UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-KSB

                 Annual Report Under Section 13 or 15(d) of the
                         Securities Exchange Act of 1934

                   For the fiscal year ended December 31, 2006

                         Commission File Number: 0-29832

                     AUSTRALIAN-CANADIAN OIL ROYALTIES LTD.


  BRITISH COLUMBIA, CANADA                                      75-2712845
--------------------------------                            -------------------
(State or other Jurisdiction of                               (IRS Employer
 Incorporation or Organization)                             Identification No.)

                                   PO Box 1629
                         1301 AVE. M, CISCO, TEXAS 76437
                    ---------------------------------------
                    (Address of Principal Executive Offices)

                                 (254) 442-2638
                (Issuer's Telephone Number, including Area Code)

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

          Securities registered pursuant to Section 12 (g) of the Act:
                           Common Stock, no par value

Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the issuer 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 if disclosure of delinquent filers in response to Item
405 of Regulation S-K (section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of issuer's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB [X]

Indicate by check mark whether the  registrant  is a shell  company
(as defined in Rule12b-2 of the Exchange  Act).             Yes [   ]  No [X]

State issuer's revenues for its most recent fiscal year
(ending December 31, 2006):                                       $42,145.00.

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed fiscal quarter:
March 30, 2007 was $2,133,258.

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 12, 2006 (the last practicable date): Class: Common
Stock, no par value - Outstanding as of April 12, 2007 was 13,521,912. The
Company's OTC Bulletin Board Symbol is "AUCAF".


<PAGE>



1
FORWARD LOOKING STATEMENTS

Statements made in this Form 10-KSB that are not historical or current facts are
"forward looking statements" made pursuant to the safe harbor provisions of
Section 27A of the Securities Act of 1933 (the "Act") and Section 21E of the
Securities Exchange Act of 1934. These statements often can be identified by the
use of terms such as "may," "will," "expect," "believe," "anticipate,"
"estimate," "approximate," or "continue," or the negative thereof. We intend
that such forward-looking statements be subject to the safe harbors for such
statements. We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Any
forward-looking statements represent management's best judgment as to what may
occur in the future. However, forward-looking statements are subject to risks,
uncertainties and important factors beyond our control that could cause actual
results and events to differ materially from historical results of operations
and events and those presently anticipated or projected. We disclaim any
obligation subsequently to revise any forward-looking statements to reflect
events or circumstances after the date of such statement or to reflect the
occurrence of anticipated or unanticipated events.

AVAILABLE INFORMATION

Australian-Canadian Oil Royalties Ltd. files annual, quarterly, current reports,
proxy statements, and other information with the Securities and Exchange
Commission (the "Commission"). You may obtain copies of our Commission filings
by going to the Commission's website at https://www.sec.gov.


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

BUSINESS DEVELOPMENT

Australian-Canadian Oil Royalties Ltd. ("ACOR" or "the Company") was
incorporated in British Columbia, Canada, in April of 1997. The Company's U.S.
office is located at 1301 Avenue M., Cisco, Texas 76437.

The Company has continued to be active in working interests and royalty
opportunities both domestically and internationally. The business of ACOR during
2006 was to make a study of available oil and gas development acreage in
Australia and select and apply for the exploration permits on the areas which
demonstrate a high probability of success with the maximum rate of return for
dollars invested.

ACOR management announced a new company website located at WWW.AUSSIEOIL.COM in
January, 2006.

CURRENT BUSINESS OPERATIONS

The Company is a purchaser and holder of both overriding royalty interests and
working interests both on an international and domestic basis. ACOR's business
is related to the principal products of oil and gas, and is dependent on various
factors, which are discussed below. The average sales price per barrel of oil
from Australia during 2006 was $US 69.50.

While revenues for the Company in 2006 are insignificant the foundation has been
made for greater potential sources of revenue from its investments in Australia.
Of particular importance the Company is the farm-out agreement entered into with
Holloman Corporation on three (3) South Australian oil and gas concessions known
as PEL 108, 109 and 112. Two drilling locations were staked on PEL 112 during
the later part of 2005, one on seismic structure C-26 covering 3,459 acres and
the other on seismic structure C-23 which covers 2,075 acres. A discovery on
either of these two large seismic structures could have a dramatic affect on the
Company's revenues. For example the Worrior wells on PEL 93 adjoins our PEL 112
to the east has three wells producing around $100,000,000 per year of oil runs.
There is no assurance that the structures on our concession PEL 112 will be
drilled and if drilled would be competed as economic producers. Holloman plans
to drill three wells during the spring/summer of 2007 with the Company having a
13.8325% carried working interest in the first three wells. The Company also
holds a 0.83% of 1% Overriding Royalty Interest in PEL's 108, 109 and 112.


                                      -2-
<PAGE>


The acquisition, exploration, development, production and sale of oil and gas
are subject to many factors that are outside the Company's control. These
factors include: market prices; national and international economic conditions;
import and export quotas; availability of drilling rigs, casing, pipe, and other
equipment and supplies; availability of and proximity to pipelines and other
transportation facilities; the supply and price of competitive fuels; and the
regulation of prices, production, transportation, and marketing by domestic and
foreign governmental authorities. Additionally, the Company generally has no
control over whether the owner or operator of leases to which its overriding
royalty interests are attributable will elect to explore for oil and gas on such
properties, or to develop them following discoveries that may occur. Each of
these factors may affect the rate at which oil and gas are produced on
properties in which the Company has an interest or affect whether wells will be
drilled on such properties, and could otherwise materially affect ACOR's
earnings.

On the Company's overriding royalties in Australia there were a total of 32
wells drilled in the Cooper/Eromanga Basin and 1 well drilled in the Bass Strait
of the Gippsland Basin resulting in 27 producers, and 5 dry holes for the year
ended December 31, 2006. For further information see Item 2 Description of
Property.


PROPOSED FUTURE BUSINESS OPERATIONS


The Company's strategy is two fold; 1) to seek overriding royalty interests in
oil and gas concessions within sedimentary basins in Australia and 2) develop
and explore existing concessions in which the Company holds working interest
through exploration - seismic and drilling.


The Company's ability to complete its planned exploration activities and explore
other oil and gas opportunities is dependent on adequate capital resources being
available and equity being obtained and/or find partners to fund the exploration
and drilling programs on the areas in which the Company holds working interests.

COMPETITION

The Company is competing with other oil companies for oil and gas leases and
concessions. The oil and gas industry is highly competitive in all of its
phases, with competition for favorable producing royalties, overriding
royalties, and good oil and gas leases being particularly intense. The Company
believes that the exploration program, promised expenditures, geological and
geophysical skill, and familiarity with an area of operations are the primary
competitive factors in the identification, selection, and acquisition of
desirable leases. When attempting to purchase interests in such properties, the
Company competes with independent operators and major oil companies.

FOREIGN TAXES AND UNITED STATES TAX CREDITS

As a result of its overriding royalty interests attributable to properties
outside the United States, the Company is subject to the imposition of taxes by
foreign governments upon the Company's income derived from such foreign
jurisdictions. These taxes are of various types, with differing tax rates, and
are subject to change. Generally, the Company's income from a foreign
jurisdiction will be taxed in the same manner as that for other companies
operating in the jurisdiction, but discriminatory taxation by a particular
jurisdiction may occur. The current non-resident corporate income tax rate in
Australia, for overriding royalty interests, is 30%.

As a Canadian corporation, the Company is liable for income taxes under the laws
of Canada. Under Canadian law the Company's Australian-source income is subject
to a 46% tax (on Canadian income). We believe the 30% Australian tax should be a
credit toward the payment of the 46% Canadian tax under double taxation treaties
between the countries.

The Company is taxable in the U.S. on U.S. source income. Because there has been
neither U.S. source net income nor any income effectively connected with a U.S.
trade or business, there have been no U.S. taxes incurred to date.


                                      -3-
<PAGE>


GOVERNMENTAL REGULATION

Oil and gas operations are subject to federal, state and local laws and
regulations governing waste, environmental quality, pollution control,
conservation and other measures regarding environmental and ecological matters.
It is impossible to predict the impact of environmental legislation and
regulations on the Company's operations and earnings in the future.

The domestic production and sale of oil and gas are subject to federal
regulation by the Department of Energy and the Federal Energy Regulation
Commission. Rates of production of oil and gas have for many years been subject
to federal and state conservation laws and regulations. In addition, oil and gas
operations are subject to extensive federal and state regulations concerning
exploration, development, production, transportation, and pricing, and even to
interruption or termination by governmental authorities.

In foreign countries, the Company may be subject to governmental restrictions on
production, pricing and export controls. Regulations existing or imposed upon
the Company or its properties at the time of their acquisition may change to an
unpredictable extent. The Company will have little or no control over the change
of regulations or imposition of new regulations and restrictions, expropriation
or nationalization by foreign governments or the imposition of additional
foreign taxes. Management believes that these actions are unlikely to be
undertaken by the state governments of South Australia or Queensland, where all
of the foreign oil and gas properties from which the Company receives royalty
income are currently located. The same belief applies for the government of
Victoria, since ACOR has acquired an overriding royalty under VIC/P45 and
VIC/P53.

NATIVE TITLE

The Company has cleared Native Title on PEL 108, PEL 109 and PEL 112 since the
former Annual Report and is pursing title on ATP 582.

Native title claims over oil and gas areas by native aboriginal groups have
become commonplace in Australia since the mid-1990's. Native title is the
activity of aboriginal groups' land claims over existing and potential oil and
gas exploration and development areas. Although native Australians are claiming
certain areas, they have not, as yet, proven actual ownership. However, any
recognized native title claim must be dealt with under the provisions of the
Native Title Act of 1993, and overseen by the state governments, which manage
specific areas within state boundaries. Due to native title claims, a certain
level of risk can be expected which could have a detrimental effect on the
timing of projects.

Both the South Australian and Queensland State governments have initiated
negotiations between industry and native title claimants. These negotiations are
being managed independently by each state and could have independent outcomes.
The Company has no involvement in these negotiations. ACOR has cleared Native
Title on all of its South Australian acreage at a cost of thousands of dollars
and a 1% overriding royalty of that so that the areas can now be drilled and
developed.

The Company's operations could also be affected from time to time by other
federal, state and local laws and regulations and by political developments,
such as the Native Title issue in onshore Australia.

While title to permits is assured, there can be no exploration on the permit
areas until negotiations with natives are completed. When negotiations over the
release areas discussed below are completed, exploration and development on the
related areas will commence.

SOUTH AUSTRALIA NATIVE TITLE STATUS:

The Native Title issue in South Australia was resolved during the first quarter
of 2003. The successful negotiation, between Industry, Government, and a number
of native tribes of Australia, covered areas leased under the Primary Industries
and Resources, South Australia (PIRSA) Cooper-Eromanga Basins Exploration
Opportunities Acreage Release, 1998, (also known as the "CO-98 Release"). The
success of this negotiation was paramount in the completion of all future
negotiations within South Australia. A well was drilled on PEL 100, which was
drilled to 8,000 feet and was a dry hole during the fiscal year ended December
31, 2005. The area has a number of other structures, which could be drilled.


                                      -4-
<PAGE>


Native Title clearance has been obtained on South Australian areas PEL's 86, 87,
88, 89, 100, 108, 109, 111, 112 & 115 all of which the Company holds and
interest (For further information see Item 2 - Description of Property).

QUEENSLAND NATIVE TITLE STATUES:

In Queensland, the Company is paying annual rentals, but access for exploration
is blocked until successful Native Title negotiations are completed. It is not
clear at the time of this report how long the negotiations will take to settle
with the local natives on ATP 582.

FOREIGN CURRENCY

Due to the nature of the Company's activities in Australia, portions of the
Company's operating capital may at times be held in various foreign currencies.
This subjects the Company to the risk of currency fluctuations and changes in
rates of conversion for different currencies. The Company does not engage or
expect to engage in any hedging or other transactions, which are intended to
manage risks relating to foreign currency fluctuations. Additionally, revenues
generated in foreign countries in which the Company has or may acquire interests
may be subject to governmental regulations, which restrict the free
convertibility of such funds, and all remittances of funds out of these
countries might require the approval of the applicable government's exchange
control agency. Presently, the Company experiences no difficulties with the free
convertibility of funds from Australia. In the Company's opinion, the foreign
exchange control laws currently in effect in Australia, do not unreasonably
delay the remittance of funds generated in Australia to the United States. The
exchange rate on April 12, 2007 was $1.00 Australian = $0.83 United States.

REGULATION OF OIL AND NATURAL GAS PRODUCTION

Our oil and natural gas exploration, production and related operations are
subject to extensive rules and regulations promulgated by federal, state and
local authorities and agencies. Failure to comply with such rules and
regulations can result in substantial penalties. The regulatory burden on the
oil and natural gas industry increases our cost of doing business and affects
our profitability. Although we believe we are in substantial compliance with all
applicable laws and regulations, because such rules and regulations are
frequently amended or reinterpreted, we are unable to predict the future cost or
impact of complying with such laws.

Many states require permits for drilling operations, drilling bonds and reports
concerning operations and impose other requirements relating to the exploration
and production of oil and natural gas. Such states also have statutes or
regulations addressing conservation matters, including provisions for the
unitization or pooling of oil and natural gas properties, the establishment of
maximum rates of production from wells, and the regulation of spacing, plugging
and abandonment of such wells.

ENVIRONMENTAL MATTERS

Our operations and properties will be subject to extensive and changing federal,
state and local laws and regulations relating to environmental protection,
including the generation, storage, handling, emission, transportation and
discharge of materials into the environment, and relating to safety and health.
The recent trend in environmental legislation and regulation generally is toward
stricter standards, and this trend will likely continue. These laws and
regulations may (i) require the acquisition of a permit or other authorization
before construction or drilling commences and for certain other activities; (ii)
limit or prohibit construction, drilling and other activities on certain lands
lying within wilderness and other protected areas; and (iii) impose substantial
liabilities for pollution resulting from our operations. The permits required
for several of our operations are subject to revocation, modification and
renewal by issuing authorities. Governmental authorities have the power to
enforce their regulations, and violations are subject to fines or injunctions,
or both. In the opinion of management, we are in substantial compliance with
current applicable environmental law and regulations, and we have no material
commitments for capital expenditures to comply with existing environmental
requirements. Nevertheless, changes in existing environmental laws and
regulations or in interpretations thereof could have a significant impact on our
business operations, as well as the oil and natural gas industry in general.


                                      -5-
<PAGE>



RESEARCH AND DEVELOPMENT ACTIVITIES

During 2005 the Company began an aggressive program with its partners on
Australian concessions PEL 108 and 112 located in South Australia by engaging a
Geophysicist and a fifty member team to conduct a 190 kilometer 2D seismic
survey and $1,900,000 worth of seismic data was also reviewed on PEL 108 and
112. ACOR entered into a farm-out agreement with Holloman Corporation where
Holloman would commit to drill three (3) wells with the Company receiving a
13.825% carried working interest through both the drilling and completion in
these three wells. For additional information see Description of Properties -
Cooper/Eromanga Basin - PEL 108, 109 & 112 on page 11.

PERSONNEL

The Company has three employees and hires part time people on an as needed
basis. The Company also engages consultants and professionals when needed for
specific projects and/or tasks.


DEFINITIONS

The following definitions are provided to clarify certain terms used in this
report:

APPLICATION AREA - An area for which the Company has applied for the grant of an
Exploration Permit.

AUTHORITY TO PROSPECT ("ATP") - a concession granted by the State of Queensland,
Australia, which entitles its holders to an exclusive right to explore for oil
and natural gas in Queensland in the particular area covered by the ATP. Each
ATP has an initial term of four years. The area covered by an ATP is reduced by
relinquishment of approximately one-fourth of the area at the start of the third
year of its effectiveness and an additional one-fourth of the original area at
the start of the fourth year of its effectiveness. The area to be relinquished
is chosen by the holder of the ATP. An ATP will require some kind of geological
and/or geophysical operations, such as new seismic or seismic interpretation,
drilling or other operations during the term of the tenure. The amount of work
to be performed depends upon the expenditures required for each specific year of
the tenure. Holders are only required to expend those amounts as set out in the
original concession document. Applications for renewal may be filed at the time
of expiration of an ATP.

BLOCK - Resource Exploration Concessions in Australia are described and
identified by blocks. Each block is measured by 5 minutes latitude by 5 minutes
longitude.

CARRIED WORKING INTEREST - where working interest is paid is paid by a third
party through is the drilling phase or both the drilling and completion of a
well. After the carried portion of the well has been satisfied then the carried
working interest holder is responsible for its share of expenditures.

DEVELOPMENTAL WELLS - oil and gas wells drilled within the proven area of an oil
or gas reservoir to the depth of a stratigraphic horizon known to be productive.

DRY HOLE - a well found to be incapable of producing oil or gas in sufficient
quantities to justify completion.

EXPLORATION PERMIT - an exclusive offshore exploration permit with a term of six
years. Said permit is managed by the Victorian State Government.

EXPLORATORY WELL - a well drilled to find and produce oil and gas in an unproved
area or to find a new reservoir in a field previously found to be productive of
oil or gas in another reservoir.

GROSS PRODUCTION - the total production of oil, gas, or natural gas liquids from
a property or group of properties for any specified period of time.

MCF - thousand cubic feet of natural gas

MMCF - million cubic feet of natural gas


                                      -6-
<PAGE>


NET ROYALTY ACRE - generally, a measurement of royalty or overriding royalty and
the equivalent of the full customary one-eighth royalty of the gross production
of revenue free and clear of exploration, drilling and production costs from one
acre of land. The number of net royalty acres used in this report applies to
figures as of March 25, 2002 and the number will change as relinquishments take
place on the ATPs, as an ATP expires or is canceled, or any new areas are added.

OVERRIDING ROYALTY INTEREST ("ORRI") - an interest assigned out of the lessee's
leasehold or working interest. The amounts payable from ORRIs are payments
calculated as a percentage of either gross production or the gross revenues of
the working interest (based on the wellhead price) from a concession or lease,
usually free and clear of all exploration, drilling and development and
production costs, except for any applicable taxes and federal levies. In
calculating the wellhead price, pipeline and trucking costs have already been
deducted from the refinery price. The overriding royalties discussed herein are
generally expressed as a percent of the gross production.

PETROLEUM EXPLORATION LICENSE ("PEL") - an exclusive oil and gas exploration
permit issued by the South Australian Department of Primary Industries and
Resources. The initial term of the tenure is for a five (5) year period.

PETROLEUM RESOURCE RENT TAX - a tax on net income in Australia reduced by
indexing on offshore production, which replaces the royalty and is a deduction
from Australian income tax.

PRODUCING WELLS - wells capable of producing oil or gas in commercial
quantities, including those wells capable of producing in commercial quantities
that are shut in, or wells that are not currently producing in commercial
quantities but have been commercially productive in the past.

ROYALTY - generally, a share of the production reserved by the grantor of an oil
or gas lease or concession. The royalty interest is customarily free of cost or
expense incident to exploration, development or production, except for
production or gathering taxes.

SPUD DATE OR SPUDDED - The date drilling operations begin.

WORKING INTEREST ("WI") - all or a fractional part of the ownership rights
granted by a concession or lease. The owner of a WI or a part thereof pays all
costs of exploration and is entitled to the gross production, less royalties
retained by the grantor or lessor, and less ORRIs or other non-operating
interests created and assigned from the WI. The owner of a WI may incur
operating expenses in excess of income.

RISK FACTORS

An investment in our common stock involves a number of very significant risks.
You should carefully consider the following risks and uncertainties in addition
to other information in evaluating our company and its business before
purchasing shares of our common stock. Our business, operating results and
financial condition could be seriously harmed due to any of the following risks.

The risks described below are all of the material risks that we are currently
aware of that are facing our company. Additional risks not presently known to us
may also impair our business operations. You could lose all or part of your
investment due to any of these risks.

We have a history of operating losses, expect to continue to incur losses, and
may never be profitable, and we must be considered to be in the exploration
stage. Further, we have been dependent on sales of our equity securities and
debt financing to meet our cash requirements.

Our development of and participation in what could evolve into an increasing
number of oil and gas prospects may require substantial capital expenditures.
The uncertainty and factors described throughout this section may impede our
ability to economically find, develop, produce, and acquire natural gas and oil
reserves. As a result, we may not be able to achieve or sustain profitability or
positive cash flows from operating activities in the future.


                                      -7-
<PAGE>


We have received a going concern opinion from our independent auditors report
accompanying our December 31, 2006 and December 31, 2005 financial statements.
The independent auditor's report accompanying our December 31, 2006 and 2005
audited financial statements contains an explanatory paragraph expressing
substantial doubt about our ability to continue as a going concern. The
consolidated financial statements have been prepared "assuming that the Company
will continue as a going concern." Our ability to continue as a going concern is
dependent on raising additional capital to fund our operations and ultimately on
generating future profitable operations. There can be no assurance that we will
be able to raise sufficient additional capital or eventually have positive cash
flow from operations to address all of our cash flow needs. If we are not able
to find alternative sources of cash or general positive cash flow from
operations, our business and shareholders will be materially and adversely
affected.

RISKS RELATED TO OUR COMMON STOCK

Our common stock is classified as a "penny stock" under SEC rules which limits
the market for our common stock. The SEC has adopted rules that regulate
broker-dealer practices in connection with transactions in "penny stocks." Penny
stocks generally 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, provided that current price and volume information with
respect to transactions in such securities is provided by the exchange or
system). Penny stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from those rules, to deliver a standardized
risk disclosure document prepared by the SEC, which specifies information about
penny stocks and the nature and significance of risks of the penny stock market.
A broker-dealer must also provide the customer with bid and offer quotations for
the penny stock, the compensation of the broker-dealer, and sales person in the
transaction, and monthly account statements indicating 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 disclosure requirements
may have the effect of reducing the trading activity in the secondary market for
stock that becomes subject to those penny stock rules. If a trading market for
our common stock develops, our common stock will probably become subject to the
penny stock rules, and shareholders may have difficulty in selling their shares.

ITEM 2.  DESCRIPTION OF PROPERTY

The Company's principal office space is located at 1301 Avenue M, Cisco, Texas
76437. The office space is for corporate identification, mailing, and courier
purposes and costs us approximately $3,200 a year to an affiliate. This $3,200
has been recorded as an expense and contributed capital in the financials.

The Company holds overriding royalty interests in the Cooper/Eromanga Basins
that covers parts of Queensland and South Australia. These Company's overriding
royalties total 508,685 net royalty acres under 15,440,116 gross surface acres
in fifteen concessions. In addition the Company also owns 2,638 net royalty
acres under 553,430 gross acres in the Bass Strait of the Gippsland Basin
located offshore of the state of Victoria, Australia. See Table of Overriding
Royalty Interests on page 9 for ownership and size of each concession.

The Eromanga Basin encompasses the southwestern portion of the State of
Queensland and the northeast corner of South Australia, and is Australia's main
onshore producing oil and gas basin.

The Cooper Basin is located in the northeast part of the State of South
Australia. Management believes ACOR's overrides are in a prime location since
the majority of ACOR's interests form nearly continuous blocks adjoining the
producing block of Santos et al. which has reserves in excess of one billion
barrels of oil equivalent and is making approximately $A930,000,000 worth of
oil, gas and associated hydrocarbons per year (equivalent to about $771 million
in U. S. dollars).

On the 15,993,546 gross surface acres where ACOR holds overriding royalty
interests, there are giant anticlines, large faults and hundreds of seismic
highs, all of which indicate possibilities of oil and gas reserves. In addition,
about $27 million worth of seismic information has been completed and is
available on the areas.


                                      -8-
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ACOR is currently receiving revenues from four of its overriding royalty
interests - ATP 267, ATP 299, ATP 560 and PEL 115. A successful gas well was
completed on ATP 543 in 1996. After completion of a gas pipeline gas began to be
marketed in August 1999, but the pipeline reduced the gas price and the well was
shut in.

ACOR has overriding royalty interests in three Permits in the Gippsland Basin,
VIC/P45, 53 and 54. The Bass Strait of the Gippsland Basin is located between
the State of Victoria and Tasmania which has in excess of 4 billion barrels of
oil/condensate and 12 TCF gas reserves discovered since exploration drilling
began in 1964.

In addition to ACOR's large overriding royalty position it also has working
interests in five concession of which four are located in the Cooper/Eromanga
Basin and one is in the Bass Strait of the Gippsland Basin. See the table for
Working Interest Holdings for additional information.

                   NON-PRODUCING OVERRIDING ROYALTY INTERESTS

                                                    PERCENTAGE
                                                     OF 1% OF      NET
    AREA         CONCESSION                GROSS      GROSS      ROYALTY
                   HOLDER                  ACRES    PRODUCTION    ACRES   BLOCKS
--------------------------------------------------------------------------------
BASS STRAIT OF GIPPSLAND BASIN
  VIC/P45        Apache Energy Ltd.        214,896      7.50%     1,284     12
  VIC/P53        Cue Petroleum             182,858      5.00%       731     11
  VIC/P54        Apache Energy Ltd.        155,676      5.00%       623     11
                                         ---------               ------
                 TOTAL                     553,430                2,638

COOPER-EROMANGA BASIN
   PEL 86        Victoria Petroleum      1,066,000     10.00%     8,528     56
   PEL 87        Victoria Petroleum      1,066,000     10.00%     8,528     56
   PEL 88        Cooper Energy           1,230,000     30.00%    29,520     64
   PEL 89        Victoria Petroleum      1,208,000     10.00%     9,664     66
   PEL 111       Victoria Petroleum        292,819     10.00%     2,343     56
   ATP 544       Australian Petroleum
                 Industries Pty. Ltd.      901,600      8.08%     5,828     49
   ATP 550       Discovery Geo
                 (Australia) Corp.         276,000     25.00%     5,520     15
   ATP 582       Cooper-Eromanga Oil     6,716,000     67.10%   360,515    365
   ATP 616       Sundance Resources        147,200    333.33%    39,253      8
                                         ---------              -------
                 TOTAL                  12,903,619              469,699


                     PRODUCING OVERRIDING ROYALTY INTERESTS

                                                    PERCENTAGE
    AREA                                             OF 1% OF      NET
   & # OF        CONCESSION                GROSS      GROSS      ROYALTY
   WELLS           HOLDER                  ACRES    PRODUCTION    ACRES   BLOCKS
--------------------------------------------------------------------------------
COOPER/EROMANGA BASIN
    PEL 115
      8 Wells    Victoria Petroleum        273,297     10.00%     2,186     56
  ATP 267
     23 Wells    Santos                    220,800     17.15%     3,029     12
  ATP 299
    93 Wells     Santos                    441,600      5.75%     2,031     24
  ATP 543        Vernon E. Faulconer
    1 Well       Australia, Inc.           956,800     25.00%    19,136     52
  ATP 560        First Sourceenergy
    3 Wells      Group Inc.                625,600     25.00%    12,512     34
  Patchawarra
     SW          Santos                     18,400      6.25%        92      1
                                         ---------               ------
                 TOTAL                   2,536,497               38,986


                                      -9-
<PAGE>

                            WORKING INTEREST HOLDINGS

                                                  PERCENTAGE
                                                      OF
    AREA         CONCESSION             GROSS      WORKING       NET
                   HOLDER               ACRES      INTEREST    WI ACRES  BLOCKS
--------------------------------------------------------------------------------
COOPER/EROMANGA BASIN
  ATP 582        ACOR                 6,716,000    100.00%    6,716,000    365
  PEL 100        Cooper Energy          145,659      2.00%        2,913      8
  PEL 108        ACOR/Sakhai            506,811     41.50%      210,327     28
  PEL 109        ACOR/Sakhai            372,633     41.50%      154,643     20
  PEL 112        ACOR/Sakhai            818,904     41.50%      339,845     45
                                     ----------              ----------
                 TOTAL                8,560,007               7,423,728

BASS STRAIT OF GIPPSLAND BASIN
  VIC/P60        ACOR/Sakai/Holloman    339,769     25.00%*      84,942     24


     * Subsequent to the end of the fiscal year ended December 31 2006, the
     Company sold its 25% working interest for $152,896 in cash and retained an
     overriding royalty interest of 2.125%. The purchaser is obligated to pay
     for its share of a $2,000,000 3D seismic program to be concluded prior to
     October 29, 2007.

The following is a summary of the activity on the Company's Australian
properties divided into three areas 1) Gippsland Basin - Victoria, 2)
Cooper/Eromanga Basin of South Australia and 3) Cooper/Eromanga Basin of
Queensland:

BASS STRAIT OF THE GIPPSLAND BASIN

VIC/54

VIC/P54 is an offshore concession covering 155,676 gross acres under which the
Company holds a 5% of 1% of gross production. On December 23, 2004 the operator
began drilling the Grayling 1-A on VIC/54. The operator confirmed three gas
columns in the well from the well log analysis. The wire-line logs provided
sufficient data regarding the reservoir quality and hydrocarbon composition of
the Golden Beach reservoirs not to warrant drill stem testing. Given its
proximity to Longtom another gas discovery on the area, gas at the Grayling
location may provide additional reserves for a future development in VIC/P54.

Over the past 16 months, intensive work on the Longtom field has resulted in two
milestone achievements: the signing of a gas sales agreement with Santos in
December 2005 and the recent successful completion and production testing of the
Longtom-3 appraisal well.

Under the terms of the gas sales agreement, Santos has agreed to process up to
450PJ of raw gas from the Longtom field through its existing Patricia Baleen
facilities near Orbost in Victoria. Santos has further agreed to purchase the
first 350PJ of the sales quality gas produced at defined prices. The agreement
is conditional on the successful completion of the Longtom-3 appraisal well (now
achieved) and meeting a number of project milestones.

On July 12, The Longtom-3 well spudded, the well is estimated to cost
approximately $US35,0000,000 to drill and complete. The Longtom-3 well will be
complex and will cost approximately $35 million to drill and complete, roughly
double the average cost of a Bass Strait (Gippsland Basin) well. The Longtom-3
well was designed to test key uncertainties surrounding the commerciality of the
resource following the successful drilling and testing of the Longtom-2 well in
November 2004. Longtom-3 confirmed that sands in the Longtom field are
stratigraphically connected between the wells and are not stratigraphically
isolated sand bodies, which was the operator's downside resource scenario. From
deepest to shallowest, the gas bearing reservoir units in the Longtom field is
named the 100, 200, 300, 400 and 500 sands (refer Longtom-3 PH/ST1/H). The
reservoirs appear to be connected to a series of vertically separate, but
laterally connected, common aquifers.


                                      -10-
<PAGE>


The Longtom-3 well clearly demonstrated that wells can be drilled in the field
that will enable the production of gas at commercial rates. Two production tests
were conducted on the well:

         The first test produced gas from the 400 sand at a creditable
         23MMscf/d. The results from this test confirm the flow potential of the
         400 sand reservoir in the Longtom field, addressing a major concern
         leading up to the drilling of the Longtom-3 well. A flow was not
         achieved in the second test of Longtom-2 (conducted over the 400 sand).
         Nexus has interpreted this test as having failed due to down-hole
         mechanical problems.

         The second test, over the 100, 200 and 300 sand intervals in the
         horizontal hole section exceeded expectations producing an estimated
         77MMcf/d when bypassing the test separator and 59MMcf/d when fl owing
         through the test separator (the separator's flow capacity). Sampling
         during the test recorded expected levels of carbon dioxide (less than
         1%) and less than one part per million hydrogen sulphide.

In addition the second test indicated that the condensate yield is higher in the
100 sands than in the sands above it, which will provide an economic boost to
the project.


VIC/P60

VIC/P60 is an offshore concession covering 339,769 gross acres under which the
Company holds a 25% working interest. In April 2005, the Company hired a
geophysicist, Roy Whiting, to study the data on VIC/P60. Through Mr. Whiting
study through most of 2006 he identified six (6) structures, of which one of the
six (6) structures, the A-1 Prospect lies in 100-200 meters of shallow water.
The A-1 prospect is approximately 4.97 miles long and 1.24 miles wide with a
seismic bright spot anomaly rated good to excellent. The seismic bright spot is
108' thick and 820' horizontal by 20,500' perpendicular wide behind a fault on
the flank of the anticline. He has traced the beds to the nearest oil and gas
fields after processing 5,000 +/- seismic lines. Subsequent to the end of the
fiscal year ended December 31 2006, the Company sold its 25% working interest
for $152,896 in cash and retained an overriding royalty interest of 2.125%. The
purchaser is obligated to pay for its share of a $2,000,000 3D seismic program
to be concluded prior to October 29, 2007.

COOPER/EROMANGA BASIN - SOUTH AUSTRALIA

PEL 115

This permit covers 273,297 gross acres under which ACOR holds an overriding
royalty interest of 10% of 1% of gross production. PEL 115, is located in the
prolific Cooper/Eromanga Basin in South Australia. The Mirage-1 well completed
in July 2005 initially flowed clean oil at rate of 372 barrels of oil per day on
a 1/2 inch choke. Mirage-1 is currently producing on optimized beam pump
operation at a rate of 260 barrels of oil per day following the initial "clean
up" production rate of 372 barrels per day over the perforated 52 foot interval
from 4330 feet to 4481 feet. Production rates on pump of up to 480 barrels of
oil per day have been achieved during 2006.

The interpreted recoverable oil reserve for the Mirage Oil Field based on 2D
seismic geophysical mapping is in a range from a mean of 1.3 million barrels up
to a maximum of 3.6 million barrels. The interpretation of the 3D data set
suggest that Mirage-1 could be part of a larger feature covering approximately
20 square kilometers that includes the Lightning and Jindivik prospects, 3.10
miles to the north-east. Such an area has the potential of containing up to 23
million barrels of oil in place, subject to the presence of suitable Murta sand
reservoir.

During 2006 three wells were drilled resulting in three successful oil
producers, Mirage-2, 3 and 4, were drilled on the Mirage Oil Field which were
all brought into production in late 2006.

PEL 108, 109 & 112

On June 21, 2006, ACOR signed a farm-out agreement with Holloman Corporation of
Odessa, Texas for the oil & gas exploration of ACOR's PELs 108, 109, & 112,
located in South Australia in the prolific Cooper/Eromanga Basin. ACOR retained
a 13.8325% carried working interest through the drilling and completion of the
first 3 wells under PELs 108, 109, & 112.


                                      -11-
<PAGE>



Holloman Corporation became the new Operator. Holloman Corp. has agreed to drill
and complete 3 wells to earn 66.667% working interest in all 3 areas. Holloman
Corp. will carry ACOR for 13.8325% in the first three wells. After the third
well, ACOR will pay its part of any future exploration performed on the 3 areas,
subject to the terms of the Joint Operating Agreement. Drilling of the first two
wells is planned for the spring/summer of 2007 on PEL 112 subject to rig
availability.


PEL 112 & 108 covers approximately 1,325,715 gross acres, and has never been
drilled (no dry holes). ACOR and partners completed a new seismic survey on PELs
112 and 108 at a cost of approximately $1,100,000 in 2005. The new seismic
survey has discovered two large seismograph highs as well as twenty-four (24)
smaller ones. The two large seismograph highs are called C-23 & C-26, which
cover a combined area of approx. 5,534 acres with excellent closure. These two
structures are the first targets for drilling by Holloman.


PEL 88

ACOR owns a 3/10ths of 1% overriding royalty interest under PEL 88, which covers
1,230,000 gross acres. In April 2005, the operator announced the drilling of the
Kitson-1 an exploration well, which had the potential of undiscovered mean
reserves of 5 million barrels of oil. The Kitson-1 was drilled to a projected
total depth of 2,205 meters and was expected to cost $1.8 million. The well was
not successful in finding commercial quantities of hydrocarbons and was plugged
and abandoned. In February 2006, the operator spudded Geordie well on PEL 88.
This exploration well failed to encounter commercial hydrocarbons and was
plugged and abandoned.

PEL 100

During December 2005 it was reported the Fairbridge-1 on PEL 100 was expected to
spud prior to December 31, 2005 however the Fairbridge-1 well was drilled on the
northern crest of the structure and was cased as a producer during the early
2006. ACOR holds a 2% working interest in the Fairbridge-1, which is the first
well of Cooper Energy's 2006 drilling program. The Fairbridge prospect is a
robust four-way dip closed structure with two crests that lies outboard from the
Keleary and Telopea oil fields. There are four potential reservoir horizons -
Birkhead, Hutton, Poolowanna and Tinchoo.

The operator drilled two exploration wells in PEL 100 in 2006. The Fairbridge 1
well had encouraging oil and gas shows in the Birkhead and Poolowanna formations
but was plugged and abandoned after cased-hole production testing demonstrated
the reservoirs were unproductive. The Strickland Bay-1 was also plugged and
abandoned.


COOPER/EROMANGA BASIN - QUEENSLAND


ATP 299

ACOR owns a .0575% of 1% ORRI under ATP-299 and its Petroleum Licenses which
covers 441,600 gross acres and currently has 93 completed wells under which ACOR
receives overriding royalties. During January 2006 the operator of ATP-299 began
a large drilling program on ACOR's overriding royalty interest. The drilling
program consisted of development wells and appraisal wells to near field
exploration (NFE) wells. The initial drilling commenced with appraisal and
development wells at the Mulberry Field and move on to NFE targets and other
producing oil fields along the Endeavour-Mulberry-Talgeberry trend in the
Tintaburra Block. During March 2006 it was announced that the drilling program
on ATP-299 was the largest program of continuous oil drilling ever undertaken in
the south/west part of Queensland section of the Cooper/Eromanga Basin. On March
7, 2006, the operator reported that the Mulberry-6 was successful in increasing
the boundaries of the Mulberry Oil Field and was cased as a Birkhead Oil
Producer. The well encountered good oil shows in the Birkhead Formation.


                                      -12-
<PAGE>



The Tintaburra Block is reported to contain approximately 84 million barrels of
proved plus probable oil in place. The 2006 program included the development of
the Mulberry Field, which could potentially recover an additional 20 million
barrels of oil from the Block. The groundwork for this program has been laid
since 2002 with an ongoing investment in reservoir studies and 3D seismic
surveys, followed by the new field discovery at Mulberry in early 2004, and
successful development drilling at that field in April 2005.

Twenty-three (23) were drilled in the Tintaburra Block in 2006. Of the
twenty-three (23), there were three (3) Plugged & Abandoned. Initial production
rates from these wells average 200 barrels of oil per day. Production is
expected to increase as more of the successful wells are brought on-line and as
the wells receive pressure support from the nearby water injection wells.

The program so far has been the most successful onshore oil-drilling program
undertaken in Australia with a success rate for drilling in the mid Birkhead
reservoir unit at 80 acre spacing continues at in excess of 80%.

ATP 267

An eleven well exploration, appraisal and development drilling campaign was
announced in December 2006. The 2006 drilling campaign was designed to appraise
the Birkhead oil pool discovered in the Muthero-3 well. The Muthero-3 appraisal
well was brought into production at the end of February 2006, free-flowing at
around 525 barrels of oil per day, ceased continuous free-flow in mid-April when
the water cut reached 20% of production from the well. The well is currently
being flowed intermittently while surface facilities are being upgraded and a
jet pump installed. The Winna-4 was also brought on line in February 2006, which
was initially flowing at around 55 barrels of oil per day.

An application has been made for a Petroleum Lease over the area of the
Currambar-1 oil discovery, which was drilled in January 2006 in ATP 267P. The
well is awaiting installation of surface facilities before being placed on
production. The Nockatunga joint venture is planning to undertake a multi-well
appraisal and development drilling campaign, which will include further drilling
on the Muthero oil field to appraise the Birkhead oil pool discovered in the
Muthero-3 well. Santos is operator of the Nockatunga oil fields.

On December 31st 2006, the Dilkera North-1 exploration well was spudded and
reached a total depth of 4,717 feet subsequent to year-end. The drill stem test
(" DST") 1 over the interval 3448-3477 feet in the Murta Member recovered 31
barrels of oil. The well was cased and suspended as a future oil producer in
2007.

ATP 560

ATP 560 covers 625,600 acres under which the Company holds a 25% of 1% override.
The Utopia Oil Field is situated in ATP 560P in the Eromanga Basin in southwest
Queensland, approximately 150 km north east of the Jackson Oilfield and 50 km
south of the Kenmore Oilfield. During the year, the Joint Venture produced
18,846 barrels (bbls) of light crude oil from the Utopia Oil Pool. Production
came from Utopia 1, Utopia 2, Utopia 3, and Utopia 6 wells. Utopia 4 was shut
in, and Utopia 5 was plugged and abandoned. The Joint Venture is considering
numerous options to accelerate production from the field. The Utopia field is a
broad low-relief structure, with a maximum relief of approximately 10 m. The
field produces from the Early Cretaceous Murta Formation and is the largest
known Murta pool in the Queensland Eromanga Basin. The oil pool is at an
approximate depth of 1020 m. The most recent technical review of Utopia
undertaken in June 2004 determined the field may contain up to 2.86 million
barrels of recoverable oil.

ATP 582

On March 30, 2006 ACOR began work on the geological studies on ACOR's ATP-582.
ATP-582 is located in Queensland Australia in the prolific Cooper/Eromanga
Basin. The permit area covers approximately 6,716,000 gross acres. The Southern
zone of ATP-582 is currently the best part of the area of the concession for oil
& gas exploration. Besides being up dip of the approximately $1 billion dollar
annual production from the Santos-Exxon producing block, it is along strike with
many new discovery wells that have sustained daily production of 1,000 - 3,000
barrels of oil per day. ACOR management has currently identified two prospects
on ATP-582 from the 850 miles seismic data, owned by ACOR. Two prospects have
been identified:


                                      -13-
<PAGE>



         The Samphire prospect covers approximately 3,800 acres and exhibits
         approximately 110 feet of closure. It is possible that a good potential
         exists for a 10-15 million barrel field, with a possible potential of
         approximately 40 million barrels.


         The Samphire West, which covers around 4,700 acres. If the Samphire
         prospect proves to be productive, a number of additional field
         discoveries may result from leads in the Southern part of ATP-582. Both
         prospects are a series of sandstone (clastic) reservoirs of pinch-outs
         and structural traps that have formed on the flank of the local high.


On September 26th, 2006 entered into a Joint Venture arrangement where the
partner will operate the concession and plans to shoot new a seismic grid survey
over the leads identified by ACOR management from old seismic data to confirm
good drillable targets with plans to drill a well. ACOR will be carried for 50%
WI in the 1st well drilled under ATP-582. DOMESTIC - KENTUCKY

The Company entered into an Agreement with Resource and Energy Technologies
Company for the drilling and development of oil and gas in the Park City Field
Prospect in Edmonson County, Kentucky. The field is located in the Highland Rim
Physiographic Province that extends over portions of central Kentucky and middle
Tennessee.


ACOR has a 1/8th Working Interest in this initial 50-well development program. A
total of 54 wells have been drilled and paid for in Edmonson County, Kentucky.
During 2006 ACOR held a number of meetings with potential partners to join in
the building of the gathering system and gas plant. All of the wells in the Park
City Gas Field are shut-in awaiting the construction of both the gathering
system and gas plant.

ITEM 3. LEGAL PROCEEDINGS

Management is not aware of any legal proceeding contemplated by any governmental
authority or any other party involving the Company or its properties. As of the
date of this Annual Report, no directory, officer or affiliate is (i) a party
adverse to our Company in any legal proceeding, or (ii) has an adverse interest
to our Company in any legal proceedings. Management is not aware of any other
legal proceedings pending or that have been threatened against the Company or
its properties.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

During the fiscal year ended December 31, 2006, no matters were submitted to the
Company's stockholders for approval, other than the election of directors and
ratify the selection of auditor at the annual meeting held December 21, 2006.


                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

MARKET FOR COMMON EQUITY

The principal trading market for the common equity securities of the Company is
the National Association of Securities Dealers OTC Bulletin Board quotation
system. The symbol is: AUCAF. The following are the highs and lows for each
quarter for fiscal year ended December 31, 2006 and 2005, respectively. These
quotations reflect inter-dealer prices, without retail mark-up, mark- down or
commissions, and may not represent actual transactions.


                                      -14-
<PAGE>


                                    2005                        2006
                            ---------------------      ----------------------
                             HIGH           LOW          HIGH           LOW
                            ------        -------       ------        -------
         1st Quarter         $3.70         $0.50         $1.75         $0.27
         2nd Quarter          2.90          0.42          1.87          0.80
         3rd Quarter          1.00          0.47          1.05          0.25
         4th Quarter          0.62          0.20          0.41          0.27


The approximate number of securities holders of record of Australian-Canadian
Oil Royalties Ltd. on December 31, 2006 was 325 of record, which does not
include stockholders whose shares are held in street or nominee names. We have
no outstanding warrants to purchase our securities. There are outstanding
options in the amounts of 50,000 shares at $1.25; 50,000 shares at $1.50; and
50,000 shares at $1.75 for a period of two years from August 27, 2005 to
Wildstein Advisory Services.

DIVIDEND POLICY

No dividends have ever been declared by the Board of Directors on our common
stock. Our losses do not currently indicate the ability to pay any cash
dividends, and the Company does not indicate the intention of paying cash
dividends either on our common stock in the foreseeable future.

Securities Authorized For Issuance Under Compensation Plans

As of the date of this Annual Report, the Company has no equity compensation
plan.

RECENT SALES OF UNREGISTERED SECURITIES

During fiscal year ended December 31, 2006, the Company issued 900,000
unregistered shares in a private placement of its common stock for $200,000 to
accredited investors. Also during the year the Company issued 600,000 shares for
promotional consultants for a value of $262,000. The Company acquired an oil and
gas override for 100,000 shares of restricted common stock valued at $45,000.

Notes payable to directors of $155,163 was converted to restricted common stock
of 574,679 shares. Director's fees of 30,000 shares were issued during the year
ended December 31, 2006 with a value of $29,100.

SHARES ELIGIBLE FOR FUTURE SALE

On April 12, 2006 the Company had 13,521,912 common shares issued and
outstanding, of which the Company believes it has approximately 3,500,000 shares
that can be sold pursuant to Rule 144 under the Securities Act of which
approximately 1,250,000 shares is held by officers and directors.

A current shareholder who is an "affiliate" of the Company, defined in Rule 144
as a person who directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the Company,
will be required to comply with the resale limitations of Rule 144. Sales by
affiliates will be subject to the volume and other limitations of Rule 144,
including certain restrictions regarding the manner of sale, notice
requirements, and the availability of current public information about the
Company. The volume limitations generally permit an affiliate to sell, within
any three month period, a number of shares that does not exceed the greater of
one percent of the outstanding shares of common stock or the average weekly
trading volume during the four calendar weeks preceding the sale. A person who
ceases to be an affiliate at least three months before the sale of restricted
securities beneficially owned for at least two years may sell the restricted
securities under Rule 144 without regard to any of the Rule 144 limitations.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OR OPERATION

The following discussion should be read in conjunction with our audited
financial statements and the related notes accompanied thereto. The following
discussion contains forward-looking statements that reflect our plans, estimates
and beliefs. Our actual results could differ materially from those discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to those discussed below and elsewhere
in this SEC 2005 Form 10-KSB, particularly in the section entitled "Risk
Factors". Our audited financial statements are stated in United States Dollars
and are prepared in accordance with United States Generally Accepted Accounting
Principles.


                                      -15-
<PAGE>


GENERAL DISCUSSION:

ACOR's 2006 fiscal year was its most active year since it was founded in 1997.
On the Company's overriding royalties in Australia there were a total of 32
wells drilled in the Cooper/Eromanga Basin and 1 well drilled in the Bass Strait
of the Gippsland Basin resulting in 27 producers, and 5 dry holes for the year
ended December 31, 2006.

ACOR began its movement from being primarily an oil royalty company to an
exploration company in 2000 when ACOR et al was awarded three large concessions
in South Australia. ACOR continued this movement toward exploration as the
potential of one of these concessions, PEL 112, became more apparent as
discoveries were made closer to this concession. Another key factor was there
are no dry holes on PEL 112 and is on trend with the new discoveries. The risk
of exploration was down graded by the success rate by new junior oil companies
in the Cooper/Eromanga Basin averaging 52%.

The 190 miles of seismic conducted on PEL 108 and 112 in 2005 was very
significant to the Company and appears to have yielded drillable prospects that
could have a dramatic impact on the Company's future earnings. During 2006 the
entered into a farm-out agreement with Holloman Corporation on three (3) South
Australian oil and gas concessions known as PEL 108, 109 and 112. Two drilling
locations were staked on PEL 112 during the later part of 2005, one on seismic
structure C-26 covering 3,459 acres and the other on seismic structure C-23
which covers 2,075 acres. A discovery on either of these two large seismic
structures could have a dramatic affect on the Company's revenues. For example
the Worrior wells on PEL 93 adjoins our PEL 112 to the east has three wells
producing around $100,000,000 per year of oil runs. There is no assurance that
the structures on our concession PEL 112 will be drilled and if drilled would be
competed as economic producers. Holloman plans to drill three wells during the
spring/summer of 2007 with the Company having a 13.8325% carried working
interest in these three wells.

The increase of the price of oil stabilizing in the $60.00 per barrel range has
caused the operators to become more aggressive with their drilling programs. For
example Santos, the operator of 299, has announced a 70 well program for 2007
under which ACOR holds a 5.75% of 1% overriding royalty. The Company's revenues
have already been affected by the large amount of new drilling on ATP 299 are
noted in the Company's revenues which is mostly attributable to oil produced
from ATP 299.

VIC/P60 is a 339,769 acre concession, which is located in the Bass Strait of the
Gippsland Basin positioned between southern Victoria and Tasmania. The Bass
Strait is a world-class petroleum province as more than 4 billion barrels of
oil/condensate and 12 TCF gas reserves have been discovered in the Basin since
exploration began in 1964, with remaining reserves estimated at 600 million
barrels of oil and 5 trillion cubic feet of gas. VIC/P60 is adjacent to giant
producing fields and an expanding gas market. Proven petroleum exists with a
variety of untested play types, which include potential in deeper stratigraphic
levels. Seismic reinterpretation is currently in progress with plans to conduct
a $AU2,000,000 seismic program in 2007. Subsequent to the end of the fiscal year
ended December 31 2006, the Company sold its 25% working interest for $152,896
in cash and retained an overriding royalty interest of 2.125%. The purchaser is
obligated to pay for its share of a $2,000,000 3D seismic program to be
concluded prior to October 29, 2007.

ACOR has overriding royalty interests under 15,440,116 gross surface acres in
the Cooper/Eromanga and Bass Strait of the Gippsland Basin plus has working
interest under 553,430 gross surface acres. For additional information regarding
these concessions including those mentioned above in this section see Item 2
Description of Property on page 8.

ACOR's management is optimistic about the future drilling planned on its
Australian interests, especially for the next couple of years.


                                      -16-
<PAGE>


On May 7-10th of 2006, ACOR management attended the 46th APPEA annual oil & gas
conference at the new Convention & Exhibition Center on the Gold Coast,
Queensland. This event represents the largest annual gathering of the upstream
oil and gas industry with over 1100 participants expected to attend. ACOR met
with several investors indicating interest in exploring for oil & gas on ACOR's
assets. The final result of those meetings has lead to the agreement of two
separate transactions with two separate oil companies agreeing to explore for
oil & gas on approximately 8,414,348 gross acres and spend approximately
$6,500,000 in onshore exploration on ACOR's assets located in South Australia
and Queensland, in the prolific Cooper/Eromanga Basin

ACOR management announced a new company website during the year which is located
at WWW.AUSSIEOIL.COM.

RESULTS OF OPERATION

The Company's oil and gas revenues almost doubled when comparing 2005 to 2006.
In 2005 the revenues were $21,151 compared to $42,145 in 2006. The new wells
brought on line in 2005 coupled with the new drilling in 2006 increased the
Company's revenues in Australia on its overriding royalties primarily
concessions ATP 299 and ATP 267. It is normal to have 3 to 6 month delay for
Australian entities to distribute production revenues. Additional drilling
occurred during the later part of 2006, which provides the opportunity for
greater sources of revenue from its investments in Australia. Of particular
importance the Company has staked two drilling locations on PEL 112, one on
seismic structure C-26 covering 3,459 acres and the other on seismic structure
C-23 which covers 2,075 acres. These two drilling locations are planned for
drilling during the spring/summer of 2007. A discovery on either of these two
large seismic structures could have a dramatic affect on the Company's revenues.
For example the Worrior wells on PEL 93 adjoining our PEL 112 to the east has
three wells producing around $100,000,000 per year of oil runs. There is no
assurance that the structures on our concession PEL 112 will be drilled and if
drilled would be competed as economic producers.

The categories of Personnel Costs, Professional fees and Promotion and
advertising reported expenditures of $563,134 for 2005 compared to $436,221 for
2006. Of the $563,134 the Company paid $402,715 through the issuance of
unregistered common stock in 2005 and of the $436,221 the Company paid $262,000
through the issuance of unregistered common stock in 2006. The unregistered
shares were issued for those services based on the close stock price at the time
of issuance without any discount for their lack of liquidity.

The other categories of expenditures for 2005 are not significant. However there
was a dramatic increase in this category for 2006($177,046), which mainly
comprises of $145,500 for director fees, 14,500 for travel and $5,500 for
postage.

Other income for the Company includes interest earned in 2006 of $10,645
compared to $19.223 for 2005. This decrease in interest income is due to not
renewing the $1,000,000 certificate of deposit.

The net loss for the year ended December 31, 2005 was $614,874 compared to a net
loss of $620,354 for the year ended December 31, 2006. Per share losses were
$0.05 per share for the year ended 2006 compared to $0.06 per share for the year
ended December 31, 2005.

LIQUIDITY AND CAPITAL RESOURCES

The Company's Total Current Assets as of December 31, 2005 were $1,012,520
compared to $14,181 on December 31, 2006. A large portion of the $1,012,520 in
current assets is $1,000,000 in certificates of deposit, which are restricted as
to use. The $1,000,000 note payable to bank and a certificate of deposit were
not renewed in 2006. The Total Current Liabilities as of December 31, 2006 were
$345,769 placing the Company's liquidity ratio of current assets to current
liabilities at .04 to 1. Cash on hand as of December 31, 2005 was $3,791 as
compared to $2956 on hand as of December 31, 2006.

The Company plans to meet its operating expenditures from a private placement of
its restricted common stock. The Company is seeking exploration partners on its
various oil and gas concessions located in Australia.

Total assets of the Company decreased from $1,948,304 on December 31, 2005 to
$1,085,996 on December 31, 2006, a decrease of $862,308 representing a 44%
decrease in assets from 2005 to 2006. The significant decrease in assets in 2006
is directly related to the $1,000,000 certificate of deposit not being renewed
in 2006. The Company oil and gas properties increased from $844,668 in 2005 to
$994,058 an increase of $149,390 a result of the acquisition of overriding
royalty interest in concessions in Australia.

Total Current Liabilities of the Company decreased from $1,286,490 on December
31, 2005 to $345,769 on December 31, 2006. The decrease is due the $1,000,000
note payable to bank not renewed in 2006. In addition loans from
officers/directors of the Company was reduced from $268,182 in 2005 to $177,194
in 2006.


                                      -17-
<PAGE>


SUBSEQUENT EVENTS

The Company entered into a Letter Agreement in December 2006, which led to a
formal agreement being entered into subsequent to the end of the 2006 fiscal
year on selling its 25% working interest in an offshore oil and gas concession
located in the Bass Strait known as Vic/P60. The terms of the sale was cash of
$152,896 in cash and retained an overriding royalty interest of 2.125%. The
purchaser is obligated to pay for its share of a $2,000,000 3D seismic program
to be concluded prior to October 29, 2007.

PLAN OF OPERATION AND FUNDING

The Company plans to seek additional oil and gas concessions in Australia on
ground level basis and will seek partners to join in this process. The Company
was successful in 2006 to enter into farm-out arrangements to defer the
exploration commitments on five concessions that are now scheduled to have
drilling and/or seismic programs conducted during 2007.

MATERIAL COMMITMENTS

The Company had material commitments on several working interest properties in
Australia. However during 2006 the Company was successful in entering into
farm-out arrangements to transfer the exploration cost to others in lieu of
cash, carried working interest or an override.

PURCHASE OF SIGNIFICANT EQUIPMENT

The Company does not intend to purchase any significant equipment during the
next twelve months.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No.
154 "Accounting Changes and Error Corrections" ("SFAS No. 154"), which replaces
APB Opinion No. 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements", which requires that a voluntary change
in accounting principle be applied retrospectively to all prior period financial
statements presented, unless it is impractical to do so. SFAS No. 154 also
provides that a change in method of depreciating or amortizing a long-lived
non-financial asset be accounted for as a change in estimate effected by a
change in accounting principle, and also provides that correction of errors in
previously issued financial statements should be termed a "restatement". SFAS
No. 154 is effective for fiscal years beginning after December 14, 2005. We do
not believe the adoption of SFAS No. 154 will have a material impact on our
financial statement.

In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS
No. 123R"). SFAS No. 123R requires all share-based payments to employees,
including grants of employee stock options and purchases under employee stock
purchase plans, to be recognized as an operating expense in the income
statement. The cost is recognized over the requisite service period based on
fair valued measured on grant dates, and the new standard may be adopted using
either the modified prospective transition method or the modified retrospective
transition method. In April 2005, the SEC approved a change in the effective
date of SFAS No. 123R for public companies to be effective in the annual, rather
than interim, periods beginning after June 14, 2005. SFAS No. 123R is effective
for the Company beginning January 1, 2006. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 (`SAB No. 107") "Share-Based Payment", which
expressed views of the SEC regarding the interaction between SFAS No. 123R and
certain SEC rules and regulations. SAB No. 107 also provides the SEC's views
regarding the valuation of share-based payment arrangements for public
companies. We have evaluated the requirements of SAB No. 107 in connection with
our adoption of SFAS No. 123R and expect that these new pronouncements will have
a material impact on our results of operations for future employee stock options
granted.


                                      -18-
<PAGE>


ACCOUNTING FOR NATURAL GAS AND OIL PRODUCING ACTIVITIES

We use the full cost method to account for our natural gas and oil producing
activities. Under this accounting method, we capitalize substantially all of the
costs incurred in connection with the acquisition, development, and exploration
of natural gas and oil reserves in full cost pools maintained by geographic
areas, regardless of whether reserves are actually discovered and apply a
quarterly full cost ceiling test. Adverse changes in conditions (primarily gas
price declines) could result in permanent write-downs in the carrying value of
oil and gas properties as well as non-cash charges to operations, but would not
affect cash flows.

We have adopted the provisions of SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the related oil and gas
properties. As of December 31, 2006 management has determined that there are no
material asset retirement obligations.

PROPERTY, EQUIPMENT AND DEPRECIATION

We follow the full cost method of accounting for our oil and gas operations
whereby all costs related to the acquisition of methane, petroleum, and natural
gas interests are capitalized. Under this method, all productive and
non-productive costs incurred in connection with the exploration for and
development of oil and gas reserves are capitalized. Such costs include land and
lease acquisition costs, annual carrying charges of non-producing properties,
geological and geophysical costs, costs of drilling and equipping productive and
non-productive wells, and direct exploration salaries and related benefits.
Proceeds from the disposal of oil and gas properties are recorded as a reduction
of the related capitalized costs without recognition of a gain or loss unless
the disposal would result in a change of 20 percent or more in the depletion
rate.

Depreciation and depletion of proved oil and gas properties is computed on the
units-of-production method based upon estimates of proved reserves, as
determined by independent consultants, with oil and gas being converted to a
common unit of measure based on their relative energy content.

The costs of acquisition and exploration of unproved oil and gas properties,
including any related capitalized interest expense, are not subject to
depletion, but are assessed for impairment either individually or on an
aggregated basis. The costs of certain unevaluated leasehold acreage are also
not subject to depletion. Costs not subject to depletion are periodically
assessed for possible impairment or reductions in value. If a reduction in value
has occurred, costs subject to depletion are increased or a charge is made
against earnings for those operations where a reserve base is not yet
established.

Estimated future removal and site restoration costs are provided over the life
of proven reserves on units-of-production basis. Costs, which include production
equipment removal and environmental remediation, are estimated each period by
management based on current regulations, actual expenses incurred, and
technology and industry standards. The charge is included in the provision for
depletion and depreciation and the actual restoration expenditures are charged
to the accumulated provision amounts as incurred.

We apply a ceiling test to capitalized costs which limits such costs to the
aggregate of the estimated present value, using a ten percent discount rate of
the estimated future net revenues from production of proven reserves at year end
at market prices less future production, administrative, financing, site
restoration, and income tax costs plus the lower of cost or estimated market
value of unproved properties. If capitalized costs are determined to exceed
estimated future net revenues, a write-down of carrying value is charged to
depletion in the period.


                                      -19-
<PAGE>


ITEM 7. FINANCIAL STATEMENTS

The following financial statement information for Australian-Canadian Oil
Royalties Ltd. begins following the signature page of this form. The Index to
the Financial Statements is on page F-1.

     Report of Independent Registered Public Accounting Firm
     Balance Sheets
     Statements of Operations and Comprehensive Loss
     Statements of Stockholders' Equity
     Statements of Cash Flows
     Notes to Financial Statements


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

Our principal independent accountant from inception through September 5, 2005
was Robert Early & Company, P.C. of Abilene, Texas. Beginning September 6, 2005
Killman, Murrell & Company, P.C. of Odessa, Texas became independent accountant
for the Company. There are no disagreements between the Company and its previous
auditor Robert Early & Company, P.C. and its current auditor, Killman, Murrell &
Company, P.C.

ITEM 8A.   CONTROLS AND PROCEDURES

FINANCIAL DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of our President and Chief
Financial Officer, we conducted an evaluation of the effectiveness of the design
and operations of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of
December 31, 2003. Based on this evaluation, our President and Chief Financial
Officer concluded that our disclosure controls and procedures were effective
such that the material information required to be included in our Securities and
Exchange Commission ("SEC") reports is recorded, processed, summarized and
reported within the time periods specified in applicable SEC rules and forms
relating to our reporting obligations, and was made known to them by others
within the Company, particularly during the period when this report was being
prepared.

AUDIT COMMITTEE REPORT

The audit committee has reviewed and discussed with management our audited
financial statements as of and for fiscal year ended December 31, 2006. The
audit committee has also discussed with Killman, Murrell & Company, P.C. the
matters required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees, as amended, by the Auditing Standards Board
of the American Institute of Certified Public Accountants. The audit committee
has received and reviewed the written disclosures and the letter from Killman,
Murrell & Company, P.C. required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees, as amended, and has discussed
with Killman, Murrell & Company, P.C. their independence.

Based on the reviews and discussions referred to above, the audit committee has
recommended to the Board of Directors that the audited financial statements
referred to above be included in our Annual Report on Form 10-KSB for fiscal
year ended December 31, 2006 filed with the Securities and Exchange Commission.

ITEM 8B. OTHER INFORMATION

Not applicable.


                                      -20-
<PAGE>




                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

DIRECTORS - The Board of Directors of the Company presently consists of five
members. Each director is elected at the annual meeting of shareholders to hold
office until the next annual meeting of shareholders and until his successor has
been elected and qualified. The following table sets forth information
concerning the persons currently serving as directors of the Company.

                                                                   DATE FIRST
                                           POSITION WITH            ELECTED
            NAME              AGE           THE COMPANY           AS DIRECTOR
-----------------------------------------------------------------------------
Kenneth W. Campbell            76             Director                 1997
Robert Kamon                   79             Director &               1997
                                              Secretary
Howard Siegel                  64             Director                 2006
Ely Sakhai                     56             Director                 1997
Andre Sakhai                   26             Director &
                                              President                2005

EXECUTIVE OFFICERS - Unless otherwise specified by the Board, all executive
officers are elected for a term of one year, commencing with the date of the
first meeting of the Board following the annual meeting of shareholders, and
serve until their successors are elected or appointed and qualified, or until
their respective death, resignation, removal or disqualification. All of the
Company's officers are executive officers. The following table sets forth
certain information with respect to the persons currently serving as executive
officers of the Company.

                                                       DATE FIRST
                                 POSITION WITH         ELECTED
     NAME          AGE            THE COMPANY         AS OFFICER
--------------------------------------------------------------------------------
Robert Kamon        79             Secretary &             1997
                                   Director

Andre Sakai         26             President &             2005
                                   Director

ANDRE SAKHAI, President & Director, attended Arizona State University, which
included a curriculum of financial accounting and microeconomics, as well as
money and banking. Mr. Sakhai is a licensed real estate salesperson in the state
of New York and has other experience in computer functions as well as experience
in all aspects of the financial markets.

ROBERT KAMON, Director and Secretary, is a petroleum-engineering graduate of the
University of Texas at Austin, Texas. Mr. Kamon has been President of three
NASDAQ listed companies. He is currently the President of several private
companies - Australian Grazing and Pastoral Co. Pty. Ltd. since 1954,
International Oil Lease Service Corp. since 1961, and Tensleep Oil and
Production, Inc. since 1989.

KENNETH W. CAMPBELL, Director, is a graduate of the University of Brandon
(Manitoba, Canada). He is President of Solar Energy Resources, Ltd., a privately
held independent Canadian oil and gas producer.

ELY SAKHAI, Director, is a civil engineering graduate of First New York City
Community College in New York. He has been engaged in the art gallery business
in New York City for the past seventeen years.

HOWARD SIEGEL, DIRECTOR, Director, is a graduate of the University of Oklahoma
and has a law degree from Saint Mary's University Law School. Mr. Siegel has
been a member of the State of Texas Bar Association since 1969 and became a
member of the Colorado Bar Association in 1989. Mr. Siegel has over thirty years
of experience in all matters of corporate law, oil & gas, real estate, employee
benefits, taxation and general practice.


FAMILY RELATIONSHIPS

In regards to family relations between the officers and directors of the
Company, Ely Sakhai is the father of Andre Sakhai.


                                      -21-
<PAGE>



ITEM 10.  EXECUTIVE COMPENSATION

The executive officers of ACOR have received no salary, bonus or stock
compensation since the organization of the Company. The Company has no bonus,
pension, or profit sharing plans. The Company pays for copies, phone usage,
travel expenses, and other labor to non-related parties.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial ownership of
the common stock of the Company as of April 12, 2007 by each of the Company's
officers and directors, each person who is known by the Company to own
beneficially more than 5% of the outstanding common stock and all officers and
directors of the Company as a group. The title of class is common stock, no par
value.


                                         # OF SHARES
       NAME AND                         BENEFICIALLY              PERCENT OF
  ADDRESS OF STOCKHOLDER                    OWNED                   CLASS
 -------------------------------------------------------------------------------
Tensleep Oil & Production, Inc.*           908,000                6.715%
1304 Avenue L
Cisco, Texas 76437

Ken Campbell                               250,000                1.849%
307 Triune Bay
Calgary, Alberta T1X 1G4
Canada

Robert Kamon**                           2,132,120               15.768%
1304 Avenue L
Cisco, Texas  76437

Howard Siegel                               30,000                 .222%
P.O. 940572
Houston, Texas 77094

Ely Sakhai                               3,159,105               23.362%
10 Windsor Dr.
Old Westbury, New York   11568

Andre Sakhai                               161,211                1.192%
10 East 29th Street, Apt. 12J
New York, New York 10016

All officers and directors as a group    6,640,436               49.108%

Jan Soleimani                              850,000                6.286%
21 Windsor Dr.
Old Westbury, New York   11568


*Tensleep Oil & Production, Inc. (Tensleep) is controlled by Robert Kamon.
     Robert Kamon owns 50% of the shares of Tensleep.

**   Robert Kamon's (1,585,126 shares), Tensleep's (908,000 shares),
     International Oil Lease Service Corp.'s (394,444 shares), and Australian
     Grazing & Pastoral Co., Pty. Ltd.'s (152,550 shares) holdings are all
     attributed to Robert Kamon for purposes of presenting his beneficial
     ownership percentage. Robert Kamon is President of these companies.

Note: The stockholders identified in this table have sole voting and investment
power with respect to the shares beneficially owned by them.


                                      -22-
<PAGE>


The owners have no rights to acquire additional shares through options,
warrants, rights, or conversion privileges within the next sixty days.

CHANGES IN CONTROL

Management is not aware of any current arrangements, which would result in a
change of control of the Company.

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company owns 13.832.5% Working Interest, Ely Sakhai, Director, owns 16.6667%
working interest and Robert Kamon, Director and Secretary, owns 4.5% Working
Interest in PEL 108, PEL 109, and PEL 112 in Australia. Ely Sakhai acquired an
equal 12 1/2% working interest in the Park City Gas Field in Kentucky for cash,
while the Company acquired its 12 1/2 % interest through the issuance of
restricted common shares. Ely Sakhai is the father of Andre Sakhai, who is also
a Director of the Company.

Two of the directors of the Company, Robert Kamon and Ken Campbell, are active
in the oil and gas industry personally. The activities of each could result in a
conflict of interest between their other oil and gas activities and those of the
Company.

Robert Kamon is President of Tensleep Oil & Production, Inc., International Oil
Lease Service Corp. (IOLS), and Australian Grazing & Pastoral Co., Pty. Ltd.
(AGP). IOLS and AGP are in the business of applying for and acquiring oil and
gas concessions in Australia; therefore, activities may involve a conflict of
interest with the Company. During 2004, the Company issued 1,044,444 restricted
shares of its common stock to IOLS based on 18 cents per shares for the 1/20th
of 1% of 8/8ths override in VIC/P54 and 1/10th of 1% override in PEL 111 and
115. Also, the Company issued 166,667 restricted shares of its common stock of
AGP based on 18 cents per share for a 1/10th of 1% override in PEL 86, PEL 87
and PEL 89.

Tensleep Oil and Production, Inc. is also in the business of oil and gas
exploration and its activities may involve a conflict of interest with the
Company.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

 EXHIBIT NO.                      DESCRIPTION


31.1    *Certification of Chief Financial Officer pursuant to Section 302 of the
        Sarbanes-Oxley Act of 2002.

31.2    *Certification of Chief Executive Officer pursuant to Section 906 of the
        Sarbanes-Oxley Act of 2002.

32.     *Certification of Chief Financial Officer pursuant to Section 906 of the
        Sarbanes-Oxley Act of 2002.

-----------------
*Filed herewith.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The firm of Killman, Murrell & Company, P.C. served as the Company's independent
auditor for the year ended December 31, 2005 and December 31, 2006. The Board of
Directors of the Company, in its discretion, may direct the appointment of
different public accountants at any time during the year, if the Board believes
that a change would be in the best interests of the stockholders. The Board of
Directors has considered the audit fees, audit-related fees, tax fees and other
fees paid to the Company's accountants, as disclosed below, and had determined
that the payment of such fees is compatible with maintaining the independence of
the accountants.


                                      -23-
<PAGE>


Audit and Audit-Related Fees: The aggregate fees, including expenses, billed by
the Company's principal accountant in connection with the audit of our financial
statements for the most recent fiscal year included in our Annual Report on Form
10-KSB; and for the review of our financial information and our quarterly
reports on Form 10-QSB during the years ending December 31, 2006 and 2005 were
$32,107 and $18,853 respectively.

Tax Fees: The Company incurred no fees for tax compliance with the Company's
principal auditor for 2006 and 2005.

All Other Fees: The Company paid its previous principal accountant $1,600 in
2005 and $2,735 in 2006 for other accounting services.


                                   SIGNATURES

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

                                           AUSTRALIAN-CANADIAN OIL
                                           ROYALTIES LTD.

Dated:    April 13, 2007                   /S/    ANDRE SAKHAI
                                           -------------------------------------
                                           Andre Sakhai, President & CEO


Dated:    April 13, 2007                   /S/   BERNARD LIPTON
                                           -------------------------------------
                                            Bernard Lipton CFO



                                      -24-
<PAGE>







                     Australian-Canadian Oil Royalties Ltd.



                          INDEX TO FINANCIAL STATEMENTS






Report of Independent Registered Public Accounting Firm....................  F-2

Balance Sheets -- December 31, 2006 and 2005...............................  F-3

Statements of Operations and Comprehensive Loss for
     the Years Ended December 31, 2006 and 2005 ...........................  F-4

Statements of Stockholders' Equity for the Years Ended
     December 31, 2006 and 2005 ...........................................  F-5

Statements of Cash Flows for the Years Ended
     December 31, 2006 and 2005 ............................................ F-6

Notes to Financial Statements .............................................. F-7







                                      F-1
<PAGE>




             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors
Australian-Canadian Oil Royalties Ltd.
Cisco, Texas

We have audited the accompanying balance sheets of Australian-Canadian Oil
Royalties Ltd. as of December 31, 2006 and 2005, and the related statements of
operations, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Australian-Canadian Oil
Royalties Ltd. as of December 31, 2006, and 2005, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company has suffered recurring losses from operations
and its limited capital resources raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also discussed in Note 13. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.




/S/ KILLMAN, MURRELL & COMPANY, P.C.
------------------------------------
Killman, Murrell & Company, P.C.
Odessa, Texas
April 6, 2007



                                      F-2
<PAGE>

<TABLE>
<CAPTION>


                     AUSTRALIAN-CANADIAN OIL ROYALTIES LTD.
                                 BALANCE SHEETS
                           December 31, 2006 and 2005


                                                                2006          2005
                                                            -----------    -----------
                                     ASSETS
CURRENT ASSETS
<S>                                                         <C>            <C>
     Cash                                                   $     2,956    $     3,791
     Cash-restricted                                               --        1,000,000
     Accounts receivable                                         11,225          8,413
     Prepaid expenses and other                                    --              316
                                                            -----------    -----------
         Total Current Assets                                    14,181      1,012,520
                                                            -----------    -----------

PROPERTY AND EQUIPMENT
     Oil and gas properties-being amortized                     122,009        122,009
     Oil and gas properties-not being amortized                 994,058        844,668
     Office equipment and software                               18,421         18,421
     Accumulated depletion and depreciation                     (63,757)       (50,398)
                                                            -----------    -----------
         Net Property and Equipment                           1,070,731        934,700
                                                            -----------    -----------

OTHER ASSETS                                                      1,084          1,084
                                                            -----------    -----------


     TOTAL ASSETS                                           $ 1,085,996    $ 1,948,304
                                                            ===========    ===========


                       LIABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
     Accounts payable                                       $     1,757    $    10,018
     Accrued expenses                                           166,818          8,300
     Loans from officers                                        177,194        268,172
     Note payable to bank                                          --        1,000,000
                                                            -----------    -----------
         Total current liabilities                              345,769      1,286,490
                                                            -----------    -----------

STOCKHOLDERS' EQUITY
     Preferred stock no par (50,000,000 shares
          authorized, none outstanding)                            --             --
     Common stock, no par (50,000,000 shares
          authorized, 13,264,269 and 11,135,042 shares
          respectively outstanding)                           2,686,550      1,995,287
     Additional paid in capital                                 160,751        153,247
     Accumulated deficit                                     (2,107,078)    (1,486,724)
     Other comprehensive income:
        Foreign currency translation adjustment                       4              4
                                                            -----------    -----------
         Total Stockholders' Equity                             740,227        661,814
                                                            -----------    -----------

     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY             $ 1,085,996    $ 1,948,304
                                                            ===========    ===========
</TABLE>


                                      F-3
<PAGE>

<TABLE>
<CAPTION>


                     AUSTRALIAN-CANADIAN OIL ROYALTIES LTD.
                STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                 For the Years Ended December 31, 2006 and 2005


                                                       2006            2005
                                                  ------------    ------------
OPERATING REVENUES
<S>                                               <C>             <C>
     Oil & gas revenues                           $     42,145    $     21,151

COST OF REVENUES
     Lease operating expenses                           11,130           7,596
     Production taxes                                       17              54
     Depletion                                           7,218           5,036
                                                  ------------    ------------

         GROSS PROFIT                                   23,780           8,465
                                                  ------------    ------------

OPERATING EXPENSES
     Personnel costs                                    92,681         114,526
     Professional fees                                  55,716         114,179
     Shareholder relations                             287,824         334,429
     Depreciation and amortization                       6,141           6,141
     Directors' fees and other                         177,046          21,456
                                                  ------------    ------------

         Total Operating Expenses                      619,408         590,731
                                                  ------------    ------------

(LOSS) FROM OPERATIONS                                (595,628)       (582,266)

OTHER INCOME
     Interest income                                    10,645          19,223
     Interest expense                                  (25,493)        (46,783)
                                                  ------------    ------------

(LOSS) BEFORE INCOME TAXES                            (610,476)       (609,826)

Australian income taxes                                  9,878           5,048
                                                  ------------    ------------

         NET LOSS                                     (620,354)       (614,874)


OTHER COMPREHENSIVE INCOME:
     Foreign currency translation adjustment              --                 2
                                                  ------------    ------------

         TOTAL COMPREHENSIVE LOSS                 $   (620,354)   $   (614,872)
                                                  ============    ============

Net loss per weighted average share outstanding   $      (0.05)   $      (0.06)
                                                  ============    ============

Weighted average shares outstanding                 12,648,703      10,753,521
                                                  ============    ============

</TABLE>



                                      F-4
<PAGE>

<TABLE>
<CAPTION>


                     AUSTRALIAN-CANADIAN OIL ROYALTIES LTD.
                        STATEMENT OF STOCKHOLDERS' EQUITY
                 For the Years Ended December 31, 2006 and 2005




                                                                                             ACCUMULATED
                                                                ADDITIONAL     ACCUMULATED      OTHER
                                           COMMON STOCK           PAID IN       EARNINGS/   COMPREHENSIVE
                                       SHARES        AMOUNT       CAPITAL       (DEFICIT)       INCOME        TOTALS
                                    -----------   -----------   -----------    -----------   -----------    -----------
     TOTALS

<S>                                <C>           <C>           <C>           <C>            <C>           <C>
BALANCES, December 31, 2004          10,484,944    $ 1,592,572   $    82,547   $  (871,850)   $         2   $   803,271

Non-cash stock issuances:
     Services                           650,098        402,715          --            --             --         402,715
Additional contributed capital
     Contributed expenses                  --             --           3,200          --             --           3,200
     Options issued for services         67,500         67,500
Net loss                                   --             --            --        (614,874)          --        (614,874)
Other comprehensive income:
     Foreign currency translation
       adjustment                          --             --            --            --                2             2
                                    -----------   -----------   -----------    -----------   -----------    -----------

BALANCES, December 31, 2005          11,135,042      1,995,287       153,247    (1,486,724)             4       661,814

Non-cash stock issuances:
     Services                           600,000        262,000          --            --             --         262,000
     Oil and gas properties             100,000         45,000          --            --             --          45,000
     Notes payable to directors         574,679        155,163          --            --             --         155,163
     Director's fees                     30,000         29,100          --            --             --          29,100
Cash stock sales                        922,222        200,000          --            --             --         200,000
Contributed expenses                       --             --           7,504          --             --           7,504
Shares returned                         (97,674)          --            --            --             --            --
Net loss                                   --             --            --        (620,354)          --        (620,354)
                                    -----------   -----------   -----------    -----------   -----------    -----------

BALANCES, December 31, 2006          13,264,269    $ 2,686,550   $   160,751   $(2,107,078)   $         4   $   740,227
                                    ===========   ===========   ===========    ===========   ===========    ===========
</TABLE>



                                      F-5
<PAGE>

<TABLE>
<CAPTION>

                     AUSTRALIAN-CANADIAN OIL ROYALTIES LTD.
                            STATEMENTS OF CASH FLOWS
                 For the Years Ended December 31, 2006 and 2005

                                                                    2006        2005
                                                              -----------    -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                           <C>            <C>
Net loss                                                      $  (620,354)   $  (614,874)
Adjustments to reconcile net (loss) to net cash
     provided by operations:
     Depreciation, depletion and amortization                      13,359         11,177
     Value of expenses contributed by officers                      7,504          3,200
     Value of expenses contributed by consultants                    --           67,500
     Stock issued for services                                    262,000        402,715
     Stock issued for directors' fees                              29,100           --
     Adjustment for foreign currency translation                     --                2

Changes in:
     Receivables                                                   (2,496)        (4,312)
     Prepaid expenses                                                --            2,258
     Interest payable                                               2,325          7,326
     Other accrued expenses                                       156,193           --
     Accounts payable                                              (8,262)         5,991
                                                              -----------    -----------

NET CASH (USED) BY OPERATING ACTIVITIES                          (160,631)      (119,017)
                                                              -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Acquisition of oil & gas properties                         (104,390)      (472,737)
     Proceeds from sale of oil & gas properties                      --          338,500
     Investment in subsidiary                                        --             (930)
                                                              -----------    -----------
NET CASH USED IN INVESTING ACTIVITIES                            (104,390)      (135,167)
                                                              -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from notes payable to officers                       64,186        248,172
     Sale of common stock                                         200,000           --
     Restricted certificates of deposit                         1,000,000     (1,000,000)
     Bank notes                                                (1,000,000)     1,000,000
                                                              -----------    -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES                         264,186        248,172
                                                              -----------    -----------


     Decrease in cash for year                                       (835)        (6,012)

         Cash and cash equivalents, beginning of year               3,791          9,803
                                                              -----------    -----------

         CASH AND CASH EQUIVALENTS, END OF YEAR               $     2,956    $     3,791
                                                              ===========    ===========


SUPPLEMENTAL DISCLOSURES:
Cash payments for:
         Interest                                             $    18,864    $    39,458
         Australian income taxes                                    9,878          5,048
     Noncash Investing and Financing Activities:,
         Stock issued for oil & gas properties and drilling        45,000           --
         Stock issue for related party notes and interest         155,163        247,637
</TABLE>



                                      F-6
<PAGE>

                     AUSTRALIAN-CANADIAN OIL ROYALTIES LTD.
                          NOTES TO FINANCIAL STATEMENTS
                           December 31, 2006 and 2005


NOTE 1: DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Australian-Canadian Oil Royalties Ltd. (the Company) was incorporated April 28,
1997 in Vancouver, British Columbia, Canada. Its primary business plan is the
purchase of overriding royalty interests for long-term passive income and
capital gains, with sales of these interests as deemed in the best interest of
the Company. Current primary income sources are royalties earned on overriding
royalty interests held by the Company. The Company also engages related entities
and third parties for leasing operations in Australia. The primary producing
properties held by the Company are located in Australia's main onshore oil and
gas producing basin. These financial statements are prepared in U.S. dollars for
use in U.S. securities filings.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FOREIGN CURRENCY TRANSACTIONS

These financial statements are prepared in U.S. dollars for use in U.S.
securities filings. However, the Company incurs transactions in Canadian,
Australian and U.S. dollars. Transactions denominated in Canadian or Australian
dollars are translated to equivalent U.S. dollars for recording in the financial
records based on currency exchange rates existing at the dates of the
transactions. Ending balances of accounts that are denominated in Canadian
dollars are translated to U.S. dollars based on the currency exchange rates
existing at December 31. The exchange gains and losses that result from
translating these amounts to U.S. dollars are accumulated and reported as Other
Comprehensive Income, a separate component of the Company's stockholders'
equity.

STOCK BASED COMPENSATION

The Company accounts for services acquired (and other expenses paid) using stock
as compensation (or payment) based on the fair value of the shares issued. Fair
value is determined based on the closing price of the stock on the date the
Company becomes obligated to issue the shares.

OIL AND GAS PROPERTIES

The Company follows the full cost method of accounting for oil and gas producing
activities and, accordingly, capitalizes all costs incurred in the acquisition,
exploration, and development of proved oil and gas properties, including the
costs of abandoned properties, dry holes, geophysical costs, and annual rentals.
All general corporate costs are treated as expenses as incurred. In general,
sale or other dispositions of oil and gas properties are accounted for as
adjustments to capitalized costs with no gain or loss recorded. Capitalized
costs are recorded in cost centers on a country-by-country basis. Most of the
Company's oil and gas properties consist of overriding royalty interests that
are located in Australia. The Company had not participated in the exploration
and development of proved oil and gas properties until 2002. Capitalized costs
are subject to a "ceiling test," which basically limits such costs to the
aggregate of the "estimated present value," discounted at a 10% interest rate of
future net revenues from proved reserves, based on current economic and
operating conditions, plus the lower of cost or fair market value of unproved
properties. Costs in excess of the ceiling test are adjusted against income.

                                   (Continued)


                                      F-7
<PAGE>


                     AUSTRALIAN-CANADIAN OIL ROYALTIES LTD.
                          NOTES TO FINANCIAL STATEMENTS
                           December 31, 2006 and 2005

NOTE 1: DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

OIL AND GAS PROPERTIES (CONTINUED)

Costs of producing royalty interests acquired in 1997 are being amortized over
the estimated reserves reported by the Queensland, Australia government at June
30, 1997; as revised by subsequent reports for discoveries, changes in
estimates, etc.; based on actual quantities sold. (These reports are generally
released one year after the end of the reporting period.) Costs of non-producing
interests are not being amortized pending development or production and sale of
oil or gas, but they are assessed for impairment on an aggregate
country-by-country basis.

OFFICE EQUIPMENT AND SOFTWARE

Office equipment and software are carried at depreciated cost. Acquisitions are
recorded at cost. Expenditures for major renewals and betterments that extend
the useful lives are capitalized. Expenditures for maintenance and repairs are
charged to expense as incurred. The cost of software and equipment is
depreciated over the estimated useful lives of the related asset. Depreciation
is computed on the straight-line method for financial reporting purposes.

INCOME TAXES

Deferred tax liabilities and assets result from temporary differences between
the financial statement and income tax bases of assets and liabilities. The
company records and adjusts any deferred tax asset valuations based on judgment
as to future realization of the deferred tax benefits supported by demonstrated
trends in the Company's operating results.

As a Canadian corporation, the Company is liable for income taxes under the laws
of Canada. Under Canadian laws the Company's Canadian-source income is subject
to a 46% tax (denominated in Canadian dollars). Operating losses can be carried
forward for seven years. The Company has unused operating loss carry-forwards at
December 31, 2006 that may be applied against future Canadian taxable income.
These expire as presented below. Because the timing of realization of the tax
benefit from these loss carry-forwards cannot be currently projected, a
valuation allowance has been established to completely offset this asset.

      AMOUNT OF UNUSED OPERATING                   EXPIRING DURING YEAR ENDED
           LOSS CARRYFORWARD                                DECEMBER 31,

              $   52,866                                       2007
                 163,410                                       2008
                  65,277                                       2009
                 104,895                                       2010
                 158,320                                       2011
                 614,874                                       2012
                 620,354                                       2013
              ----------
              $1,779,996
              ==========





                                   (Continued)


                                      F-8
<PAGE>


                     AUSTRALIAN-CANADIAN OIL ROYALTIES LTD.
                          NOTES TO FINANCIAL STATEMENTS
                           December 31, 2006 and 2005

NOTE 1: DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES (CONTINUED)

The difference between taxable income and net income for financial reporting is
the write-down of the oil and gas properties due the ceiling test that is not
deductible for tax purposes.

The potential tax benefit from these operating loss carry-forwards is $818,800
and $541,900 in 2006 and 2005, respectively. The Company has recognized a
valuation allowance against these deferred tax assets due the inability to
foresee when such benefits will be realized.

The Company is subject to a 30% Australian income tax on Australian source
royalty income. This tax is withheld by the payer. The Company incurred
Australian income taxes on its oil and gas production totaling $9,878 and $5,048
in 2006 and 2005, respectively.

LOSS PER SHARE

U.S. accounting rules provide for the calculation of "Basic" and "Diluted"
earnings per share. Basic earnings per common share are computed by dividing net
income available to common stockholders by the weighted

Weighted average shares outstanding were 12,648,703 and 10,753,521 for 2006 and
2005, respectively. Outstanding common stock equivalents have been excluded from
the calculation of diluted losses per share because their effect would be
antidilutive.

CASH FLOWS

The Company considers unrestricted cash and cash investments with initial
maturity or marketability of three months or less to be cash equivalents for
purposes of presenting its Statement of Cash Flows. Cash investments whose use
is limited through collateral restrictions are not considered to be cash for
cash flows.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles required management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimated.

FINANCIAL INSTRUMENTS

Unless otherwise specified, management believes the carrying value of its
financial instruments approximates their fair value due to the short term to
maturity.

RECLASSIFICATIONS

Certain 2005 amounts have been reclassified in order to conform to the 2006
financial statement presentation.

                                   (Continued)


                                      F-9
<PAGE>


                     AUSTRALIAN-CANADIAN OIL ROYALTIES LTD.
                          NOTES TO FINANCIAL STATEMENTS
                           December 31, 2006 and 2005

NOTE 1: DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RECENT ACCOUNTING PRONOUNCEMENTS

Statement No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans"-an amendment of FASB Statements No. 87, 88, 106, and 123R.
This Statement improves financial reporting by requiring an employer to
recognize the over funded or under funded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income of a
business entity or changes in unrestricted net assets of a not-for-profit
organization.

Statement No. 157, "Fair Value Measurements". This Statement defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair value
measurements. This Statement applies under other accounting pronouncements that
require or permit fair value measurements.

Statement No. 156, "Accounting for Servicing of Financial Assets"-an amendment
of FASB Statement No. 140. This Statement amends FASB Statement No. 140,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES, with respect to the accounting for separately recognized
servicing assets and servicing liabilities.

Statement No. 155, Accounting for Certain Hybrid Financial Instruments-an
amendment of FASB Statement No. 133 and 140. This Statement amends FASB
Statements No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, and No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL
ASSETS AND EXTINGUISHMENTS OF LIABILITIES.

In the opinion of management, these Statements will have no material effect on
the financial statements of the Company.

NOTE 2:  RESTRICTED CASH

The December 31, 2005 balance sheet reflected a $1,000,000 restricted cash
balance. This amount consisted of certificates of deposits ("CD").that served as
collateral for the short-term bank notes. The CD matured at six-month intervals
(the same as the note). The Company's ability to use these funds was restricted
under the terms of the collateral agreement (i.e., as long as the note was
outstanding, the CD was unavailable for other purposes). The CD was carried as a
current asset and the note a current liability, both of which could be
liquidated at any six-month maturity anniversary. The CD and related notes
payable was liquidated on June 26, 2006.

NOTE 3:   ACCOUNTS RECEIVABLE

At December 31, 2006 and 2005 the Company has accrued receivables for oil and
gas production from its Australian overriding royalty interests totaling $11,225
and $8,413, respectively. Collection of the accrued Australian production
generally occurs during the quarter following the quarter of production.

The cost bases of the receivables are believed to approximate their fair values.
No allowance for bad debts has been established because the Company has not
experienced any significant inability to collect is receivables.


                                      F-10
<PAGE>


                     AUSTRALIAN-CANADIAN OIL ROYALTIES LTD.
                          NOTES TO FINANCIAL STATEMENTS
                           December 31, 2006 and 2005

NOTE 4:   PROPERTIES AND EQUIPMENT

The following table presents costs of property and equipment at December 31,
2006 and 2005.

                                                     2006               2005
                                                 -----------        -----------

Oil and gas properties                           $ 1,116,067        $   966,677
Office equipment                                       2,870              2,870
Seismic analysis software                             15,551             15,551
                                                 -----------        -----------

    Total costs                                    1,134,488            985,098

    Accumulated depletion                            (50,964)           (43,746)
    Accumulated depreciation                         (12,793)            (6,652)
                                                 -----------        -----------

Net Property and Equipment                       $ 1,070,731        $   934,700
                                                 ===========        ===========

Depreciation expense was $6,141 for both 2006 and 2005. The office equipment and
the software are being depreciated on a straight-line basis over three years.

NOTE 5:  OIL AND GAS PROPERTIES

Following is a summary of capitalized costs related to oil and gas properties:
<TABLE>
<CAPTION>


                                                 2006                           2005
                                      --------------------------    --------------------------
                                       AUSTRALIA         U.S.         AUSTRALIA        U.S.
                                      -----------    -----------    -------------  -----------

<S>                                   <C>            <C>            <C>            <C>
Acquisition cost                      $   480,714    $     4,378    $   405,714    $     4,378
Exploration cost                          503,015           --          439,161           --
Assignments, transfers, and rentals       162,023           --          151,488           --
Less allowance for excess costs           (34,064)          --          (34,064)          --
                                      -----------    -----------    -----------    -----------

     Total                              1,111,688          4,378        962,299          4,378
Less accumulated depletion                (48,848)        (2,116)       (41,869)        (1,877)
                                      -----------    -----------    -----------    -----------

     Net Oil and Gas Properties       $ 1,062,840    $     2,262    $   920,430    $     2,501
                                      ===========    ===========    ===========    ===========
</TABLE>


            Costs Excluded from Amortization as of December 31, 2006

     Excluded acquisition costs incurred during 2006                $   75,000
     Excluded exploration costs incurred during 2006                    63,854
     Excluded acquisition costs incurred during 2005                    31,076
     Excluded exploration costs incurred during 2005                   439,161
     Sale of interest in excluded exploration costs during 2005       (338,500)
     Excluded acquisition costs incurred during 2004                   247,875
     Excluded exploration costs incurred during 2004                    10,280
     Excluded acquisition costs incurred during 2003                    27,000
     Excluded costs incurred prior to 2003                             427,776
                                                                    ----------

     Total costs excluded from amortization                         $  983,522
                                                                    ===========


                                   (Continued)


                                      F-11
<PAGE>


                     AUSTRALIAN-CANADIAN OIL ROYALTIES LTD.
                          NOTES TO FINANCIAL STATEMENTS
                           December 31, 2006 and 2005

NOTE 5:  OIL AND GAS PROPERTIES (CONTINUED)

The costs producing properties are being amortized over reserve estimates
reported by the Queensland, Australia government for June 30, 1997, as adjusted
for subsequently reported information, based on quantities produced. These
producing properties are ATP 267, ATP 299, ATP 543, and ATP 560. Other interests
have not produced marketable oil or gas from which the Company has received
revenues. The costs associated with these properties are not being amortized
pending determination of reserve quantities and commencement of production.
Depletion expense totaled $7,218 and $5,063 for 2006 and 2005.

In addition to depletion, these costs are subjected to a "ceiling" test based on
reported reserves. It has been determined that book values exceed the ceiling
test at December 31, 2006 and 2005. Adjustments to reduce the carrying values
based on the ceiling tests were $0 in 2006 and $0 in 2005. Additionally, as
discussed below, the U.S. investment was determined to be impaired.

Australia

During 2005, seismic work was performed on VIC/P60 and PEL's 108, 109 and 112
which amounted to $439,161. The Company sold 1/3 of 5% working interest in PEL's
108, 109 & 112 for $338,500 to cover the cost of the seismic work. Other lease
maintenance costs, which include license fees and rentals on ATP 582 and VIC/P60
totaled $31,076.


During 2006, seismic work was performed on PEL 112 which amounted to $3,600. On
PEL 100 the Company paid $60,254 for their portion of the drilling costs of the
Fairbridge well which was a dry hole. The Company purchased a 0.025% Overriding
Royalty Interest under VIC/P45 for $45,000 and a 1/10th of 1% Overriding Royalty
Interest Under VIC/P53 for $30,000. Other lease maintenance costs, which
included variation fees and rentals on PEL's 108, 109 and 112 totaled $10,536.

NOTE 6:   LOANS FROM SHAREHOLDERS AND NOTES PAYABLE

During 2005, the Company borrowed an additional $248,172 from its previous
president and current secretary in traunches based on a 12-month term bearing
interest at 4.5% annually. Interest incurred on all of these notes during 2005
totaled $7,765. During 2006, the Company borrowed additional funds from its
previous president and current secretary in the amount of $64,186. The Company
repaid a portion of the loans to its previous president during 2006 in the
amount of $155,163. Loans from officers totaled $177,194 as of December 31,
2006.

The Company had outstanding loans of $1,000,000 from the American State Bank of
Cisco, as of December 31, 2005. These notes were six month notes and were
renewed in April and December each year since the Company started borrowing in
2001. The balances outstanding at December 31, 2005 bear interest at 4.88% and
were due and paid in total in June, 2006. These notes were secured by
certificates of deposit shown as restricted cash on the balance sheet. Total
interest incurred on these bank notes during 2006 and 2005 was $18,864 and
$39,458.




                                      F-12
<PAGE>


                     AUSTRALIAN-CANADIAN OIL ROYALTIES LTD.
                          NOTES TO FINANCIAL STATEMENTS
                           December 31, 2006 and 2005

NOTE 7:   TRANSACTIONS WITH RELATED PARTIES

An officer provided office space and services, with no cash costs to the
Company. These contributed costs had estimated unpaid values of $3,200 for both
2006 and 2005. These amounts have been recorded as operating expenses and as
additional paid-in capital in their respective years.

During 2006 and 2005, the Company reimbursed commonly-controlled entities for
personnel and office expenses totaling $52,192 and $84,232, respectively. These
entities, Tensleep Oil & Production, Inc., and Secretarial Services, Inc., are
within the control of the Company's Secretary. Additionally, the Company repaid
Australian Grazing & Pastoral Co., Pty. Ltd., also controlled by the Company's
Secretary for filing fees during 2006, which totaled $26,473.

The Company borrowed $64,186 and $248,172 from two of its current and previous
officers during 2006 and 2005. These funds were used to pay for administrative
costs and efforts to promote the Company's name and availability.

At December 31, 2006 and 2005, the Company's accounts payable was $1,606 and
$3,140, respectively payable to related parties.

Common Shares to Directors - The Compensation Committee approved 30,000 shares
of restricted stock per director for the year of 2006, valued at $0.97 per
share, being the market value on June 28, 2006. This recommendation by the
Compensation Committee was voted on and approved by the Board of Directors and
has been recorded as an expense in these financial statements in the amount of
$145,500. This stock will be issued to each director at the director's
discretion. Howard Siegel is the only director whose stock was issued in 2006 in
the amount of 30,000 shares.

NOTE 8:   FOREIGN OPERATIONS

As noted above, the Company was incorporated in Canada. Additionally, the
Company operates primarily in Australia where most of its properties are
presently located. Approximately 90% of all operating revenues reported by the
Company during 2006 and 2005 were received from Australian oil and gas royalty
interests. Depletion expense and Australian income taxes reported by the Company
during 2006 and 2005 are also related to the revenue received from the
Australian royalties. Australian revenues were $41,008 and $18,198 in 2006 and
2005.

Essentially all of the Company's administrative costs are incurred in the United
States. Leasing operating expenses and taxes have been incurred in the U.S. and
taxes have been paid to Australia.

NOTE 9:   STOCK TRANSACTIONS

During 2006, the Company issued a total of 2,129,227 shares. A total of 574,679
shares were issued for loan repayment to its previous president valued at
$155,163; 922,222 shares were sold for cash in the amount of $200,000; 30,000
shares were issued for Director's Fees valued at $29,100; 100,000 shares were
issued for an interest in an Australian Property valued at $45,000; 97,674
shares were returned to the company from previous issue for oil and gas interest
in Kentucky; and 600,000 shares were issued for services valued at $262,000.

The Company has also approved the issuance of 132,643 shares of its common stock
in payment of services performed in 2006. This expense has been recorded in the
amount of $39,793 or $.30 per share at December 31, 2006.


                                   (Continued)


                                      F-13
<PAGE>

                     AUSTRALIAN-CANADIAN OIL ROYALTIES LTD.
                          NOTES TO FINANCIAL STATEMENTS
                           December 31, 2006 and 2005

NOTE 9:   STOCK TRANSACTIONS (CONTINUED)

During 2005, the Company issued 650,098 shares for consulting services valued at
$402,715 and an additional 150,000 options valued at $67,500. The exercise
prices of these options range from $1.25 to $1.75 and all carry a life of 7
years. During 2006 there were no options or warrants that were granted,
exercised, or cancelled. All 150,000 options were outstanding at December 31,
2006 and 2005.

NOTE 10:   CONTINGENCIES

The original package of Australian overriding royalty interests acquired by the
Company in 1997 included a 1/8 of 1% interest in all production from the
Patchawarra Southwest Block of PEL's 5 & 6. This overriding royalty comprises
approximately 5,348 net royalty acres under 1,069,717 surface acres. The
Patchawarra Southwest Block became productive in June 1989 and has produced
approximately $A67,119,716 in revenues from oil, gas and LPG since that time.
This overriding royalty was first created in June 1971 as a 1/4 of 1% interest
out of a 10% working interest. Since that time, this interest has been assigned
to six different companies with the last assignee being Australian-Canadian Oil
Royalties Ltd. During 1997, the Company determined that, due to the extensive
time elapsing between assignments and the failure of some intermediate assignees
to properly assign title, it will be necessary to engage in litigation in order
to collect both past and future royalty payments. In addition to the legal costs
incurred in this litigation, the Company will be required to pay the stamp duty
(transfer tax), charged by the Australian government, for each previously
unrecorded assignment.

The Company is considering the appropriate timing and costs which will be
required to undertake the necessary litigation to perfect its title in this
royalty interest. As of December 31, 2006, no litigation has been undertaken.
Legal counsel has advised the Company that the expected cost of the litigation
process will be in the range of $A30,000 plus any stamp duty that may be
required. The required stamp duty will be based on the state's determination of
value and will be required to be paid for each unregistered transfer in the
chain of title. At this time no estimate of this cost can be made. Upon
successfully clearing title to the property, the Company expects to collect
approximately $A42,000 in royalties on previous production. A six-year statute
of limitations runs on unpaid royalty revenue.

The Company has extensive commitments on its working interest properties in
Australia. The following summarizes these commitments.

ATP 582 - The Company has annual rentals of $20,000 per year on the 6,716,000
acre concession which the Company owns 100%.

PEL's 108, 109 & 112 - The Company has annual rentals which are approximately
$10,000 per year on these concessions and the Company owns a 13.8325% Carried
Working Interest.

PEL 100 - The Company owns a 2% working interest in PEL 100 and will be required
to pay its share of the completion of the Fairbridge well which is estimated to
be $25,000 for its share plus will be required to pay for its 2% working
interest of any future drilling and completions.

VIC/P60 - The Company's portion of the current commitment on seismic to be
conducted is $500,000. Management is currently negotiating with a Canadian Firm
to pay us our cash investment back of $120,000 and the Company will keep an
overriding royalty interest.

In the event the Company cannot fund the above commitments or farm-out these
areas to partners for funding, then the concessions will be subject to being
cancelled.


                                      F-14
<PAGE>


                     AUSTRALIAN-CANADIAN OIL ROYALTIES LTD.
                          NOTES TO FINANCIAL STATEMENTS
                           December 31, 2006 and 2005

NOTE 11:   CONCENTRATION OF RISK

The producing oil and gas assets of the Company are all located in Australia.
These continue to be the primary source of operating revenues for the Company.

Accounts at the bank are insured by the Federal Deposit Insurance Corporation
(FDIC) up to $100,000 per depositor. Combined balances at December 31, 2006 at
the Company's primary bank did not exceeded federally insured limits.

NOTE 12:   GOING CONCERN CONSIDERATIONS

As of December 31, 2006, the Company has limited disposable cash and its
revenues are not sufficient to, and cannot be projected to, cover operating
expenses and expansion by the Company. These factors raise substantial doubt as
to the ability of the Company to continue as a going concern. Management's plans
include attempting to find a drilling company to farm out the working interest
it holds in Australia, raising funds from the public through a stock offering,
and attempting to acquire additional producing interests in exchange for stock.
Management intends to make every effort to identify and develop sources of
funds. There is no assurance that Management's will be successful. The Company
is effectively debt free and could continue to operate at subsistence levels
pending development of funding sources, unless required to fulfill its
obligation in Australia.

NOTE 13:   SUPPLEMENTARY DATA - RESERVES OF OIL AND GAS (UNAUDITED)

The following schedules set out available information about the Company's oil
and gas activities at December 31, 2006.
                   RESERVES OF OIL AND GAS - ROYALTY INTERESTS

The current quantities of proved reserves of oil and gas relating to royalty
interests are not presented because the necessary information is not available
or the Company's interests are not large enough to economically and reasonably
obtain this information. The Company's share of oil and gas produced from the
producing interests is presented in the following schedule. No estimates of
reserves have been reported to or filed with any Federal authority or agency
during the year presented. All of these royalty interests are in Australia. The
gas wells on ATP 543 were shut in all of 2006.

                                                          GAS (MCF)   OIL (BBLS)
                                                          ---------   ----------
Reserves reported by the Queensland
     government as of June 30, 1997                         --            3,962
Additions or adjustments after 1997                       15,272          2,350
  Discoveries                                               --           74,514
  Cumulative previous production                          (4,232)        (3,447)
  Current year production                                   --             (543)
                                                         -------        -------

   Unrecovered reserves                                   11,040         76,836
                                                         =======        =======


                                   (Continued)


                                      F-15
<PAGE>


                     AUSTRALIAN-CANADIAN OIL ROYALTIES LTD.
                          NOTES TO FINANCIAL STATEMENTS
                           December 31, 2006 and 2005

NOTE 13:   SUPPLEMENTARY DATA - RESERVES OF OIL AND GAS (UNAUDITED) (CONTINUED)

               RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES (1)
                      For the Year Ended December 31, 2006

                                               AUSTRALIA       U.S.      TOTAL
                                               ---------       ----      -----

Sales of oil and gas                          $  41,008    $   1,137   $  42,145

Production costs (including taxes)                 --           --          --
Acquisition, exploration
     and development                            149,390         --       149,390
Depletion                                         6,979          239       7,218
                                              ---------    ---------   ---------
Results of operations from
     producing activities (excluding
     corporate overhead)                      $(115,361)   $     898   $ 114,463
                                              =========    =========   =========


All sales were to unaffiliated entities.

       CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES (1)
                              At December 31, 2006

                                                   AUSTRALIA             U.S.
                                                   ---------             ----

Unproved properties
     (not being amortized)                       $   962,180         $     1,878
Proved properties
     (being amortized)                               183,572               2,500
                                                 -----------         -----------

   Total Capitalized Costs                         1,145,752               4,378

Allowance for excess costs                           (34,064)               --
Accumulated depletion                                (48,847)             (2,116
                                                 -----------         -----------

Net Capitalized Costs                            $ 1,062,840         $     2,262
                                                 ===========         ===========







                                   (Continued)


                                      F-16
<PAGE>


                     AUSTRALIAN-CANADIAN OIL ROYALTIES LTD.
                          NOTES TO FINANCIAL STATEMENTS
                           December 31, 2006 and 2005


NOTE 13: SUPPLEMENTARY DATA - RESERVES OF OIL AND GAS (UNAUDITED) (CONTINUED)


 COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT
                      For the Year Ended December 31, 2006

                                               AUSTRALIA                U.S.
                                               ---------                ----
Property acquisition costs:
     Proved                                   $   --           $            --
     Unproved                                   75,000                      --
     Exploration costs                          74,390                      --
     Development costs                            --                        --
                                              --------         -----------------

Total                                         $149,390         $            --
                                              ========         =================

(1)      As mentioned at Note 5, the Company acquired a working interest in the
         Park City Gas Field in the U.S. that has been drilled but is not in
         production, except for a small amount of oil. The operator's petroleum
         engineer has performed a volumetric calculation of estimated gas in
         place. However, reliable reserve information (and value) for this
         property is highly subjective at the time of preparation of these
         financial statements because the field has opened a previously
         unexplored area in Kentucky and there has been no way to predict
         production rates or decline curves. Producible reserves are relatively
         shallow and there has not been a substantive test of the production
         rates and rate of decline of the estimated reserves. Because of these
         facts, a reliable estimate of the timing of production and future cash
         flows has not been determined. Since reliable information is not
         available at the time of preparation of these financial statements, the
         Company has not presented the disclosures of reserve information that
         are normally required for working interests based on information that
         management believes could prove to be unreliable or unsupportable.

         Additionally, because of the high nitrogen content in the gas found in
         the field, the gas is not marketable without being processed to remove
         excess nitrogen. Finding a funding source for the gas plant has proven
         to be problematic and, at present, causes projections of the potential
         to recover the Company's investment to be highly questionable. Based on
         this analysis, the Company has recorded an impairment for the full
         carrying value of its U.S. investment.

NOTE 14 - SUBSEQUENT EVENTS

The Company entered into a Letter of Intent with William Miertschin on December
20, 2006 to sell their portion of the 62.5% Working Interest on Victoria Permit
60. The sellers will also transfer 53.125% Net Revenue Interest and retain a
9.375% Overriding Royalty Interest. Total consolidation for the sale is $637,068
US with The Company proceeds totaling $152,896 on January 22, 2007. As of report
date sales contract has not been received.


                                      F-17