,332  salaries  paid to Mr.  Carlsen  prior  to the  Company's
     acquisition of CalEx.

Long-Term Incentive Plan Awards

Long-term  incentive plan awards ("LTIP") means any plan providing  compensation
intended to serve as an incentive for  performance to occur over a period longer
than one  financial  year  whether  performance  is  measured  by  reference  to
financial  performance  of the  Company  or an  affiliate,  or the  price of the
Company's common shares but does not include option or stock appreciation rights
plans or plans for compensation  through restricted shares or units. The Company
did not grant any LTIP's  during the most recently  completed  fiscal year ended
May 31, 2002.

Stock Appreciation Rights

Stock appreciation  rights ("SAR's") means a right,  granted by an issuer or any
of its subsidiaries as compensation for services  rendered or in connection with
office or  employment,  to receive a payment of cash or an issue or  transfer of
securities  based  wholly  or in part on  changes  in the  trading  price of the
Company's  common  shares.  There were no SAR's granted during the most recently
completed fiscal year ended May 31, 2002 to the Named Executive  Officers of the
Company.

Options Granted and Exercised during the Most Recently Completed Financial Year

The  following  stock  options were  granted to the  Company's  Named  Executive
Officers during the fiscal year ended May 31, 2002:


                                     - 23 -

<PAGE>
<TABLE>
<CAPTION>

                                                % OF TOTAL                           MARKET VALUE OF
                                               OPTIONS/SARS                       SECURITIES UNDERLYING
                         SECURITIES UNDER       GRANTED TO        EXERCISE OR      OPTIONS/SARS ON THE
                           OPTIONS/SARS        EMPLOYEES IN        BASE PRICE         DATE OF GRANT
    NAME                     GRANTED         FISCAL YEAR (1)      ($/SECURITY)         ($/SECURITY)       EXPIRATION DATE
---------------          ---------------     ---------------      ------------    ---------------------   ---------------
<S>                     <C>                     <C>               <C>               <C>                   <C>    <C>
Ted Carlsen               250,000 / N/A           31.25%            CDN$0.60          CDN$0.20 / N/A         Sept.28/04

Donald W. Busby             Nil / N/A              N/A                N/A               N/A / N/A               N/A

</TABLE>
(1)  Percentage  of all  options  granted  during the fiscal  year ended May 31,
     2002.

No stock options were exercised during the fiscal year ended May 31, 2002 by the
Named Executive Officers. The following table sets out the fiscal year-end value
of  unexercised  options of the Named  Executive  Officers as at the fiscal year
ended May 31, 2002:
<TABLE>
<CAPTION>
                                                                                                 VALUE OF UNEXERCISED
                                                                   UNEXERCISED OPTIONS/SARS    IN-THE-MONEY OPTIONS/SARS
                              SECURITIES                              AT FISCAL YEAR END          AT FISCAL YEAR END
                              ACQUIRED ON          AGGREGATE                (#)(3)                     ($)(3)(4)
                               EXERCISE         VALUE REALIZED
     NAME                       (#)(1)              ($)(2)         EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
----------------              -----------       --------------     -------------------------   -------------------------
<S>                             <C>                 <C>                <C>                       <C>
Ted Carlsen                       Nil                 Nil                 250,000/N/A                     Nil

Donald W. Busby                   Nil                 Nil                 160,000/N/A               CDN$40,000/N/A
</TABLE>

(1)  Number of shares acquired on the exercise of the options.

(2)  Calculated  using  the  difference  between  the  closing  price on the TSX
     Venture on the date of exercise and the exercise price of the options.

(3)  As  freestanding  SARs have not been granted,  the number relates solely to
     options.

(4)  Calculated  using  the  closing  price of the  Company's  shares on the TSX
     Venture on  December  21, 2001 of  CDN$0.45,  being the last day the shares
     traded prior to the halt in the trading of the Company's  shares,  less the
     exercise prices the options.

Defined Benefit or Actuarial Plan

The Company does not provide retirement benefits for directors or officers.

Termination of Employment, Change of Responsibilities and Employment Contracts

The Company has no plans or arrangements in respect of remuneration  received or
that may be  received by the Named  Executive  Officers  in the  Company's  most
recently  completed  financial  year or  current  financial  year in  respect of
compensating  such  officers in the event of  termination  of  employment  (as a
result  of  resignation,  retirement,  change of  control,  etc.) or a change in
responsibilities  following  a  change  of  control,  where  the  value  of such
compensation exceeds CDN$100,000 per executive officer.

Compensation of Directors

The Company  does not  compensate  its  directors in their  capacities  as such,
although  directors of the Company are reimbursed for their expenses incurred in
connection with their services as directors.

The following table sets out the number of stock options granted to directors of
the  Company  who are not the Named  Executive  Officers  during the fiscal year
ended May 31, 2002, on an aggregate basis:

                                     - 24 -

<PAGE>
<TABLE>
<CAPTION>
                                                 % OF TOTAL                            MARKET VALUE OF
                                                OPTIONS/SARS                             SECURITIES
                                                 GRANTED TO                              UNDERLYING
                         SECURITIES UNDER       EMPLOYEES IN         EXERCISE OR       OPTIONS/SARS ON
                           OPTIONS/SARS        FISCAL YEAR AND       BASE PRICE       THE DATE OF GRANT
         NAME                 GRANTED         INTERIM PERIOD(1)     ($/SECURITY)        ($/SECURITY)       EXPIRATION DATE
----------------------   ---------------      -----------------     ------------      -----------------    ---------------
<S>                       <C>                    <C>                <C>               <C>                  <C>
 Directors other than       450,000/N/A            56.25%             CDN$0.60          CDN$0.20/N/A          Sept.28/04
    Named Executive
       Officers
          (#)
       three(3)
</TABLE>
(1)  Percentage  of all  options  granted  during the fiscal  year ended May 31,
     2002.

No stock options were exercised during the fiscal year ended May 31, 2002 by the
directors of the Company who are not the Named Executive Officers. The following
table sets out the fiscal  year-end  value of  unexercised  options  held by the
directors who are not the Named  Executive  Officers as of the fiscal year ended
May 31, 2002:
<TABLE>
<CAPTION>
                                                                                                 VALUE OF UNEXERCISED
                                                                   UNEXERCISED OPTIONS/SARS    IN-THE-MONEY OPTIONS/SARS
                              SECURITIES                              AT FISCAL YEAR END          AT FISCAL YEAR END
                              ACQUIRED ON          AGGREGATE                (#)(3)                     ($)(3)(4)
                               EXERCISE         VALUE REALIZED
          NAME                  (#)(1)              ($)(2)         EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
  --------------------        -----------       --------------     -------------------------   -------------------------
<S>                             <C>               <C>                   <C>                          <C>
  Directors other than            Nil                 Nil                 450,000/N/A                   Nil/N/A
     Named Executive
        Officers
           (#)
        three(3)
</TABLE>

(1)  Number of shares acquired on the exercise of the options.
(2)  Calculated  using  the  difference  between  the  closing  price on the TSX
     Venture on the date of exercise and the exercise price of the options.
(3)  As  freestanding  SARs have not been granted,  the number relates solely to
     the options.
(4)  Calculated  using  the  closing  price of the  Company's  shares on the TSX
     Venture on  December  21, 2001 of  CDN$0.45,  being the last day the shares
     traded prior to the halt of the trading of the Company's  shares,  less the
     exercise price of CDN$0.60 per share.


Indebtedness of Directors, Executive Officers And Senior Officers
-----------------------------------------------------------------
During the fiscal year ended May 31, 2001, the Company,  through CalEx, provided
a loan of $35,000 to Ted  Carlsen,  the former  President  and  Director  of the
Company,  to acquire  350,000 common shares of the Company (the "Loan  Shares").
The Company had received a promissory  note for the loan. The promissory note is
non-interest  bearing and is repayable  either in part or in full as required by
the Company upon the  disposition  of part or all of the Loan Shares held by Mr.
Carlsen.  During the fiscal  year ended May 31,  2002,  the  Company  received a
partial payment of $5,000 and, as at May 31, 2002,  300,000 Loan Shares remained
pledged  as  security  for the  remaining  principal  balance  of $30,000 of the
promissory note.

On June 18, 2002, Mr. Carlsen  agreed to sell,  subject to regulatory  approval,
650,000  common shares of the Company,  which includes the remaining Loan Shares
pledged as security for the $30,000  promissory note, to Mr. Desmond O'Kell. Mr.
O'Kell has agreed to assume the indebtedness and terms of the promissory note.

On October 7, 2002, Mr. Carlsen  resigned as the President and a Director of the
Company and Mr. O'Kell was appointed the President of the Company.


                                     - 25 -

<PAGE>

Otherwise,  during the Company's  last  completed  financial  year ended May 31,
2002, no current or former director,  executive officer or senior officer of the
Company,  proposed  management  nominee  for  election  as a  director  or  each
associate  or  affiliate of any such  director,  executive or senior  officer or
proposed  nominee  is or  has  been  indebted  to  the  Company  or  any  of its
subsidiaries  or  is  and  has  been  indebted  to  another  entity  where  such
indebtedness  is or has been the  subject  of a  guarantee,  support  agreement,
letter of credit or other similar  arrangement or understanding  provided by the
Company or any of its subsidiaries, other than routine indebtedness.

Employees

As at the date of this annual report,  the Company had no employees.  Certain of
the  Company's  officers and  directors  devote less than  full-time  employment
equivalent  to the affairs of the Company.  During the fiscal year ended May 31,
2002, the Company  employed no full-time  employees and one part-time  employee.
During the fiscal year ended May 31, 2001,  the Company  employed one  full-time
employee and no part-time employees.

Share Ownership

The following table sets forth certain  information  regarding  ownership of the
Company's  shares by each current  officer and director of the Company,  and all
officers and directors as a group, as of the date of this annual report.


                                         COMMON SHARE          PERCENTAGE OF(1)
NAME AND POSITION(S)                      OWNERSHIP           OUTSTANDING SHARES
-----------------------------------      ------------         ------------------

Desmond O'Kell                           1,643,500(2)               21.49%
President, Chief Financial Officer,
Secretary and Director

John Behr                                    5,000                   0.07%
Director

Nick DeMare                                660,001(3)                8.63%
Director                                 ---------                  -----

Officers and Directors,
as a group (3 persons)                   2,308,501                  30.19%
                                         =========                  =====


(1)  Based on  7,646,085  shares of common stock  outstanding  as of the date of
     this annual report.
(2)  On June 18, 2002, Mr. Ted Carlsen, the former President and Director of the
     Company,  and Mr.  O'Kell  entered  into an agreement  whereby,  subject to
     regulatory approval, Mr. Carlsen will sell 650,000 shares of the Company to
     Mr. O'Kell. The figures do not include the sale of the shares.
(3)  Includes 600,001 shares held directly and 60,000 shares held through Chase.

Options

On August 22, 2001, the shareholders of the Company approved the Company's Stock
Option Plan.  The Stock Option Plan  provides  for equity  participation  in the
Company by the  directors,  officers  and  employees  of the  Company  and their
affiliates,  employees of persons providing  management services to the Company,
and  consultants to the Company and its  affiliates,  through the acquisition of
common shares  pursuant to the grant of options to purchase  common shares.  The
Stock  Option  Plan is  administered  by the board of  directors  or, in certain
circumstances,  a committee of the board of directors. Options may be granted to
purchase the Company's common shares on such terms that the administrator of the
Stock Option Plan may determine  within the limitations of the Stock Option Plan
and  subject to the rules of  applicable  regulatory  authorities.  The  maximum
aggregate  number of common  shares to be reserved and  authorized  to be issued
pursuant to options  granted  under the Stock  Option Plan is  1,518,217  common
shares..

The exercise  price for options  granted  under the Stock Option Plan may not be
less than the  closing  price of the  common  shares on the TSX  Venture  on the
trading  day  prior  to the  date of  grant  (less  up to the  maximum  discount
permitted by applicable TSX Venture  policies).  Options granted under the Stock
Option  Plan are subject to a minimum 18 month  vesting  schedule  whereby  each
option will vest equally on a quarterly  basis,  or such other more  restrictive

                                      - 26 -

<PAGE>

vesting  schedule as the  administrator  of the Stock Option Plan may determine.
Options are  non-assignable and are exercisable for a period of up to five years
from the date the  option is  granted,  subject  to  earlier  termination  after
certain  events such as the  optionee's  cessation  of service to the Company or
death.  Under TSX Venture rules all stock options granted under the Stock Option
Plan and any Common Shares issued  thereunder  will be subject to a minimum four
month hold period from the date of grant of the option.

Insiders of the Company are not  permitted  to hold  options  entitling  them to
acquire greater than 10% of the Company's  outstanding  common shares. The Stock
Option Plan is effective until ten years from its commencement, unless the Stock
Option Plan is extended or earlier  terminated by the administrator of the Stock
Option Plan in accordance with the terms thereof

The following table sets forth certain information regarding options held by the
Company's  officers,  directors  and  employees to acquire  common shares of the
Company, as of the date this of annual report:

<TABLE>
<CAPTION>
                            REASONS FOR STOCK OPTION
NAME                                 GRANT             NUMBER         EXERCISE PRICE       EXPIRY DATE
--------------------------       --------------      ----------       --------------       -------------------
                                                                           CDN$
<S>                               <C>                 <C>               <C>             <C>
Donald W. Busby(1)                  Director            160,000            0.20            December 21, 2003
Chase Management Ltd.(1)(2)         Director             35,000            0.20            December 21, 2003
Nick DeMare(1)                      Director             60,000            0.20            December 21, 2003
William Lee(1)                      Director             15,000            0.20            December 21, 2003
Harvey Lim(1)                       Employee             15,000            0.20            December 21, 2003
John Behr                           Director            100,000            0.60            September 28, 2004
Ted Carlsen                         Director            250,000            0.60            January 5, 2003(3)
Desmond O'Kell                      Director            250,000            0.60            September 28, 2004
                                                     ----------
                     TOTAL                              885,000
                                                     ==========
</TABLE>

(1)  Options remain granted under arrangements negotiated.
(2)  Chase is a private company indirectly wholly-owned by Mr. DeMare.
(3)  Mr.  Carlsen  resigned  as the  President  and a Director of the Company on
     October  7,  2002.  His  options  remain   outstanding  90  days  from  his
     resignation.


ITEM 7.   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------


PRINCIPAL HOLDERS OF VOTING SECURITIES

The following table sets forth certain  information  regarding  ownership by all
persons who  beneficially  own greater than five  percent (5%) of the  Company's
outstanding shares, as of the date of this annual report:


                                                               PERCENTAGE OF
NAME                               NO. OF SECURITIES       OUTSTANDING SHARES(1)
--------------------------         -----------------       ---------------------
Desmond O'Kell                      1,893,500(2)(3)               23.98%
St. Albert, Alberta

Donald W. Busby                     1,560,000(4)                  19.98%
Bakersfield, California

Nick DeMare                           755,001(5)                   9.75%
Burnaby, British Columbia

Ted Carlsen                           900,000(3)(6)               11.40%
Bakersfield, California

                                      - 27 -
<PAGE>

(1)  Where  persons  listed on this  table  have the right to obtain  additional
     shares of common  stock  through  the  exercise of  outstanding  options or
     warrants or the  conversion of convertible  securities  within 60 days from
     the date of this annual report,  these  additional  shares are deemed to be
     outstanding  for the purpose of computing  the  percentage  of common stock
     owned by such persons, but are not deemed to be outstanding for the purpose
     of computing the percentage  owned by any other person.  Based on 7,646,085
     shares of common stock outstanding as of the date of this annual report.
(2)  On June 18,  2002,  Messrs.  Carlsen and O'Kell  entered  into an agreement
     whereby,  subject to  regulatory  approval,  Mr.  Carlsen will sell 650,000
     shares of the  Company to Mr.  O'Kell.  These  figures do not  reflect  the
     proposed sale of the shares.
(3)  Includes  options  held by Mr.  O'Kell to  acquire  an  additional  250,000
     shares.
(4)  These  shares are held in the name of the Donald W. Busby 1999  Irrevocable
     Trust, of which Mr. Busby is the grantor of the trust and retains the power
     to replace the  trustee.  Includes  options held by Mr. Busby to acquire an
     additional 160,000 shares.
(5)  Includes  options  held by Mr.  DeMare and Chase to  acquire an  additional
     60,000 shares and 35,000 shares, respectively.
(6)  Includes  options  held by Mr.  Carlsen to acquire  an  additional  250,000
     common shares which are set to expire on January 5, 2003.

None of the Company's  principal  shareholders have different voting rights than
any of the Company's other common shareholders.

SIGNIFICANT CHANGES IN OWNERSHIP

On September 27, 2001, the Company issued  4,346,084 common shares to the former
shareholders  of  CalEx as a  result  of its  acquisition  of  CalEx  under  the
Agreement and Plan of Merger.


ESCROWED SHARES

(1)  Capital Pool Escrow Shares

Pursuant to the Capital Pool Company Policy, all common shares which were issued
prior to completion of a qualifying  transaction  and were  beneficially  owned,
directly or  indirectly,  by a related  party (a person who was a related  party
prior to the completion of the qualifying  transaction)  are required to be held
in escrow,  including  common  shares  acquired by a related  party prior to the
Company's  initial public offering and common shares acquired by a related party
pursuant to the Company's initial public offering. The shares held in escrow may
be voted by the owner of the shares. Any common shares acquired in the secondary
market prior to the  qualifying  transaction by a control person of the Company,
will also be held in escrow.  Any common shares  acquired by any person prior to
the offering at less than the initial public offering price must also be held in
escrow. Release of the common shares from escrow is subject to completion by the
Company of a qualifying transaction.

The  Company,  Donald W. Busby,  Nick DeMare and William Lee have entered into a
discount seed share capital escrow  agreement  dated June 28, 2000 with Montreal
Trust Company of Canada  pursuant to which  2,200,001  seed capital  shares were
held in escrow (the "Escrow Agreement").  The Escrow Agreement provides that the
common shares held in escrow pursuant to its terms and the beneficial  ownership
thereof may not be sold,  assigned,  hypothecated,  transferred within escrow or
otherwise  dealt with in any manner without the prior written consent of the TSX
Venture.  The capital pool  company  policy  provides  that the TSX Venture will
generally  permit a  transfer  of escrow  shares in an arm's  length  qualifying
transaction  to  incoming  principals  of  the  Company.  In  the  event  of the
bankruptcy of an escrow  shareholder,  provided the TSX Venture does not object,
the escrowed shares may be transferred to the trustees in the bankruptcy or such
person  legally  entitled to the  escrowed  shares  which  shares will remain in


                                     - 28 -

<PAGE>

escrow subject to the Escrow  Agreement.  In the event of the death of an escrow
shareholder,  provided the TSX Venture does not object, the escrowed shares held
by the escrow shareholder will be released from escrow.

As of the date of this annual report, 880,000 common shares, representing 40% of
the original escrowed shares, were released and the following shares remain held
in escrow:


                                                             NUMBER OF COMMON
  NAME OF BENEFICIAL OWNER                                   SHARES IN ESCROW
  -----------------------------------------                  ----------------

  Donald W. Busby 1999 Irrevocable Trust(1)                           840,000

  Nick DeMare                                                         450,001

  William Lee                                                          30,000
                                                                  -----------
          TOTAL:                                                    1,320,001
                                                                  ===========

     (1)  These  common  shares are held in the name of the Donald W. Busby 1999
          Irrevocable  Trust, of which Mr. Busby is the grantor of the trust and
          retains the power to replace the trustee.

The remaining shares in escrow will be released, as to 330,000 common shares, on
each of the 18th,  24th,  30th and 36th month following the initial release date
of September 27, 2001.

(2)  CalEx Escrow Shares

On the  completion  of the  Agreement  and Plan of Merger,  a total of 2,323,500
common shares held by the principals of CalEx  described  below were escrowed in
accordance  with the policies of the TSX Venture (the "Escrowed  Securities") in
connection with the acquisition.  The Escrowed Securities have been deemed to be
Surplus  Securities  and will be released  from escrow on an automatic  six year
time release, at six month intervals, in equal tranches of 5% for the first four
tranches  ending on the 24th month from  September 27, 2001, the date of the TSX
Venture  Notice,  and in equal tranches of 10% for the remaining  eight tranches
ending on the 72nd month from the date of the TSX Venture Notice.

As at the date of this  annual  report,  the  following  shares  remain  held in
escrow.

                                                NUMBER OF COMMON
  NAME OF BENEFICIAL OWNER                      SHARES IN ESCROW
  ------------------------                      ----------------

  Ted Carlsen                                         612,000(1)

  Desmond O'Kell                                    1,479,150
                                                   ----------
          TOTAL:                                    2,091,150
                                                   ==========

     (1)  includes 27,000 common shares held by associates and affiliates of Mr.
          Carlsen

CHANGE OF CONTROL

On January 14,  2002,  the Company  entered  into a letter of intent  whereby it
agreed, subject to shareholder and regulatory approvals,  to acquire 100% of the
issued and  outstanding  common shares of OPS.  Under the terms of the letter of
intent,  the Company  proposes to issue up to 4.8 million  common  shares of the
Company to the shareholders of OPS. No shares will be issued until OPS generates
CDN $4 million in  revenue,  at which time  800,000  shares  will be issued.  An
additional  800,000  shares  will be issued  when a further  CDN $4  million  in
revenue  is  achieved.  Thereafter  800,000  shares  will  be  issued  for  each
incremental CDN $5 million in revenue is achieved,  until all 4.8 million shares
are issued.

OPS is a  privately-owned,  software  development  company  based  in  Edmonton,
Alberta.  The  primary  purpose  of the  business  combination  is to change the
primary  business  focus  of the  Company  from  oil  and  gas  exploration  and
development to the development and utilization of software technology for use in
the oil and gas industry and in particular for  optimization  of oil and gas and
power energy resources.



                                     - 29 -

<PAGE>

The Company has  provided OPS a bridge loan of  CDN$150,000.  The bridge loan is
non-interest  bearing.  OPS has agreed to pledge its assets as security  for the
bridge loan and in addition,  the principals of OPS have pledged their shares of
OPS as security.

In light of the current  market  conditions,  both the Company and OPS recognize
that a  restructuring  of the OPS business plan is required  before the proposed
acquisition can proceed.  The extent of the changes and the amendments,  if any,
to the letter of intent are not known at this time.  The Company  cannot predict
if OPS will be successful in its restructuring.  However, the Company feels that
the restructuring must take place by the end of calendar 2002.

UNITED STATES SHAREHOLDERS

As of the date of this annual  report,  there were  approximately  12 registered
holders of the  Company's  common  shares in the United  States,  with  combined
holdings of 1,152,500  shares,  representing  15.07% of the issued shares of the
Company on November 30, 2002.

CONTROL BY FOREIGN GOVERNMENT OR OTHER PERSONS

To the  best  of the  Company's  knowledge,  the  Company  is  not  directly  or
indirectly owned or controlled by another  corporation,  any foreign government,
or any other natural or legal person.

RELATED PARTY TRANSACTIONS AND PROPOSED COMPENSATION

Other than as  disclosed  below,  for the year ended May 31, 2002 and the period
from June 1, 2002 to October 31,  2002,  the  Company  has not entered  into any
transactions or loans between the Company and any (a) enterprises  that directly
or indirectly through one or more intermediaries,  control or are controlled by,
or are under common control with, the Company;  (b) associates;  (c) individuals
owning,  directly or indirectly,  an interest in the voting power of the Company
that gives them significant influence over the Company, and close members of any
such individuals' family; (d) key management personnel and close members of such
individuals' families; or (e) enterprises in which a substantial interest in the
voting power is owned,  directly or indirectly by any person described in (c) or
(d) or over which such a person is able to exercise significant influence.




     1.   From  inception to May 31, 2002,  the Company  issued common shares to
          its former officers and directors, at CDN$0.10 per share, as follows:

          Shares issued to the Donald W. Busby
             1999 Irrevocable Trust(1)                               1,400,000
          Shares issued to Mr. Nick DeMare                             750,001
          Shares issued to Mr. William Lee                              50,000
                                                                    ----------
               Total                                                 2,200,001
                                                                    ==========

          (1)  These  shares  are held in the name of the  Donald W.  Busby 1999
               Irrevocable Trust, of which Mr. Donald W. Busby is the grantor of
               the trust and retains the power to replace the trustee.

     2.   During the fiscal year ended May 31, 2002 the Company  paid a total of
          $13,092 (2001 - $2001;  2000 - $nil) to Chase for accounting  services
          provided by Chase, a private  corporation owned 100% indirectly by Mr.
          DeMare. Mr. DeMare resigned as a Director of the Company on completion
          of the  acquisition  of CalEx on September  27, 2001.  Mr.  DeMare was
          reappointed as a Director of the Company on October 7, 2002.

     3.   During the fiscal  year ended May 31,  2001,  the  Company  provided a
          working capital loan of $35,000 to Ted Carlsen,  the former  President
          of the Company.  During the fiscal year ended May 31, 2002, $5,000 was
          repaid. See "Indebtedness of Management" below.


                                     - 30 -

<PAGE>

INDEBTEDNESS OF MANAGEMENT

Except as described  below, no director,  officer or promoter or other member of
management of the Company,  or any associate or affiliate of any such person, is
or has been indebted to the Company.

During the fiscal year ended May 31, 2001, the Company,  through CalEx, provided
a loan of $35,000 to Ted  Carlsen,  the former  President  and  Director  of the
Company,  to acquire  350,000 common shares of the Company (the "Loan  Shares").
The Company had received a promissory  note for the loan. The promissory note is
non-interest  bearing and is repayable  either in part or in full as required by
the Company upon the  disposition  of part or all of the Loan Shares held by Mr.
Carlsen.  During the fiscal  year ended May 31,  2002,  the  Company  received a
partial payment of $5,000 and, as at May 31, 2002,  300,000 Loan Shares remained
pledged  as  security  for the  remaining  principal  balance  of $30,000 of the
promissory note.

On June 18, 2002, Mr. Carlsen  agreed to sell,  subject to regulatory  approval,
650,000  common shares of the Company,  which includes the remaining Loan Shares
pledged as security for the $30,000  promissory note, to Mr. Desmond O'Kell. Mr.
O'Kell has agreed to assume the indebtedness and terms of the promissory note.

On October 7, 2002, Mr. Carlsen  resigned as the President and a Director of the
Company and Mr. O'Kell was appointed the President of the Company.

Otherwise,  during the Company's  last  completed  financial  year ended May 31,
2002, no current or former director,  executive officer or senior officer of the
Company,  proposed  management  nominee  for  election  as a  director  or  each
associate  or  affiliate of any such  director,  executive or senior  officer or
proposed  nominee  is or  has  been  indebted  to  the  Company  or  any  of its
subsidiaries  or  is  and  has  been  indebted  to  another  entity  where  such
indebtedness  is or has been the  subject  of a  guarantee,  support  agreement,
letter of credit or other similar  arrangement or understanding  provided by the
Company or any of its subsidiaries, other than routine indebtedness.  Otherwise,
during the  Company's  last  completed  financial  year ended May 31,  2002,  no
director,  executive officer or other officer of the Company,  has been indebted
to the  Company  or is and has  been  indebted  to  another  entity  where  such
indebtedness  is or has been the  subject  of a  guarantee,  support  agreement,
letter of credit or other similar  arrangement or understanding  provided by the
Company, other than through normal business dealings.

CONFLICTS OF INTEREST

The table below shows that certain  directors of the Company are also directors,
officers or shareholders of other companies which are engaged in the business of
acquiring,   developing  and  exploiting  natural  resource   properties.   Such
associations  may give rise to  conflicts  of interest  from  time-to-time.  The
directors  of the Company are  required by law to act honestly and in good faith
with a view to the best  interest of the Company  and to disclose  any  interest
which they may have in any project or opportunity of the Company.  However, each
director has a similar  obligation  to other  companies  for which such director
serves as an officer or director.  The Company has no specific  internal  policy
governing conflicts of interest.  As of the date of this report, no conflicts of
interest have arisen,  except as described  below and above.  Where conflicts of
interests  arose,  the directors of the Company  disclosed  their  interests and
abstained from voting on the transaction.

The following table  identifies the name of each director of the Company and any
company,  which is a  reporting  issuer in Canada,  and for which such  director
currently serves as an officer or director:
<TABLE>
<CAPTION>
PRINCIPAL            REPORTING COMPANY                        CAPACITY                  PERIOD
--------------       ----------------------------             ---------                 ----------------------
<S>                <C>                                     <C>                        <C>
Desmond O'Kell       n/a                                      n/a                       n/a

Nick DeMare          Aladdin Resources Corp.                  Director                  January 2001 - present
                                                              Secretary                 January 2001 - November 2001
                     Andean American Mining Corp.             Secretary                 December 1995 - present
                     California Exploration Ltd.              Director                  October 2002 - present
                     Desert Holdings Inc.                     Director                  October 2002 - present

</TABLE>
                                     - 31 -

<PAGE>

<TABLE>
<CAPTION>
PRINCIPAL            REPORTING COMPANY                        CAPACITY                  PERIOD
--------------       ----------------------------             ---------                 ----------------------
<S>                <C>                                     <C>                        <C>
                     GGL Diamond Corp.                        Director                  May 1989 - present
                     Golden Peaks Resources Ltd.              Director                  January 1992 - present
                     Hilton Petroleum Ltd.                    Director                  October 1989 - present
                     Hydromet Technologies Limited            Director                  September 2000 - present
                     Kookaburra Resources Ltd.                Director                  June 1988 - present
                     Trimark Energy Ltd.                      Director                  January 1996 - present
                     Tumi Resources Limited                   Director                  January 2000 - present

John Behr            n/a                                      n/a                       n/a
</TABLE>

There  are no known  existing  or  potential  conflicts  of  interest  among the
Company,  promoters,  directors,  officers,  principal holders of securities and
persons providing professional services to the Company which could reasonably be
expected to affect an investor's investment decision except as described in this
section.

The  Company  does not have any  agreements  with  its  officers  or  directors,
including any officers or directors with a conflict of interest, with respect to
the amount of time they must spend on the Company's business.


ITEM 8.   FINANCIAL INFORMATION
--------------------------------------------------------------------------------

FINANCIAL STATEMENTS

Audited  Financial  Statements for the fiscal years ended May 31, 2002, 2001 and
2000.

LEGAL PROCEEDINGS

There are no  material  legal  proceedings  to which the  Company  or CalEx is a
party,  nor to the  best  knowledge  of  management  are any  legal  proceedings
contemplated.

SIGNIFICANT CHANGES

Subsequent  to May 21,  2002,  the Company  incurred  approximately  $105,000 in
expenditures on its petroleum properties. The majority of these costs related to
the  side-track  well on the Basil  Prospect.  The well was  uneconomic  and was
plugged and abandoned.

DIVIDEND POLICY

Since its  inception,  the Company has not paid any  dividends to  shareholders.
Management  does not  anticipate  that the  Company  will pay any  dividends  to
shareholders in the immediate future.


ITEM 9.   THE OFFER AND LISTING.
--------------------------------------------------------------------------------


PRICE HISTORY

The Company's common stock commenced  trading on the TSX Venture on December 21,
2000. The Company's common stock currently trades on the TSX Venture,  under the
symbol "CAX" and CUSIP number 130202 10 4. On December 21, 2001,  the trading of
the Company's  shares were halted to allow for the  announcement of the proposed
acquisition of OPS. The shares have not resumed trading.

The following  table lists the monthly  volume of trading and high and low sales
prices on the TSX  Venture  for  shares of the  Company's  common  stock for the
period from June 1, 2001 to December 21, 2001:


                                     - 32 -

<PAGE>


                 TORONTO VENTURE EXCHANGE STOCK TRADING ACTIVITY

                                   HIGH               LOW
MONTH ENDED                       (CDN$)             (CDN$)              VOLUME
--------------------              ------             ------             -------
December 21, 2001(1)               0.50               0.35              106,500
November 30, 2001                  0.40               0.17               27,000
October 31, 2001                   0.27               0.20               50,500
September 30, 2001                 0.23               0.21               22,000
August 31, 2001                    0.40               0.23               25,350
July 31, 2001(2)                   0.70               0.35              134,000
June 30, 2001(2)                    -                   -                     -

(1)  Trading in the  Company's  shares was halted on December  21, 2001 to allow
     for the  announcement  of the proposed  acquisition of OPS. The shares have
     not resumed trading.

(2)  Trading in the Company's  shares was halted on May 3, 2001 to allow for the
     announcement  of the  acquisition of CalEx.  The shares resumed  trading on
     July 12, 2001.

The   Company's   common   shares  have  been  approved  for  quotation  on  the
Over-the-Counter  Bulletin  Board (the "OTC")  system  operated by the  National
Association of Securities  Dealers under the symbol CAXVF;  the initial trade of
the Company's common shares on the OTC system occurred on January 22, 2002.

                    OTC BULLETIN BOARD STOCK TRADING ACTIVITY


                                                    SALES PRICE (US$)
                                                -------------------------
YEAR ENDED                    VOLUME            HIGH                 LOW

May 31, 2002                 2,530,800          $0.43               $0.20


                                                    SALES PRICE (US$)
                                                -------------------------
QUARTER ENDED                 VOLUME            HIGH                 LOW

November 31, 2002                4,500          $0.03               $0.03
August 31, 2002                  2,500          $0.15               $0.15
May 31, 2002                 1,525,500          $0.43               $0.20
February 28, 2002            1,005,300          $0.40               $0.32



                                                    SALES PRICE (US$)
                                                -------------------------
MONTH ENDED                   VOLUME            HIGH                 LOW

November 30, 2002                4,500          $0.03               $0.03
October 31, 2002                     -          $ -                 $ -
September 30, 2002                   -          $ -                 $ -
August 31, 2002                      -          $ -                 $ -
July 31, 2002                        -          $ -                 $ -
June 30, 2002                    2,500          $0.15               $0.15


These above  quotations  reflect  inter-dealer  prices without  retail  mark-up,
markdown, or commissions and may not necessarily represent actual transactions.

The OTC-BB is smaller and less liquid than the major  securities  markets in the
United States. The trading volume of our shares on the OTC-BB has been volatile.
Consequently,  shareholders  in the United  States may not be able to sell their
shares at the time and at the price they desire.


                                     - 33 -

<PAGE>



ITEM 10.  ADDITIONAL INFORMATION
--------------------------------------------------------------------------------


ARTICLES OF CONTINUANCE AND BYLAWS

The  Company  was  incorporated  under the laws of British  Columbia,  Canada on
December 10, 1999 by  registration  of its Memorandum and Articles with the B.C.
Registrar of Companies under the  incorporation  number 597349. On September 25,
2001,  the  Company  was  continued  to  the  Yukon  Territory,  Canada  by  the
registration  of its  Articles  of  Continuance  with  the  Yukon  Registrar  of
Corporations.

The Company has previously been engaged in the business of acquiring,  exploring
and  developing  crude oil and  natural  gas  prospects  in the San  Joaquin and
Sacramento Basins in California,  United States. See "Item 4. Information on the
Company." The following is a summary of all material provisions of the Company's
Articles of Continuance and Bylaws and certain  provisions of the Yukon Business
Corporations Act (the "Yukon Act"), applicable to the Company:

A.   DIRECTOR'S  POWER TO VOTE ON A PROPOSAL,  ARRANGEMENT  OR CONTRACT IN WHICH
     THE DIRECTOR IS MATERIALLY INTERESTED

     A director or officer who is a party to, or who is a director or officer of
     or has a  material  interest  in any  person  who is a party to, a material
     contract or proposed  material contract must disclose the nature and extent
     of his interest in accordance with the Yukon Act. A director who holds such
     material  interest may not vote on the  transaction  but will be counted in
     the quorum  present at the meeting at which such vote is taken.  A director
     that is a party to a material contract or proposed material contract cannot
     vote on any resolution to approve the contract unless the contract is:

     1.   an  arrangement  by way of security  for money lent to or  obligations
          undertaken by a director,  or by a body  corporate in which a director
          has an interest, for the benefit of the Company or an affiliate,

     2.   a  contract  relating  primarily  to a  director's  remuneration  as a
          director, officer, employee or agent of the Company or an affiliate;

     3.   a contract for purchasing and maintaining insurance to cover directors
          against liability incurred by them as directors as specified under the
          Yukon Act;

     4.   a contract  for the  indemnification  of a director  by the Company as
          specified under the Yukon Act; or

     5.   a contract with an affiliate.

B.   DIRECTOR'S  POWER,  IN  THE  ABSENCE  OF AN  INDEPENDENT  QUORUM,  TO  VOTE
     COMPENSATION TO THEMSELVES OR ANY MEMBERS OF THEIR BODY

     The  compensation  of the  directors is governed by the  Company's  By-laws
     which allow for the  determination  of remuneration to be paid by the Board
     of Directors.

C.   BORROWING POWERS EXERCISABLE BY THE DIRECTORS

     The directors may, on behalf of the Company:

     1.   borrow money on the credit of the Company;

     2.   issue, reissue, sell or pledge debt obligations of the Company;

     3.   give a guarantee on behalf of the Company to secure  performance of an
          obligation of any person,  subject to certain  conditions  detailed in
          section 46 of the Yukon Act; or


                                     - 34 -

<PAGE>



     4.   mortgage,  hypothecate, pledge or otherwise create a security interest
          in all or any property of the Company,  owned or subsequently acquired
          to secure any obligation of the Company.

D.   RETIREMENT AND NON-RETIREMENT OF DIRECTORS UNDER AN AGE LIMIT REQUIREMENT

     There are no such  provisions  applicable to the Company under its Articles
     of Continuance, Bylaws or the Yukon Act.

E.   NUMBER OF SHARES REQUIRED FOR A DIRECTOR'S QUALIFICATION

     A director of the Company is not be required to hold a share in the capital
     of the Company as qualification of his office.

DESCRIPTION OF COMMON SHARES

The authorized  capital of the Company consists of an unlimited number of common
shares without par value.  A complete  description is contained in the Company's
Articles of Continuance.

Of the Company's  unlimited  share capital,  a total of 7,646,085  common shares
were issued and outstanding as of November 30, 2002. All of the common shares of
the Company rank equally as to voting rights, participation in a distribution of
the assets of the Company on a  liquidation,  dissolution  or  winding-up of the
Company and the  entitlement of dividends.  The holders of the common shares are
entitled to receive notice of all shareholder meetings and to attend and vote at
such  meetings.  Each common share  carries  with it the right to one vote.  The
common shares do not have preemptive or conversion  rights.  In addition,  there
are no sinking fund or redemption provisions applicable to the common shares.

The  declaration  of dividends on the common shares of the Company is within the
discretion  of the Company's  Board of  Directors.  The Company has not paid any
dividends on its common  shares and has no policy with respect to the payment of
dividends.

The Company's  issued and  outstanding  common shares are not subject to further
capital  calls by the  Company  and there  are no  provisions  in the  Company's
Articles of  Continuance or Bylaws or the Yukon Act  discriminating  against any
existing or  prospective  holder of the  Company's  common shares as a result of
such shareholder owning a substantial number of shares.

Neither the  Articles  of  Continuance  nor the Bylaws of the  Company  have any
limitations on non-resident or foreign ownership of the Company's common shares.

The Yukon Act provides that the rights and  provisions  attached to any class of
shares may not be amended unless consented to by a separate resolution passed by
a majority  of not less than 2/3 of the votes  cast,  in person or by proxy,  by
holders of shares of that class.

SHAREHOLDER MEETINGS

The  Company's  first annual  general  meeting  must take place within  eighteen
months of the date of its incorporation and thereafter an annual general meeting
will  be  held  not  later  than  fifteen   months  from  its  last  meeting  of
shareholders, at such time and place as may be determined by the directors.

A notice of record date advising of the Company's annual general meeting and the
date for which the  determination  of shareholders is to be fixed must be issued
seven days in advance of the record  date.  The notice of  meeting,  information
circular,  financial  statements and proxy are to be mailed to the  shareholders
not less than 25 days prior to the meeting date. A quorum for the transaction of
business  at a  general  meeting  is  two  shareholders  present  in  person  or
represented by proxy representing a minimum of 5% of the issued voting shares in
the Company.


                                     - 35 -

<PAGE>



Only members who are registered  holders of the Company's shares at the close of
business  on the record  date (a date  which is not more than 50 days,  nor less
than 35 days prior to the date of the meeting) who either  attend the meeting or
who have  completed  and  delivered a form of proxy in the manner and subject to
the provisions described above shall be entitled to vote or to have their shares
voted at the meeting.

On a show of hands,  every person who is present and entitled to vote shall have
one  vote.  Whenever  a vote by show of  hands  shall  have  been  taken  upon a
question,  unless a ballot thereon is so required or demanded,  a declaration by
the  Chairman of the meeting that the vote upon the question has been carried or
carried by a particular  majority or not carried, an entry to that effect in the
minutes of the meeting shall be conclusive evidence of the fact without proof of
the number or  proportion  of the votes  recorded  in favour of or  against  any
resolution or other  proceeding in respect of the said question,  and the result
of the  vote so  taken  shall  be the  decision  of the  members  upon  the said
question.

MATERIAL CONTRACTS

The following is a listing of contracts material to the business of the Company,
which were not entered into in the ordinary course of business:

(1)  Letter of Intent Agreement dated January 14, 2002, among the Company,  OPS,
     EYEKON Technologies Inc. and Craig Clydesdale.  See "Item 4. Information on
     the Company - Business Overview";

(2)  Escrow Agreement dated September 26, 2001 among the Company,  Computershare
     Trust Company of Canada and each of Greystoke Investments Inc., Ted Carlsen
     and Monica  Carlsen.  See "Item 7. Major  Shareholders  and  Related  Party
     Transactions - Escrowed Shares";

(3)  Sponsorship  Agreement  dated  July 6, 2001  among the  Company,  Canaccord
     Capital Corporation ("Canaccord") and California Exploration, Inc., whereby
     Canaccord  agreed to sponsor the qualifying  transaction for the listing of
     the Company on the TSX Venture at a cost of CDN$25,000;

(4)  Agreement  and  Plan of  Merger  dated  July 3,  2001  among  the  Company,
     California Exploration,  Inc. and QDM Acquisition Corporation. See "Item 4.
     Information on the Company - Acquisition of California Exploration Inc.";

(5)  Letter  Agreement  dated  May  3,  2001  between  the  Company,  California
     Exploration,  Inc.,  Theodore  Carlsen  and  Desmond  O'Kell.  See "Item 5.
     Operating and Financial Review and Prospects - Overview.";

(6)  Stock Option  Agreements  dated June 19, 2000 among the Company and each of
     Donald W. Busby, Chase Management Ltd., Nick DeMare, William Lee and Harvey
     Lim. See "Item 6. Directors, Senior Management and Employees - Options.";

(7)  Escrow  Agreement  dated June 28,  2000 among the  Company  and each of the
     Donald W. Busby 1999 Irrevocable  Trust, Chase Management Ltd., Nick DeMare
     and  William  Lee.  See  "Item 7.  Major  Shareholders  and  Related  Party
     Transactions - Escrowed Shares."; and

(8)  Agency  Agreement  dated  September  27, 2000  between QDM  Ventures  Ltd.,
     Research  Capital  Corporation  and Montreal  Trust Company of Canada.  See
     "Item 4.  Information  on the  Company -  History  and  Development  of the
     Company."

EXCHANGE CONTROLS

There are no governmental  laws,  decrees,  or regulations in Canada relating to
restrictions on the export or import of capital,  or affecting the remittance of
interest,  dividends, or other payments to non-resident holders on the Company's
Common  Stock.  Any  remittances  of dividends to United States  residents  are,
however,  subject  to a  15%  withholding  tax  (10%  if  the  shareholder  is a
corporation  owning at least 10% of the outstanding Common Stock of the Company)
pursuant to Article X of the reciprocal tax treaty between Canada and the United
States. See "Item 10. Additional Information - Taxation," below.

                                     - 36 -

<PAGE>



Except as  provided  in the  Investment  Canada  Act (the  "Act"),  there are no
limitations  specific to the rights of non- Canadians to hold or vote the common
stock of the Company under the laws of Canada or in the charter documents of the
Company.

Management of the Company  considers that the following  general  summary fairly
describes those  provisions of the Act pertinent to an investment by an American
investor in the Company.

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

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

If an investment is reviewable  under the Act, an application  for review in the
form prescribed is normally required to be filed with Investment Canada prior to
the investment  taking place and the investment may not be implemented until the
review has been completed and the Minister  responsible for Investment Canada is
satisfied that the  investment is likely to be of net benefit to Canada.  If the
Minister is not satisfied  that the investment is likely to be of net benefit to
Canada, the non-Canadian must not implement the investment or, if the investment
has been  implemented,  may be  required  to divest  himself  of  control of the
business that is the subject of the investment.

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

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

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

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

(1)  direct  acquisitions of control of Canadian businesses with assets of CDN$5
     million  or more  unless  the  acquisition  is  being  made by an  American
     investor;

(2)  direct  acquisitions  of  control of  Canadian  businesses  with  assets of
     CDN$152 million or more by an American investor;

(3)  indirect  acquisitions  of control of  Canadian  businesses  with assets of
     CDN$5 million or more if such assets  represent  more than 50% of the total
     value  of the  assets  of the  entities,  the  control  of  which  is being
     acquired, unless the acquisition is being made by an American investor;

(4)  indirect  acquisitions  of control of  Canadian  businesses  with assets of
     CDN$152  million or more by an American  investor if such assets  represent
     more than 50% of the total value of the assets of the entities, the control
     of which is being acquired;

(5)  indirect  acquisitions  of control of  Canadian  businesses  with assets of
     CDN$50  million or more even if such assets  represent less than 50% of the
     total  value of the assets of the  entities,  the control of which is being
     acquired,  unless the acquisition is being made by an American  investor in
     which case there is no review; and


                                     - 37 -

<PAGE>

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

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

An  American,  as defined in the Act includes an  individual  who is an American
national or a lawful,  permanent  resident of the United States, a government or
government  agency of the United  States,  an  American-controlled  corporation,
limited  partnership,  trust  or  joint  venture  and  a  corporation,   limited
partnership,  trust or joint  venture  that is  neither  American-controlled  or
Canadian-controlled  of which  two-thirds  of its  board of  directors,  general
partners or trustees,  as the case may be, are any  combination of Canadians and
Americans.

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

The Act specifically  exempts certain  transactions from either  notification or
review. Included among the category of transactions is the acquisition of voting
shares or other voting  interests  by any person in the ordinary  course of that
person's  business as a trader or dealer in securities.  Given the nature of the
Company's  business and the size of its operations,  management does not believe
the Act would apply to an investment in the Company's shares by a U.S. investor.

TAXATION

Material Canadian Federal Income Tax Consequences
-------------------------------------------------
Management  of the  Company  considers  that  the  following  discussion  fairly
describes the material Canadian federal income tax consequences  applicable to a
holder of Common Stock of the Company who is a resident of the United States and
who is not a resident of Canada and who does not use or hold,  and is not deemed
to use or hold,  his shares of Common  Stock of the Company in  connection  with
carrying on a business in Canada (a "non-resident shareholder").

This summary is based upon the current provisions of the Income Tax Act (Canada)
(the  "ITA"),  the  regulations  thereunder  (the  "Regulations"),  the  current
publicly  announced  administrative and assessing policies of Canada Customs and
Revenue  Agency,  Taxation and all specific  proposals (the "Tax  Proposals") to
amend the ITA and  Regulations  announced  by the  Minister of Finance  (Canada)
prior to the date hereof.  This  description  is not  exhaustive of all possible
Canadian federal income tax consequences and, except for the Tax Proposals, does
not take into account or anticipate any changes in law,  whether by legislative,
governmental or judicial action.

Dividends
---------
Dividends  paid on the common  stock of the  Company to a  non-resident  will be
subject to withholding  tax. The Canada-U.S.  Income Tax Convention  (1980) (the
"Treaty") provides that the normal 25% withholding tax rate is reduced to 15% on
dividends  paid on  shares of a  corporation  resident  in  Canada  (such as the
Company) to  residents  of the United  States,  and also  provides for a further
reduction of this rate to 5% where the  beneficial  owner of the  dividends is a
corporation  which is a resident of the United States which owns at least 10% of
the voting shares of the corporation paying the dividend.


                                     - 38 -

<PAGE>


Capital Gains
-------------
In general,  a  non-resident  of Canada is not subject to tax under the ITA with
respect  to a  capital  gain  realized  upon  the  disposition  of a share  of a
corporation  resident in Canada that is listed on a prescribed  stock  exchange.
For  purposes  of the ITA,  the TSX  Venture  is a  prescribed  stock  exchange.
Non-residents  of Canada who dispose of shares of the Company will be subject to
income tax in Canada with respect to capital gains if:

     (a)  the non-resident holder;
     (b)  persons  with  whom  the  non-resident  holder  did not  deal at arm's
          length;  or
     (c)  the non-resident  holder and persons with whom the non-resident holder
          did not deal with at arm's length,

owned  not less  than 25% of the  issued  shares  of any  class or series of the
Company at any time during the five-year period  preceding the  disposition.  In
the case of a  non-resident  holder  to whom  shares  of the  Company  represent
taxable Canadian  property and who is resident in the United States, no Canadian
taxes will be payable on a capital gain realized on such shares by reason of the
Treaty unless the value of such shares is derived principally from real property
situated in Canada.  However, in such a case, certain  transitional relief under
the Treaty may be available.

Material United States Federal Income Tax Considerations
--------------------------------------------------------
The following  discussion  summarizes the material  United States federal income
tax  consequences,  under current law,  applicable to a U.S.  Holder (as defined
below)  of  the  Company's  common  stock.  This  discussion  does  not  address
consequences peculiar to persons subject to special provisions of federal income
tax law, such as tax-exempt organizations, qualified retirement plans, financial
institutions,  insurance  companies,  real estate investment  trusts,  regulated
investment companies,  broker-dealers,  nonresident alien individuals or foreign
corporations,  or shareholders  owning common stock representing 10% of the vote
and value of the Company. In addition, this discussion does not cover any state,
local or foreign tax consequences.

The following discussion is based upon the sections of the Internal Revenue Code
of 1986,  as amended (the  "Code"),  Treasury  Regulations,  published  Internal
Revenue Service ("IRS") rulings,  published  administrative positions of the IRS
and court decisions that are currently applicable,  any or all of which could be
materially and adversely changed,  possibly on a retroactive basis, at any time.
In addition,  this  discussion  does not consider the  potential  effects,  both
adverse and beneficial of recently proposed legislation which, if enacted, could
be  applied,  possibly  on  a  retroactive  basis,  at  any  time.  Holders  and
prospective  holders of the Company's  common stock should consult their own tax
advisors  about the  federal,  state,  local and  foreign  tax  consequences  of
purchasing, owning and disposing of shares of common stock of the Company.

U.S. HOLDERS

As used herein,  a "U.S.  Holder" is defined as (i) citizens or residents of the
U.S.,  or any state  thereof,  (ii) a  corporation  or other  entity  created or
organized  under the laws of the U.S.,  or any  political  subdivision  thereof,
(iii) an estate  the  income of which is  subject  to U.S.  federal  income  tax
regardless of source or that is otherwise  subject to U.S. federal income tax on
a net  income  basis in  respect  of the  common  stock,  or (iv) a trust  whose
administration  is subject to the primary  supervision of a U.S. court and which
has one or  more  U.S.  fiduciaries  who  have  the  authority  to  control  all
substantial  decisions  of the trust,  whose  ownership  of common  stock is not
effectively  connected  with the  conduct of a trade or  business  in the United
States and  shareholders  who  acquired  their  stock  through  the  exercise of
employee stock options or otherwise as compensation.

DISTRIBUTIONS ON SHARES OF COMMON STOCK

U.S. Holders receiving dividend distributions (including constructive dividends)
with  respect to the  Company's  common  stock are  required to include in gross
income for United  States  federal  income tax purposes the gross amount of such
distributions to the extent that the Company has current or accumulated earnings
and profits,  without  reduction for any Canadian  income tax withheld from such
distributions.  Such  Canadian tax withheld may be credited,  subject to certain


                                     - 39 -

<PAGE>


limitations,  against  the  U.S.  Holder's  United  States  federal  income  tax
liability  or,  alternatively,  may be deducted in computing  the U.S.  Holder's
United States federal taxable income by those who itemize deductions.  (See more
detailed  discussion  at  "Foreign  Tax  Credit"  below.)  To  the  extent  that
distributions exceed current or accumulated earnings and profits of the Company,
they  will be  treated  first as a return  of  capital  up to the U.S.  Holder's
adjusted  basis in the  common  stock  and  thereafter  as gain from the sale or
exchange of such shares.  Preferential tax rates for long-term capital gains are
applicable to a U.S. Holder which is an individual,  estate or trust.  There are
currently  no  preferential  tax rates for  long-term  capital  gains for a U.S.
Holder which is a corporation. Dividends paid on the Company's common stock will
not  generally  be eligible for the  dividends  received  deduction  provided to
corporations receiving dividends from certain United States corporations.


FOREIGN TAX CREDIT

A U.S. Holder who pays (or has withheld from distributions)  Canadian income tax
with respect to the ownership of the Company's common stock may be entitled,  at
the option of the U.S.  Holder,  to either a deduction  or a tax credit for such
foreign tax paid or withheld. Generally, it will be more advantageous to claim a
credit  because  a  credit  reduces  United  States  federal  income  taxes on a
dollar-for-dollar  basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on a year-by-year basis and applies to all
foreign  taxes paid by (or  withheld  from) the U.S.  Holder  during  that year.
Subject to certain  limitations,  Canadian  taxes  withheld will be eligible for
credit against the U.S.  Holder's United States federal income taxes.  Under the
Code,  the  limitation  on  foreign  taxes  eligible  for  credit is  calculated
separately  with respect to specific  classes of income.  Dividends  paid by the
Company  generally  will be  either  "passive"  income or  "financial  services"
income,  depending on the particular U.S.  Holder's  circumstances.  Foreign tax
credits  allowable  with respect to each class of income  cannot exceed the U.S.
federal income tax otherwise  payable with respect to such class of income.  The
consequences of the separate  limitations  will depend on the nature and sources
of each U.S.  Holder's  income and the  deductions  appropriately  allocated  or
apportioned  thereto.  The  availability  of the  foreign  tax  credit  and  the
application  of the  limitations on the credit are fact specific and holders and
prospective  holders  of common  stock  should  consult  their own tax  advisors
regarding their individual circumstances.

DISPOSITION OF SHARES OF COMMON STOCK

A U.S.  Holder  will  recognize  gain or loss  upon the sale of shares of common
stock equal to the difference,  if any,  between (i) the amount of cash plus the
fair market value of any property received; and (ii) the shareholder's tax basis
in the  common  stock.  This  gain or loss will be  capital  gain or loss if the
shares  are a capital  asset in the hands of the U.S.  Holder,  and such gain or
loss will be  long-term  capital  gain or loss if the U.S.  Holder  has held the
common  stock for more than one year.  Gains and losses are netted and  combined
according to special rules in arriving at the overall capital gain or loss for a
particular  tax  year.   Deductions  for  net  capital  losses  are  subject  to
significant  limitations.  For U.S.  Holders  who are  individuals,  any  unused
portion of such net  capital  loss may be  carried  over to be used in later tax
years until such net capital loss is thereby  exhausted.  For U.S. Holders which
are corporations (other than corporations  subject to Subchapter S of the Code),
an unused net  capital  loss may be carried  back three years from the loss year
and carried  forward five years from the loss year to be offset against  capital
gains until such net capital loss is thereby exhausted.

OTHER CONSIDERATIONS

The Company has not  determined  whether it meets the  definition  of a "passive
foreign  investment  company" (a "PFIC").  It is unlikely that the Company meets
the  definition  of  a  "foreign  personal  holding  company"  (a  "FPHC")  or a
"controlled foreign corporation (a "CFC") under current U.S. law.

If more  than  50% of the  voting  power  or value  of the  Company  were  owned
(actually  or  constructively)  by U.S.  Holders  who each  owned  (actually  or
constructively)  10% or more of the voting power of the Company's  common shares
("10%  Shareholders"),  then  the  Company  would  become  a CFC  and  each  10%
Shareholder would be required to include in its taxable income as a constructive
dividend  an amount  equal to its share of certain  undistributed  income of the
Company.  If (1) more  than 50% of the  voting  power or value of the  Company's
common  shares  were  owned  (actually  or  constructively)  by  five  or  fewer
individuals  who are citizens or  residents of the United  States and (2) 60% or



                                     - 40 -

<PAGE>



more of the Company's  income consisted of certain  interest,  dividend or other
enumerated  types of income,  then the Company  would be a FPHC.  If the Company
were a FPHC,  then each U.S.  Holder  (regardless of the amount of the Company's
common  shares  owned by such U.S.  Holder)  would be required to include in its
taxable  income  as  a   constructive   dividend  its  share  of  the  Company's
undistributed income of specific types.

If 75% or more of the  Company's  annual gross income has ever  consisted of, or
ever consists of, "passive" income or if 50% or more of the average value of the
Company's  assets in any year has ever consisted of, or ever consists of, assets
that produce, or are held for the production of, such "passive" income, then the
Company would be or would become a PFIC. The Company has not provided assurances
that it has not been and does not expect to become a PFIC.

If the Company were to be a PFIC, then a U.S. Holder would be required to pay an
interest  charge  together  with tax  calculated at maximum tax rates on certain
"excess  distributions"  (defined to include  gain on the sale of stock)  unless
such U.S.  Holder made an  election  either to (1) include in his or her taxable
income  certain  undistributed  amounts of the  Company's  income or (2) mark to
market his or her Company  common  shares at the end of each taxable year as set
forth in Section 1296 of the Code.

INFORMATION REPORTING AND BACKUP WITHHOLDING

U.S. information reporting requirements may apply with respect to the payment of
dividends to U.S.  Holders of the Company  shares.  Under  Treasury  regulations
currently in effect,  non-corporate holders may be subject to backup withholding
at a 31% rate with respect to dividends when such holder (1) fails to furnish or
certify a correct  taxpayer  identification  number to the payor in the required
manner,  (2) is  notified  by the IRS that it has failed to report  payments  of
interest or dividends  properly or (3) fails,  under certain  circumstances,  to
certify  that it has been  notified  by the IRS  that it is  subject  to  backup
withholding for failure to report interest and dividend payments.

INSPECTION OF DOCUMENTS

Copies of the  documents  referred to in this annual  report may be inspected at
the  Company's  corporate  office  at Suite  1305 - 1090  West  Georgia  Street,
Vancouver, British Columbia, V6E 3V7, during normal business hours.



ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------------
Not applicable.



ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
--------------------------------------------------------------------------------
Not applicable.


                                     PART II


ITEM 13.  ITEM DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
--------------------------------------------------------------------------------
Not applicable.



ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
          PROCEEDS
--------------------------------------------------------------------------------
Not applicable.


                                     - 41 -

<PAGE>



ITEM 15.  CONTROLS AND PROCEDURES
--------------------------------------------------------------------------------
Within the 90-day  period  prior to the filing of this report there have been no
significant  changes in the  Company's  internal  controls or the  occurrence of
events or other factors that could significantly affect these controls.



ITEM 16.  [RESERVED]
--------------------------------------------------------------------------------
Not applicable.


                                     - 42 -

<PAGE>

                                    PART III

ITEM 17.  FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
See pages F-1 though F-20.


ITEM 18.  FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Not applicable.


ITEM 19.  EXHIBITS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
   EXHIBIT NUMBER                                         DESCRIPTION                                         PAGE
   --------------      -----------------------------------------------------------------------------          ----
       <S>           <C>                                                                                   <C>
         1.1           Articles of Continuance (3)                                                             N/A
         1.2           By-Law No. 1 (3)                                                                        N/A
         3.1           Stock Option Agreements dated June 19, 2000 among the Company and each of               N/A
                       Donald W. Busby, Chase Management Ltd., Nick DeMare, William Lee and
                       Harvey Lim. (1)
         3.2           Escrow Agreement dated June 28, 2000 among the Company and each of                      N/A
                       Donald W. Busby 1999 Irrevocable Trust, Chase Management Ltd., Nick
                       DeMare and William Lee. (1)
         3.3           Agency Agreement dated September 27, 2000 between QDM Ventures Ltd.,                    N/A
                       Research Capital Corporation and Montreal Trust Company of Canada. (2)
         3.4           2001 Stock Option Plan (3)                                                              N/A
         3.5           Letter Agreement dated May 3, 2001 between the Company, California                      N/A
                       Exploration Inc. and certain major shareholders of California Exploration Inc.
                       (3)
         3.6           Agreement and Plan of Merger dated July 3, 2001 among the Company,                      N/A
                       California Exploration Inc. and QDM Acquisition Corporation (3)
         3.7           Sponsorship Agreement dated July 6, 2001 among the Company, Canaccord                   N/A
                       Capital Corporation and California Exploration Inc. (3)
         3.8           Escrow Agreement dated September 26, 2001 among the Company,                            N/A
                       Computershare Trust Company of Canada and each of Greystoke Investments
                       Inc., Ted Carlsen and Monica Carlsen (3)
         3.9           Letter of Intent Agreement dated January 14, 2002 among the Company,                    67
                       Optimal Power Systems Ltd., EYEKON Technologies Inc. and Craig
                       Clydesdale.
         8.1           List of Subsidiaries                                                                    78
        10.1           Certification of Desmond O'Kell                                                         80
</TABLE>

     (1)  Previously filed as an exhibit to the Company's registration statement
          on Form 20-F,  filed with the  Securities  and Exchange  Commission on
          August 31, 2000. File Number 0-30920.

                                     - 43 -

<PAGE>


     (2)  Previously filed as an exhibit to the Company's registration statement
          on Form 20-F/A Amendment No. 1, filed with the Securities and Exchange
          Commission on October 16, 2000. File Number 0-30920.

     (3)  Previously filed as an exhibit to the Company's registration statement
          on Form 20-F Annual, filed with the Securities and Exchange Commission
          on November 29, 2001. File Number 0-30920.




                                     - 44 -

<PAGE>

                                   SIGNATURES


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


                                           CALIFORNIA EXPLORATION LTD.


Dated: December 11, 2002                   /s/ Desmond O'Kell
       -------------------                 -------------------------------------
                                           Desmond O'Kell
                                           President, (Chief Executive Officer),
                                           Chief Financial Officer and Secretary


                                     - 45 -

<PAGE>



                                  CERTIFICATION



I, Desmond O'Kell, certify that:

1.   I have reviewed  this annual report on Form 20-F of California  Exploration
     Ltd.;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;


Date:    December 11, 2002
         -------------------------

Signed:   /s/ Desmond O'Kell
         -------------------------
         Desmond O'Kell, President, (Chief Executive Officer),
         Chief Financial Officer and Secretary


                                     - 46 -

<PAGE>











--------------------------------------------------------------------------------



                           CALIFORNIA EXPLORATION LTD.

                          (Formerly QDM Ventures Ltd.)

                          (A Development Stage Company)


                        CONSOLIDATED FINANCIAL STATEMENTS

                   FOR THE YEARS ENDED MAY 31, 2002 AND 2001,

                  AND PERIODS FROM OCTOBER 6, 1999 (INCEPTION)

                            TO MAY 31, 2000 AND 2002

          (Expressed in United States Dollars, unless otherwise stated)


--------------------------------------------------------------------------------























                                       F-1

                                     - 47 -

<PAGE>












AUDITORS' REPORT


To the Shareholders of
California Exploration Ltd. (formerly QDM Ventures Ltd.)


We have audited the consolidated  balance sheets of California  Exploration Ltd.
(formerly QDM Ventures  Ltd.) as at May 31, 2002 and 2001 and the  statements of
operations  and  deficit and cash flow for the years ended May 31, 2002 and 2001
and for the period  from  incorporation  on December  10, 1999 to May 31,  2000.
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 Canadian and United States  generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable  assurance whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.

In our opinion,  these  financial  statements  present  fairly,  in all material
respects,  the financial position of the Company as at May 31, 2002 and 2001 and
the results of its operations and cash flow for the years ended May 31, 2002 and
2001 and for the period from  incorporation on December 10, 1999 to May 31, 2000
in accordance with Canadian generally accepted accounting principles.

Canadian generally accepted  accounting  principles vary in certain  significant
respects from  accounting  principles  generally  accepted in the United States.
Application  of accounting  principles  generally  accepted in the United States
would have affected assets and shareholders'  equity as at May 31, 2002 and 2001
and the results of operations  for the years ended May 31, 2002 and 2001 and for
the period from  December 10, 1999 to May 31, 2000 to the extent  summarized  in
Note 12 to the financial statements.


                                                               /s/ D&H Group
Vancouver, B.C.
September 27, 2002                                         Chartered Accountants



                                    D&H Group
                          A Partnership of Corporations
        A Member of BHD Association with affiliated offices across Canada
     and Internationally 10 th Floor, 1333 West Broadway, Vancouver B.C. V6H
               4C1 www.dhgroup.ca ! F 604-731-9923 T 604-731-5881

                                       F-2

                                     - 48 -

<PAGE>













COMMENTS BY AUDITORS FOR U.S. READERS
ON CANADA - U.S. REPORTING DIFFERENCE



In the United States,  reporting  standards for auditors require the addition of
an explanatory  paragraph  (following the opinion  paragraph) when the financial
statements are affected by conditions and events that cast substantial  doubt on
the Company's ability to continue as a going concern, such as those described in
Note 1 to the  financial  statements.  Our  report  to  the  shareholders  dated
September 27, 2002 is expressed in accordance with Canadian reporting  standards
which do not permit a reference to such events and  conditions  in the auditors'
report when these are adequately disclosed in the financial statements.


                                                                /s/ D&H Group
Vancouver, B.C.
September 27, 2002                                         Chartered Accountants








                                    D&H Group
                          A Partnership of Corporations
        A Member of BHD Association with affiliated offices across Canada
     and Internationally 10 th Floor, 1333 West Broadway, Vancouver B.C. V6H
               4C1 www.dhgroup.ca ! F 604-731-9923 T 604-731-5881

                                       F-3

                                     - 49 -

<PAGE>



                           CALIFORNIA EXPLORATION LTD.
                          (Formerly QDM Ventures Ltd.)
                          (A Development Stage Company)
                           CONSOLIDATED BALANCE SHEETS
                                  AS AT MAY 31
          (Expressed in United States Dollars, unless otherwise stated)

<TABLE>
<CAPTION>
                                                                                     2002                 2001
                                                                                      $                    $
                                   A S S E T S
<S>                                                                              <C>                 <C>
CURRENT ASSETS

Cash                                                                                    98,408              360,580
Amounts receivable and prepaids                                                         20,323              159,004
                                                                                  ------------         ------------
                                                                                       118,731              519,584

BRIDGE LOANS (Note 4)                                                                   99,800                    -

CAPITAL ASSETS (Note 5)                                                                 50,698               91,290

OIL AND GAS PROPERTIES (Notes 6 and 13)                                                268,396               20,697

OTHER ASSETS (Note 7)                                                                  263,531              280,934
                                                                                  ------------         ------------
                                                                                       801,156              912,505
                                                                                  ============         ============
                              L I A B I L I T I E S

CURRENT LIABILITIES

Accounts payable and accrued liabilities (Note 9(b))                                   190,031               35,071

ADVANCES FROM SHAREHOLDER (Note 9(a))                                                   58,920                    -
                                                                                  ------------         ------------
                                                                                       248,951               35,071
                                                                                  ------------         ------------
                      S H A R E H O L D E R S ' E Q U I T Y


SHARE CAPITAL (Note 8)                                                               1,102,823            1,019,339

DEFICIT ACCUMULATED DURING DEVELOPMENT STAGE                                          (550,618)            (141,905)
                                                                                  ------------         ------------
                                                                                       552,205              877,434
                                                                                  ------------         ------------
                                                                                       801,156              912,505
                                                                                  ============         ============
</TABLE>
OPERATIONS (Note 1)
SUBSEQUENT EVENTS (Note 13)


APPROVED BY THE DIRECTORS

/S/ Desmond O'Kell, Director
----------------------------
/S/ Nick DeMare, Director
----------------------------

                                       F-4

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

                                     - 50 -

<PAGE>



                           CALIFORNIA EXPLORATION LTD.
                          (Formerly QDM Ventures Ltd.)
                          (A Development Stage Company)
                CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
          (Expressed in United States Dollars, unless otherwise stated)


<TABLE>
<CAPTION>
                                                         CUMULATIVE FROM
                                                         OCTOBER 6, 1999       YEAR             YEAR           OCTOBER 6,
                                                         (INCEPTION) TO        ENDED            ENDED           1999 TO
                                                             MAY 31,          MAY 31,          MAY 31,          MAY 31,
                                                              2002             2002             2001             2000
                                                                $                $                $                $
<S>                                                       <C>             <C>              <C>             <C>
EXPENSES

Accounting and administration                                   44,702           21,880           12,725           10,097
Audit and legal                                                 75,544           53,977           15,290            6,277
Amortization of capital assets                                  92,194           38,442           36,524           17,228
Office and miscellaneous                                       120,156           75,246           11,209           33,701
Salaries, wages and related benefits                            78,625           53,921           22,671            2,033
Travel and related costs                                        27,072              713            9,830           16,529
                                                          ------------     ------------     ------------     ------------
                                                               438,293          244,179          108,249           85,865
                                                          ------------     ------------     ------------     ------------
OTHER ITEMS

Gain on sale of oil and gas properties                         252,833                -                -          252,833
Write-down of other assets                                    (223,375)        (123,375)        (100,000)               -
Industry partners inducement                                  (123,404)               -         (123,406)               2
Impairment of oil and gas properties                           (39,346)         (39,346)               -                -
Write-off of amounts receivable                                (74,293)         (74,293)               -                -
Interest and other income                                       95,260           72,480           10,620           12,160
Income tax recovery (expense)                                        -                -           73,000          (73,000)
                                                          ------------     ------------     ------------     ------------
                                                              (112,325)        (164,534)        (139,786)         191,995
                                                          ------------     ------------     ------------     ------------
NET EARNINGS (LOSS) FOR THE PERIOD                            (550,618)        (408,713)        (248,035)         106,130

RETAINED EARNINGS (DEFICIT) -
    BEGINNING OF PERIOD                                              -         (141,905)         106,130                -
                                                          ------------     ------------     ------------     ------------
RETAINED EARNINGS (DEFICIT) -
     END OF PERIOD                                            (550,618)        (550,618)        (141,905)         106,130
                                                          ============     ============     ============     ============
BASIC AND DILUTED EARNINGS
     (LOSS) PER SHARE                                                           $(0.06)          $(0.08)            $0.05
                                                                           ============     ============     ============
WEIGHTED AVERAGE NUMBER OF
     COMMON SHARES OUTSTANDING                                                6,509,418        3,233,755        2,038,016
                                                                           ============     ============     ============
</TABLE>



                                       F-5

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


                                     - 51 -

<PAGE>



                           CALIFORNIA EXPLORATION LTD.
                          (Formerly QDM Ventures Ltd.)
                          (A Development Stage Company)
                      CONSOLIDATED STATEMENTS OF CASH FLOW
          (Expressed in United States Dollars, unless otherwise stated)


<TABLE>
<CAPTION>
                                                         CUMULATIVE FROM
                                                         OCTOBER 6, 1999       YEAR             YEAR           OCTOBER 6,
                                                         (INCEPTION) TO        ENDED            ENDED           1999 TO
                                                             MAY 31,          MAY 31,          MAY 31,          MAY 31,
                                                              2002             2002             2001             2000
                                                                $                $                $                $
<S>                                                       <C>             <C>              <C>             <C>
CASH PROVIDED FROM (USED FOR)

OPERATING ACTIVITIES

Net earnings (loss) for the period                            (550,618)        (408,713)        (248,035)         106,130
Items not affecting cash
   Amortization of capital assets                               92,194           38,442           36,524           17,228
   Write-off of amounts receivable                              74,293           74,293                -                -
   Write-down of other assets                                  223,375          123,375          100,000                -
   Impairment of oil and gas properties                         39,346           39,346                -                -
Decrease (increase) in amounts
   receivable and prepaids                                     (86,597)          72,407          255,102         (414,106)
Increase in accounts payable and accrued liabilities           192,635          157,564           12,171           22,900
Increase (decrease) in income taxes payable                          -                -          (73,000)          73,000
                                                          ------------     ------------     ------------     ------------
                                                               (15,372)          96,714           82,762         (194,848)
                                                          ------------     ------------     ------------     ------------
INVESTING ACTIVITIES

Additions to capital assets                                   (142,892)               -                -         (142,892)
Recovery of (additions to) oil and gas properties             (307,742)        (287,045)          63,520          (84,217)
Other assets                                                  (573,485)        (190,401)        (114,393)        (268,691)
Loan repayment (advance)                                       (30,000)           5,000          (35,000)               -
                                                          ------------     ------------     ------------     ------------
                                                            (1,054,119)        (472,446)         (85,873)        (495,800)
                                                          ------------     ------------     ------------     ------------
FINANCING ACTIVITIES

Issuance of common shares                                    1,078,450                -          200,000          878,450
Share issue costs                                              (24,111)               -             (680)         (23,431)
Deferred acquisition costs                                     (13,221)         (13,221)               -                -
Advances from shareholder                                       58,920           58,920                -                -
Cash assumed on reorganization                                 100,047          100,047                -                -
Reorganization costs                                           (32,186)         (32,186)               -                -
                                                          ------------     ------------     ------------     ------------
                                                             1,167,899          113,560          199,320          855,019
                                                          ------------     ------------     ------------     ------------
NET INCREASE ( DECREASE) IN CASH                                98,408         (262,172)         196,209          164,371

CASH - BEGINNING OF PERIOD                                           -          360,580          164,371                -
                                                          ------------     ------------     ------------     ------------
CASH - END OF PERIOD                                            98,408           98,408          360,580          164,371
                                                          ============     ============     ============     ============
</TABLE>
SUPPLEMENTARY CASH FLOW INFORMATION

Non-cash activities

During the year ended May 31, 2002, the Company issued  4,346,084  common shares
to complete the corporate reorganization, as described in Note 3.

                                       F-6

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


                                     - 52 -

<PAGE>


                           CALIFORNIA EXPLORATION LTD.
                          (Formerly QDM Ventures Ltd.)
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEARS ENDED MAY 31, 2002 AND 2001
          (Expressed in United States Dollars, unless otherwise stated)


1.   OPERATIONS

     The Company was  incorporated  under the Company Act of British Columbia on
     December  10, 1999,  as Buck  Ventures  Ltd. On May 10,  2000,  the Company
     changed  its  name to QDM  Ventures  Ltd.  As  part  of the  reorganization
     described in Note 3, on September 25, 2001, the Company changed its name to
     California  Exploration  Ltd. and filed Articles of  Continuance  under the
     Business Corporations Act (Yukon Territory).

     The Company is focused on the  acquisition,  exploration and development of
     crude oil and  natural  gas  reserves in the  western  United  States.  The
     Company is a development stage oil and gas company and, as of May 31, 2002,
     has not  earned  any  significant  production  revenue,  nor  found  proved
     reserves  on  any  of  its   properties.   The  Company  has  entered  into
     participation  and farm-in  agreements with industry partners on certain of
     its properties  pursuant to which these partners have acquired interests in
     the Company's  properties  for cash and  issuances of their common  shares.
     Additional  funding will be required for the Company to  participate in the
     acquisition,  exploration  and  development  of  interests  in oil  and gas
     properties.  In order to meet the  Company's  continuing  financing  needs,
     management of the Company intends to raise working capital through the sale
     of common shares or other securities, or merge with industry partners.

     In addition  to its oil and gas  activities,  the Company has also  entered
     into a letter of intent,  as described in Note 4, which if completed,  will
     result in the Company conducting business in the technology sector.

     The  consolidated  financial  statements have been prepared on the basis of
     accounting principles applicable to a going concern, which contemplates the
     realization  of assets  and  extinguishment  of  liabilities  in the normal
     course of business.  The Company's consolidated financial statements do not
     include any adjustments related to the realization of the carrying value of
     assets or the  amounts  and  classification  of  liabilities  that might be
     necessary should the Company be unable to continue in existence.

     The  ability of the Company to continue  operations  as a going  concern is
     dependent  upon its success in  obtaining  capital  through  sale of common
     shares or other securities and ultimately achieving profitable operations.


2.   SIGNIFICANT ACCOUNTING POLICIES

     BASIS OF PRESENTATION

     These consolidated  financial  statements of the Company have been prepared
     in  accordance  with  Canadian  generally  accepted  accounting  principles
     ("Canadian GAAP"). The significant differences between these principles and
     those  that  would  be  applied  under  United  States  generally  accepted
     accounting principles ("US GAAP") are disclosed in Note 12.

     The  preparation of financial  statements in conformity  with Canadian GAAP
     requires  management  to make  estimates  and  assumptions  that affect the
     reported  amount of assets and  liabilities  and  disclosure  of contingent
     liabilities  at the  date of the  financial  statements,  and the  reported
     amounts of revenues and expenditures  during the reporting  period.  Actual
     results could differ from those reported.



                                       F-7

                                     - 53 -

<PAGE>


                           CALIFORNIA EXPLORATION LTD.
                          (Formerly QDM Ventures Ltd.)
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEARS ENDED MAY 31, 2002 AND 2001
          (Expressed in United States Dollars, unless otherwise stated)


2.   SIGNIFICANT ACCOUNTING POLICIES (continued)

     The consolidated  financial  statements include the accounts of the Company
     and its wholly-owned  subsidiary,  California Exploration Inc. ("CalEx"), a
     company  incorporated  under the laws of the state of Nevada. See also Note
     3.

     USE OF ESTIMATES

     The  preparation  of  financial  statements  in  conformity  with  Canadian
     generally  accepted  accounting  principles  requires  management  to  make
     estimates  and  assumptions  that affect the reported  amount of assets and
     liabilities  and  disclosure of contingent  liabilities  at the date of the
     financial statements, and the reported amounts of revenues and expenditures
     during the period. Actual results may differ from those estimates.

     CASH EQUIVALENTS

     Cash includes cash and short-term  deposits  maturing within 90 days of the
     original date of acquisition.

     OIL AND GAS PROPERTIES

     Capitalized Costs
     -----------------
     The  Company  follows the full cost  method of  accounting  for oil and gas
     operations.  Under this method all costs related to the exploration for and
     development of oil and gas reserves are capitalized on a country-by-country
     basis.  Costs include lease acquisition  costs,  geological and geophysical
     expenses,   overhead   directly  related  to  exploration  and  development
     activities and costs of drilling both productive and non-productive  wells.
     Proceeds from the sale of properties are applied against capitalized costs,
     without  any  gain or  loss  being  recognized,  unless  such a sale  would
     significantly alter the rate of depletion and depreciation.

     Depletion and Depreciation
     --------------------------
     Depletion  of  exploration  and  development   costs  and  depreciation  of
     production equipment is provided using the unit-of-production  method based
     upon  estimated  proven  oil and gas  reserves.  The  costs of  significant
     unevaluated  properties  are excluded from costs subject to depletion.  For
     depletion  and  depreciation  purposes,  relative  volumes  of oil  and gas
     production and reserves are converted at the energy  equivalent  conversion
     rate of six thousand cubic feet of natural gas to one barrel of crude oil.

     Ceiling Test
     ------------
     In  applying  the full cost  method,  the Company  performs a ceiling  test
     whereby the carrying  value of  petroleum  and natural gas  properties  and
     production  equipment,  net of  future  income  taxes  and the  accumulated
     provision for site restoration and abandonment  costs, is compared annually
     to an  estimate  of  future  net cash flow  from the  production  of proven
     reserves.  Net cash flow is estimated using year end prices, less estimated
     future  general and  administrative  expenses,  financing  costs and income
     taxes. Should this comparison indicate an excess carrying value, the excess
     is charged against earnings.


                                       F-8

                                     - 54 -

<PAGE>


                           CALIFORNIA EXPLORATION LTD.
                          (Formerly QDM Ventures Ltd.)
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEARS ENDED MAY 31, 2002 AND 2001
          (Expressed in United States Dollars, unless otherwise stated)


2.   SIGNIFICANT ACCOUNTING POLICIES (continued)

     JOINT OPERATIONS

     Substantially  all of the Company's oil and gas exploration  activities are
     conducted  jointly  with  others  and,   accordingly,   these  consolidated
     financial statements reflect the Company's  proportionate  interest in such
     activities.

     CAPITAL ASSETS

     Capital assets, which comprise office equipment, furniture and fixtures and
     computer  software  are  recorded  at cost  less  accumulated  amortization
     calculated  using the  straight-line  method  over their  estimated  useful
     lives.

          Office equipment                                      5 years
          Office furniture and fixtures                         7 years
          Software                                              3 years

     LONG-TERM INVESTMENTS

     Long-term investments are accounted for using the cost method.

     REVENUE RECOGNITION

     The Company  will  recognize  oil and gas  revenues  from its  interests in
     producing wells as oil and gas is produced and sold from these wells.

     INCOME TAXES

     Income tax  liabilities  and assets are  recognized  for the  estimated tax
     consequences  attributable to differences  between the amounts  reported in
     the consolidated financial statements and their respective tax bases, using
     enacted  income  tax  rates.  The effect of a change in income tax rates on
     future  income tax  liabilities  and assets is  recognized in income in the
     period that the change  occurs.  Future income tax assets are recognized to
     the extent that they are considered more likely than not to be realized.

     LOSS PER SHARE

     Basic earnings per share is computed by dividing income available to common
     shareholders  by the weighted  average number of common shares  outstanding
     during the period.  The  computation of diluted  earnings per share assumes
     the  conversion,  exercise or contingent  issuance of securities  only when
     such  conversion,  exercise  or  issuance  would have a dilutive  effect on
     earnings  per share.  The  dilutive  effect of  convertible  securities  is
     reflected  in  diluted  earnings  per  share  by  application  of  the  "if
     converted" method. The dilutive effect of outstanding  options and warrants
     and  their  equivalents  is  reflected  in  diluted  earnings  per share by
     application of the treasury stock method.



                                       F-9

                                     - 55 -

<PAGE>


                           CALIFORNIA EXPLORATION LTD.
                          (Formerly QDM Ventures Ltd.)
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEARS ENDED MAY 31, 2002 AND 2001
          (Expressed in United States Dollars, unless otherwise stated)


2.   SIGNIFICANT ACCOUNTING POLICIES (continued)

     SHARE OPTION PLAN

     The Company has a stock  option plan which is  described  in Note 8(c).  No
     compensation  expense  is  recognized  for this plan  when  shares or share
     options are issued pursuant to the plan.  Consideration  paid for shares on
     exercise of the share options is credited to share capital.

     CONCENTRATION OF CREDIT RISK

     Financial   instruments,   which   potentially   subject   the  Company  to
     concentrations  of credit risk,  consist of cash. The Company  periodically
     evaluates the credit  worthiness of financial  institutions,  and maintains
     cash accounts only in large high quality financial institutions.

     FAIR VALUE

     The  carrying  amount  reported  in the  balance  sheet for  cash,  amounts
     receivable,  bridge  loans,  other  assets,  accounts  payable  and accrued
     liabilities and advances from shareholder approximates fair value.


3.   CORPORATE REORGANIZATION

     On September  27, 2001,  the Company  completed a  reorganization  with the
     shareholders of CalEx,  whereby the Company issued  4,346,084 common shares
     of its share capital for 100% of the issued and  outstanding  share capital
     of CalEx.

     Since  this  transaction  resulted  in the  former  shareholders  of  CalEx
     acquiring  control  of the  Company,  the  exchange  has been  treated  for
     accounting  purposes  as  a  reverse  takeover.   In  accounting  for  this
     transaction:

     i)   CalEx is deemed to be the purchaser and parent  company for accounting
          purposes. Accordingly, its net assets are included in the consolidated
          balance sheets at their historical book value;

     ii)  control of the net assets and  business of the  Company  was  acquired
          effective  September 27, 2001. The transaction has been accounted as a
          purchase of the assets and  liabilities  of the Company by CalEx.  The
          assets and liabilities of the Company have been recorded at their fair
          values, as follows:
                                                                           $

          Net working capital                                            89,208
          Advances to CalEx, as at combination date,
             eliminated on consolidation                                 21,462
          Deferred reorganization costs                                  70,113
                                                                   ------------
          Net assets purchased                                          180,783
                                                                   ============



                                      F-10

                                     - 56 -

<PAGE>


                           CALIFORNIA EXPLORATION LTD.
                          (Formerly QDM Ventures Ltd.)
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEARS ENDED MAY 31, 2002 AND 2001
          (Expressed in United States Dollars, unless otherwise stated)


3.   CORPORATE REORGANIZATION (continued)

     iii) the  consolidated  statements of operations  and deficit and cash flow
          for the year ended May 31, 2002 include  CalEx's results of operations
          and cash  flow  for the  year  ended  May 31,  2002 and the  Company's
          results of  operations  and cash flow from the  effective  date of the
          business  acquisition.  The comparative figures for the year ended May
          31, 2001 are those of CalEx.

     Prior to completion of the corporate  reorganization  the Company  incurred
     general and  administration  costs totalling $40,391 for the period June 1,
     2001 to September 27, 2001.


4.   PROPOSED BUSINESS ACQUISITION

     On January  14,  2002,  the  Company  entered  into a letter of intent (the
     "Letter  of  Intent")  whereby  it  agreed,   subject  to  shareholder  and
     regulatory approvals,  to acquire 100% of the issued and outstanding common
     shares  of  Optimal  Power  Systems  Ltd.   ("OPS"),   a  private   company
     incorporated  under the laws of  Alberta.  Under the terms of the letter of
     intent,  the Company  proposes to issue up to 4.8 million  common shares of
     the Company to the  shareholders  of OPS, based upon OPS achieving  certain
     revenue levels.

     OPS was  established  in August  2001 to provide  technology  and  turn-key
     solutions  to  optimize  oil,  gas and  power  energy  resources.  OPS is a
     development stage company with limited operations to date.

     The Company has provided OPS bridge loans totaling  $99,800 (CDN $150,000).
     The bridge loans are non-  interest  bearing.  OPS has agreed to pledge its
     assets as security for the bridge loans. In addition,  the  shareholders of
     OPS have also agreed to pledge their shareholdings in OPS as security.

     As at May 31,  2002,  the  Company  has  incurred  $13,221  for legal  fees
     associated with the proposed acquisition.  This amount has been recorded as
     deferred  acquisition  costs. In the event the business  acquisition is not
     completed, the Company will charge the deferred costs to operations.

     Subsequent to May 31, 2002, the Company and OPS agreed that a restructuring
     of OPS' business plan was required  before the proposed  acquisition  could
     proceed. The extent of the changes and the amendments,  if any, that may be
     required to the Letter of Intent are not known at this time.


5.   CAPITAL ASSETS
<TABLE>
<CAPTION>
                                                    2002                                    2001
                                   --------------------------------------   --------------------------------------
                                                 ACCUMULATED                              ACCUMULATED
                                      COSTS     AMORTIZATION       NET          COSTS    AMORTIZATION      NET
                                   -----------  ------------  -----------   -----------  ------------  -----------
                                        $            $             $             $            $             $
    <S>                            <C>            <C>          <C>          <C>         <C>            <C>
     Office furniture and fixtures      20,466         7,288       13,178        25,750         5,560       20,190
     Office equipment                   50,425        24,916       25,509        51,895        15,272       36,623
     Software                           67,397        55,386       12,011        67,397        32,920       34,477
                                   -----------  ------------  -----------   -----------  ------------  -----------
                                       138,288        87,590       50,698       145,042        53,752       91,290
                                   ===========  ============  ===========   ===========  ============  ===========
</TABLE>

                                      F-11

                                     - 57 -

<PAGE>


                           CALIFORNIA EXPLORATION LTD.
                          (Formerly QDM Ventures Ltd.)
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEARS ENDED MAY 31, 2002 AND 2001
          (Expressed in United States Dollars, unless otherwise stated)


6.   OIL AND GAS PROPERTIES

                                                        2002              2001
                                                         $                 $
     Undeveloped oil and gas prospects
        Acquisitions and leasehold costs               20,697            20,697
        Exploration costs                             247,699                 -
                                                  -----------       -----------
                                                      268,396            20,697
                                                  ===========       ===========

     Property  acquisition  costs include costs incurred to purchase,  lease, or
     otherwise  acquire  a  property.  Exploration  costs  include  the costs of
     geological and geophysical  activity,  dry holes and drilling and equipping
     exploratory wells.

     During the year ended May 31,  2002,  the Company  recorded  an  impairment
     charge  of  $39,346  (2001 - nil)  reflecting  its  share  of  unsuccessful
     drilling  activities and related acquisition costs. As at May 31, 2002, the
     Company had not found any proved reserves.

     See Note 13.


7.   OTHER ASSETS
                                                       2002              2001
                                                         $                 $

     Portfolio investments                             11,500           134,875
     Other                                            136,679           146,059
     Deferred acquisition costs (Note 4)               13,221                 -
     Due from related parties (Note 9(b))             102,131                 -
                                                  -----------       -----------
                                                      263,531           280,934
                                                  ===========       ===========

     During the year ended May 31, 2001,  the Company  wrote down its  portfolio
     investments  by $100,000.  During the year ended May 31, 2002,  the Company
     wrote down the investments by a further $123,375, to $11,500, its estimated
     fair market value.




                                      F-12

                                     - 58 -

<PAGE>


                           CALIFORNIA EXPLORATION LTD.
                          (Formerly QDM Ventures Ltd.)
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEARS ENDED MAY 31, 2002 AND 2001
          (Expressed in United States Dollars, unless otherwise stated)


8.   SHARE CAPITAL
<TABLE>
<CAPTION>
                                                                            Number
                                                                           of Shares             $

     Authorized - unlimited common shares
       (2001 - 100,000,000 common shares) without par value
   <S>                                                                  <C>              <C>
     CalEx
     -----
     Inception, October 6, 1999                                                      -               -
     Shares issued for cash                                                  2,346,084         878,450
     Less:  share issuance costs                                                     -         (23,431)
                                                                          ------------    ------------
     Balance, May 31, 2000                                                   2,346,084         855,019

     Shares issued for cash                                                  2,000,000         200,000
     Less:  share issuance costs                                                     -            (680)
     Loan to officer                                                                 -         (35,000)
                                                                          ------------    ------------
     Balance, May 31, 2001                                                   4,346,084       1,019,339

     Repayment on loan by officer                                                    -           5,000

     Reverse Take-over Transaction at September 27, 2001
     ---------------------------------------------------
     Adjustment of shares to reflect shares of the legal
       parent outstanding at time of reverse take-over                       3,245,001               -
     Net assets of legal parent at time of reverse take-over                         -         180,783
     Less:  reorganization costs                                                     -        (102,299)
                                                                          ------------    ------------
     Balance, May 31, 2002                                                   7,591,085       1,102,823
                                                                          ============    ============

</TABLE>

     (a)  During the year ended May 31, 2002, the Company completed the business
          combination with CalEx and issued 4,346,084 common shares of its share
          capital for 100% of the issued and outstanding  common stock of CalEx.
          Of the shares  issued in the  business  combination,  at May 31, 2002,
          2,207,325  shares (the "Security  Shares") are held in escrow pursuant
          to a security  escrow  agreement,  and will be  released at six months
          intervals over a period ending September 27, 2007.

     (b)  As at May 31, 2002,  1,650,001  common  shares (the  "Escrow  Shares")
          remain held in escrow and will be released at six month intervals over
          a period ending September 27, 2004.

     (c)  On July 20,  2001,  the  Company's  Board of Directors  (the  "Board")
          approved  and adopted a stock  option plan (the  "Plan").  The maximum
          number of shares  reserved  for  issuance  under the Plan is 1,518,217
          common shares which amount represents 20% of the issued capital of the
          Company,  of which 285,000 shares are currently reserved for issue for
          stock  options  granted  prior  to the  adoption  of the  Plan  by the
          directors of the Company.


                                      F-13

                                     - 59 -

<PAGE>


                           CALIFORNIA EXPLORATION LTD.
                          (Formerly QDM Ventures Ltd.)
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEARS ENDED MAY 31, 2002 AND 2001
          (Expressed in United States Dollars, unless otherwise stated)


8.   SHARE CAPITAL (continued)

          Share   options  to  directors   and  employees  of  the  Company  and
          consultants to acquire  1,085,000  shares were granted and outstanding
          as at May 31, 2002.  These  options are  exercisable  on varying dates
          expiring  from  fiscal  2004 to  fiscal  2005 at prices  ranging  from
          CDN$0.20 to CDN $0.60 per share.

          Details of options outstanding are as follows:
<TABLE>
<CAPTION>
                                                        2002                            2001
                                             ---------------------------     ---------------------------
                                                                WEIGHTED                        WEIGHTED
                                                                 AVERAGE                         AVERAGE
                                                NUMBER          EXERCISE        NUMBER          EXERCISE
                                              OF OPTIONS          PRICE       OF OPTIONS          PRICE
                                                                  CDN$                            CDN$
       <S>                                   <C>                <C>           <C>              <C>
          Balance, beginning of year              285,000         0.20                  -           -
          Granted                                 800,000         0.60            285,000         0.20
                                             ------------                    ------------
          Balance, end of year                  1,085,000         0.49            285,000         0.20
                                             ============                    =============
</TABLE>
     (d)  As at May 31, 2002, warrants to purchase up to 55,000 common shares of
          the Company at CDN$0.20 per share on or before June 21, 2002, remained
          outstanding.  Subsequent to May 31, 2002,  the warrants were exercised
          and the Company received $11,000.


9.   RELATED PARTY TRANSACTIONS

     (a)  During  the year  ended May 31,  2002,  the  former  President  of the
          Company advanced $58,920 to the Company pursuant to a proposed private
          placement,  which was not  completed.  The  advance  is non-  interest
          bearing and the shareholder has agreed not to demand  repayment of the
          advance during the next fiscal year.

     (b)  The Company conducts certain oil and gas operations with  corporations
          in which  certain of the  corporations'  officers  and  directors  are
          current shareholders and former officers and directors of the Company.
          These  transactions were conducted under the same terms and conditions
          as  transactions  with  non-related  parties.  As at May 31, 2002, the
          Company  had  recorded  $102,131  (2001 - $nil)  in other  assets  and
          $172,394  (2001 - $nil) in accounts  payable  and accrued  liabilities
          with the related corporations.

     (c)  During the year ended May 31,  2001,  the  Company  provided a loan of
          $35,000 to the  President  of the  Company to acquire  350,000  common
          shares of the Company  (the "Loan  Shares").  The  Company  received a
          promissory  note for the loan.  The  promissory  note is  non-interest
          bearing and is repayable  either in part or in full as required by the
          Company upon the disposition of part or all of the Loan Shares held by
          the  President.  During  the year  ended  May 31,  2002,  the  Company
          received a partial payment of $5,000. As at May 31, 2002, 300,000 Loan
          Shares remain pledged as security for the promissory note.



                                      F-14

                                     - 60 -

<PAGE>


                           CALIFORNIA EXPLORATION LTD.
                          (Formerly QDM Ventures Ltd.)
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEARS ENDED MAY 31, 2002 AND 2001
          (Expressed in United States Dollars, unless otherwise stated)


10.  INCOME TAXES

     As at May 31,  2002,  the Company has  accumulated  non capital  losses for
     Canadian income tax purposes of  approximately  CDN$190,000,  expiring from
     2007 to 2009,  and for United States  income tax purposes of  approximately
     $568,000,  expiring from 2020 to 2022,  which are available for application
     against future taxable income,  the related benefits of which have not been
     recognized in these financial statements.


11.  SEGMENTED INFORMATION

     As at May 31, 2002, the Company and its subsidiary operated in one industry
     segment,  the  exploration for and the development of petroleum and natural
     gas. The Company's  current petroleum and natural gas interests are located
     in the  United  States  and its  corporate  assets  are  located in Canada.
     Identifiable  assets,  revenues  and net loss in each of  these  geographic
     areas are as follows:

                                                            2002
                                               --------------------------------
                                               IDENTIFIABLE             NET
                                                  ASSETS               LOSS
                                                    $                    $
     United States                                  590,781            (227,389)
     Canada                                         210,375            (181,324)
                                               ------------        ------------
                                                    801,156            (408,713)
                                               ============        ============


                                                            2001
                                               --------------------------------
                                               IDENTIFIABLE             NET
                                                  ASSETS               LOSS
                                                    $                    $
     United States                                  458,836             (96,006)
     Canada                                         453,669            (152,029)
                                               ------------        ------------
                                                    912,505            (248,035)
                                               ============        ============


                                                            2000
                                               --------------------------------
                                               IDENTIFIABLE             NET
                                                  ASSETS         EARNINGS (LOSS)
                                                    $                   $
     United States                                  689,117            (152,944)
     Canada                                         367,932             259,074
                                               ------------      --------------
                                                  1,057,049             106,130
                                               ============      ==============


                                      F-15

                                     - 61 -

<PAGE>


                           CALIFORNIA EXPLORATION LTD.
                          (Formerly QDM Ventures Ltd.)
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEARS ENDED MAY 31, 2002 AND 2001
          (Expressed in United States Dollars, unless otherwise stated)


12.  DIFFERENCES   BETWEEN  CANADIAN  AND  UNITED  STATES   GENERALLY   ACCEPTED
     ACCOUNTING PRINCIPLES

     (a)  The  consolidated  financial  statements  of  the  Company  have  been
          prepared  according to Canadian GAAP which differ in certain  material
          respects from US GAAP.  Material  differences  between Canadian and US
          GAAP  and  their  effect  on  the  Company's   consolidated  financial
          statements are summarized in the tables below.
<TABLE>
<CAPTION>
                                                                                                 OCTOBER 6,
                                                                  YEAR ENDED      YEAR ENDED      1999 TO
                                                                   MAY 31,          MAY 31,       MAY 31,
                                                                    2002            2001           2000
                                                                      $               $              $
        <S>                                                     <C>            <C>           <C>
          Consolidated Statements of Operations
            and Comprehensive Income
          Earnings (loss) for the period
            Canadian GAAP                                            (408,713)      (248,035)       106,130
            Write-down of investment (i)                               38,500        100,000              -
            Other compensation expense (iv                                  -       (160,000)             -
                                                                 ------------   ------------   ------------
                                                                     (370,213)      (308,035)       106,130
          Other Comprehensive Income
            Unrealized holding gain (loss) on
              available-for-sale marketable securities (i)            (27,317)      (129,576)        18,393
                                                                 ------------   ------------   ------------
          Comprehensive earnings (loss) for the period               (397,530)      (437,611)       124,523
                                                                 ============   ============   ============
            Earnings (loss) per share basic and
              fully diluted - US GAAP                                  $(0.06)        $(0.14)         $0.06
                                                                 ============   ============   ============
</TABLE>









                                      F-16


                                     - 62 -

<PAGE>

                          CALIFORNIA EXPLORATION LTD.
                          (Formerly QDM Ventures Ltd.)
                         (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   FOR THE YEARS ENDED MAY 31, 2002 AND 2001
         (Expressed in United States Dollars, unless otherwise stated)


12.  DIFFERENCES   BETWEEN  CANADIAN  AND  UNITED  STATES   GENERALLY   ACCEPTED
     ACCOUNTING PRINCIPLES (continued)

                                                         2002            2001
                                                           $               $
     Consolidated Balance Sheets

     Total Assets
       Canadian GAAP                                    801,156         912,505
       Available for sale securities (i)                      -         (11,183)
                                                   ------------    ------------
       US GAAP                                          801,156         901,322
                                                   ============    ============

     Total Liabilities
       Canadian GAAP                                    248,951          35,071
                                                   ------------    ------------
       US GAAP                                          248,951          35,071
                                                   ============    ============

     Shareholders' Equity
       Canadian GAAP                                    552,205         877,434
       Available for sale securities (i)                      -         (11,183)
                                                   ------------    ------------
       US GAAP                                          552,205         866,251
                                                   ============    ============

          (i)  Marketable securities

               US GAAP requires  marketable  securities  which are classified as
               available for sale to be carried at fair value,  as determined by
               quoted published market prices,  with unrealized losses and gains
               on  available  for sale  securities  to be included as a separate
               component of  shareholders'  equity.  In  addition,  net realized
               gains and losses on security  transactions would be determined on
               the  specific  identification  cost  basis  and  included  in the
               determination of earnings for the year.

          (ii) Stock option plan for employees and directors

               The Company has a stock option plan which reserves  common shares
               for issuance to employees and directors.  The Company has adopted
               the disclosure  only provisions of SFAS No. 123 for stock options
               granted to employees and directors.  Accordingly, no compensation
               cost  has  been   recognized  for  the  stock  option  plan.  Had
               compensation  costs  for the  Company's  stock  option  plan been
               determined  based on the fair  value at the grant date for awards
               during the periods ended May 31, 2002,  2001 and 2000  consistent
               with the  provisions  of SFAS No.  123,  the  Company's  earnings
               (loss) and earnings (loss) per share would have been increased to
               the proforma amounts indicated below:





                                      F-17

                                     - 63 -

<PAGE>

                           CALIFORNIA EXPLORATION LTD.
                          (Formerly QDM Ventures Ltd.)
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEARS ENDED MAY 31, 2002 AND 2001
          (Expressed in United States Dollars, unless otherwise stated)



12.  DIFFERENCES   BETWEEN  CANADIAN  AND  UNITED  STATES   GENERALLY   ACCEPTED
     ACCOUNTING PRINCIPLES (continued)
<TABLE>
<CAPTION>
                                                                             2002         2001        2000
                                                                               $           $            $
            <S>                                                        <C>           <C>          <C>
               Earnings (loss) - as reported under US GAAP                (397,530)    (437,611)    124,523
               Earnings (loss) - proforma                                 (447,800)    (437,611)    124,523

               Earnings (loss) per share - as reported under US GAAP        $(0.06)      $(0.14)      $0.06
               Earnings (loss) per share - proforma                         $(0.07)      $(0.14)      $0.06
</TABLE>
               The fair market  value of each  option  granted to an employee or
               director  is  estimated  on the date of grant  using  the Black -
               Scholes Option Pricing Model with the following  assumptions used
               for grants during the periods ended May 31, 2002, 2001 and 2000:

                                               2002          2001          2000
                                               ----          ----          ----
               Risk-free interest rate         3.14%          N/A           N/A
               Expected volatility              125%          N/A           N/A
               Expected lives                3 years          N/A           N/A


          (iii)Private Placements of Common Stock with Related Parties

               US GAAP requires  disclosure of private  placements  conducted by
               the  Company  where  directors  and  officers  of the Company are
               participants.  During  the year  ended May 31,  2002,  directors,
               officers and  companies  controlled  by the directors or officers
               acquired  nil shares  (2001 -  1,600,000  shares;  2000 - 843,500
               shares) of the Company,  pursuant to private placements conducted
               by the Company, for cash proceeds of $nil (2001 - $160,000;  2000
               - $506,100);

          (iv) Private Placements of Common Stock

               The  Company  conducts  the  majority  of its  equity  financings
               pursuant  to  private  placements.  US GAAP  does  not  permit  a
               discount from the estimated fair value,  or the market price,  as
               appropriate.  US GAAP requires the  recognition  of the estimated
               fair value or market  value of the  Company's  common  stock as a
               credit  to share  capital,  with a charge to  operations  for the
               portion of the discount relating to equity  financings  conducted
               with  officers  and  directors  of the  Company  and a charge  to
               shareholders' equity, as a capital distribution, for the discount
               relating to the remaining portion of the equity financings.






                                      F-18

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<PAGE>

                           CALIFORNIA EXPLORATION LTD.
                          (Formerly QDM Ventures Ltd.)
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEARS ENDED MAY 31, 2002 AND 2001
          (Expressed in United States Dollars, unless otherwise stated)


12.  DIFFERENCES   BETWEEN  CANADIAN  AND  UNITED  STATES   GENERALLY   ACCEPTED
     ACCOUNTING PRINCIPLES (continued)


               Under US GAAP, loss and capital  distributions for the year ended
               May 31,  2002 would  increase  by $nil (2001 -  $160,000;  2000 -
               $nil) and $nil (2001 - $40,000; 2000 - $nil),  respectively,  and
               share  capital,  as at May 31,  2002 would  increase  by $200,000
               (2001  -  $200,000;  2000 -  $nil).  There  is no net  change  to
               shareholders' equity.

          (v)  Reverse Take-over Accounting

               Under  Canadian  GAAP,  a reverse  takeover of a publicly  listed
               shell  corporation  is  presently  considered  to  be a  business
               combination. Under US GAAP, such a reverse takeover of a publicly
               listed  shell   corporation   is   considered  to  be  a  capital
               transaction in substance and not a business combination.  In this
               particular  transaction  there is no difference in the underlying
               accounting for the transaction.

          (vi) Income Tax

               Under  Canadian  GAAP,   deferred  tax  assets  relating  to  the
               potential  benefit  of  income  tax  loss  carryforwards  are not
               recognized  unless there is virtual  certainty of  realization of
               the benefit. US GAAP provides similar treatment, but requires the
               benefit be recognized and a valuation  allowance be recognized to
               fully offset the deferred tax asset.

               As at  August  31,  2002,  the  Company  has fully  reserved  the
               $167,000  tax  benefit  of  operating  loss  carryforwards,  by a
               valuation allowance of the same amount, because the likelihood of
               realization of the tax benefit cannot be determined. Of the total
               tax benefit,  $85,000 is  attributable  to the year ended May 31,
               2002.

     (b)  The  Company's  consolidated  statements  of cash flow  comply with US
          GAAP.

     (c)  New Technical Pronouncements

          In June 2001,  the  Financial  Accounting  Standards  Board  ("FASB"),
          issued SFAS 143,  "Accounting for Asset Retirement  Obligations." SFAS
          143 addresses  financial  accounting  and  reporting  for  obligations
          associated with the retirement of tangible  long-lived  assets and the
          associated  asset  retirement  costs.  SFAS  143  generally   requires
          obligations associated with asset retirements to be recognized earlier
          and  displayed  as  liabilities  rather  than  as  contra-assets.  The
          pronouncement is effective for financial  statements issued for fiscal
          years beginning after June 15, 2002.  Management does not believe that
          the  adoption  of SFAS  143  will  have any  impact  on its  financial
          position or results of operations.




                                      F-19

                                     - 65 -

<PAGE>

                           CALIFORNIA EXPLORATION LTD.
                          (Formerly QDM Ventures Ltd.)
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEARS ENDED MAY 31, 2002 AND 2001
          (Expressed in United States Dollars, unless otherwise stated)


12.  DIFFERENCES   BETWEEN  CANADIAN  AND  UNITED  STATES   GENERALLY   ACCEPTED
     ACCOUNTING PRINCIPLES (continued)


          In August 2001,  FASB issued SFAS 144,  "Accounting for the Impairment
          or  Disposal  of  Long-Lived  Assets."  SFAS 144  addresses  financial
          accounting and reporting for the impairment or disposal of long- lived
          assets.  SFAS 144 establishes a single accounting model for long-lived
          assets to be disposed of by sale. The  pronouncement  is effective for
          financial  statements issued for fiscal years beginning after December
          15,  2001.  Management  does not believe that the adoption of SFAS 144
          will  have  any  impact  on  its  financial  position  or  results  of
          operations.

          In June 2002, FASB issued SFAS 146,  "Accounting for Costs  Associated
          with  Exit or  Disposal  Activities."  SFAS  146  addresses  financial
          accounting  and reporting for costs  associated  with exit or disposal
          activities  and nullifies  Emerging  Issues Task Force Issue No. 94-3,
          "Liability  Recognition for Certain Employee  Termination Benefits and
          Other  Costs to Exit an  Activity."  SFAS  146  generally  requires  a
          liability for a cost associated  with an exit or disposal  activity to
          be recognized  and measured  initially at its fair value in the period
          in which the liability is incurred. The pronouncement is effective for
          exit  or  disposal  activities  initiated  after  December  31,  2002.
          Management  does not believe  that the  adoption of SFAS 146 will have
          any impact on its financial position or results of operations.


13.  SUBSEQUENT EVENTS

     Subsequent  to May 31,  2002,  the  Company  conducted  the  drilling  of a
     side-track to an exploratory well which was initially  drilled in 2001. The
     results from the side-track  determined that the well was uneconomic and it
     was plugged and  abandoned.  As at May 31,  2002,  the Company had incurred
     $268,396 associated with the acquisition and exploration on the prospect. A
     further  $51,000  was  paid by the  Company  subsequent  to May  31,  2002,
     relating  to the  side-track.  These  costs will be  charged to  operations
     during fiscal 2003.

     See also Note 4.




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