United States
                       Securities and Exchange Commission
                             Washington, D.C. 20549

                                    FORM 20-F

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

                                       or

[X]  Annual  Report  Pursuant  to  Section  13 or 15(d)  of the  Securities
     Exchange Act of 1934

                    FOR THE FISCAL YEAR ENDED MAY 31, 2002

                                       or

[ ]  Transition  Report  Pursuant to Section 13 or 15(d) of the  Securities
     Exchange Act of 1934

              For the transition period from _________ to _________

                        Commission file number: 000-30390

                              HILTON PETROLEUM LTD.
             (Exact name of Registrant as specified in its charter)

                              HILTON PETROLEUM LTD.
                 (Translation of Registrant's name into English)

                             YUKON TERRITORY, CANADA
                 (Jurisdiction of incorporation or organization)

      1305 - 1090 WEST GEORGIA STREET, VANCOUVER, BRITISH COLUMBIA, V6E 3V7
                    (Address of principal executive offices)

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

                                      NONE

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

                           COMMON STOCK, NO PAR VALUE
                                (Title of Class)

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

                                 NOT APPLICABLE
                                (Title of Class)

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

                   36,575,159 COMMON SHARES AS OF MAY 31, 2002

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

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

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

Item 17     X     Item 18                                          Page 1 of 106
        ---------         ---------                                    ---  ----


                                       -1-

<PAGE>



General Information:

Unless otherwise indicated, all references herein are to United States dollars.

                                    GLOSSARY

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


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

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

BCF                      One billion cubic feet.

BO                       Barrels of oil.

BOE                      Barrels of oil equivalent.

BOPD                     Barrels of oil per day.

BW                       Barrels of water.

BWPD                     Barrels of water per day.

farm-in                  Acquisition of all or part of the operating rights from
                         the  working  interest  owner  to an  assignee,  by the
                         assumption of all or some of the burden of  development
                         to earn an interest in the property. The vendor usually
                         retains an  overriding  royalty but may retain any type
                         of interest.

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

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

gross reserves           The  total  reserves   estimated  to  be   economically
                         recoverable.

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

isopach maps             Maps  showing   variations   in  the   thickness  of  a
                         particular  sedimentary bed and the interval or spacing
                         between one sedimentary bed and another.

liquids                  Crude oil and natural gas liquids.

MBO                      One thousand barrels of oil.

MCF                      One thousand cubic feet.

MCFE                     One thousand cubic feet equivalent.

md                       Millidarcies - a term used to measure the relative ease
                         with which oil and gas can flow.

MMBOE                    One million barrels of oil equivalent.

MMCFD                    One million cubic feet per day.


                        -2-

<PAGE>




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

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

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

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

NGLs                     Natural gas liquids.

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

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


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

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

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

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


                                       -3-

<PAGE>




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


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

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

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

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

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

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

proved properties        Properties with proved  reserves.

unproved  properties
                         Properties  with  no  proved   reserves.

reversionary interest    A portion of an economic interest that will be returned
                         to its former  owner  after a  predetermined  amount of
                         production  or income  has been  produced.

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

water flooding           The secondary  recovery method in which water is forced
                         down  injection  wells  laid  out in  various  patterns
                         around  the  producing   wells.   The  water   injected
                         displaces the oil and forces it to the producing wells.


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


                                       -4-

<PAGE>




workover                 A  major  remedial  operation  on a  completed  well to
                         restore,  maintain,  or improve the well's  production.
                         Workovers  use  workover  rigs and can take many  forms
                         such as  acidizing  or  fracing  the well or removal of
                         sand or  paraffin  buildup.  The term  workover is also
                         used for deepening an existing well or plugging back to
                         produce from a shallower formation.

Forward Looking Statements

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



                                       -5-

<PAGE>




                                     PART I

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



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



ITEM 3.  KEY INFORMATION.
--------------------------------------------------------------------------------

SELECTED FINANCIAL DATA

The  selected  financial  data of the Company for the years ended May 31,  2002,
2001 and 2000,  was derived from the  financial  statements of the Company which
have been audited by D & H Group (formerly Dyke & Howard), independent Chartered
Accountants,  as indicated  in their report which is included  elsewhere in this
report.  The selected  financial data set forth for the years ended May 31, 1999
and 1998 are  derived  from the  Company's  audited  financial  statements,  not
included herein.

The  information  in the following  table was  extracted  from the more detailed
consolidated  financial  statements and related notes included herein and should
be read in conjunction  with such financial  statements and with the information
appearing  under the heading "Item 9.  Management's  Discussion  and Analysis of
Financial Condition and Results of Operations."

Reference is made to Note 12 of the Company's  consolidated financial statements
included herein for a discussion of the material  differences  between  Canadian
generally  accepted  accounting  principles  ("GAAP") and U.S.  GAAP,  and their
effect on the Company's financial statements.

<TABLE>
<CAPTION>

                                                                         Year Ended May 31,
                                                                 (in '000s, except per share data)
                                                  -----------------------------------------------------------------
                                                      2002          2001          2000          1999           1998
                                                      ----          ----          ----          ----           ----
<S>                                             <C>             <C>         <C>           <C>            <C>

Revenues                                              $231        $5,229        $4,574        $3,774         $2,945
Interest Income and Other                             $854          $101          $279           $96           $143
Production Costs                                      $168        $1,903        $2,312        $2,157         $1,378
General and Administrative                            $816        $1,292        $1,149        $1,291           $865
Interest Expense on Long-Term Debt                    $694        $1,480        $1,786        $1,997           $968
Depreciation, Depletion and Impairment             $26,111        $1,455        $1,541        $2,244         $5,678
Legal and Litigation                                     -             -          $239          $303           $176
Corporate Finance Fees                                   -             -             -          $327              -
Gain on Sale of Petroleum Interests                      -         $(212)            -             -        $(2,147)
Gain on Sale of Marketable Securities                    -          $(25)        $(173)            -          $(895)
Write-down of Investment                              $700          $956             -             -              -
Non-controlling Interest                                 -             -             -             -            $11
Earnings (Loss)                                   $(27,985)      $(1,519)      $(2,240)      $(4,450)       $(2,924)
Earnings (Loss) Per Share                          $(0.77)       $(0.05)       $(0.09)       $(0.28)        $(0.22)
Weighted Average Number of Shares                   36,410        31,702        23,984        16,110         13,201
Dividends per Share                                  $0.00         $0.00         $0.00         $0.00          $0.00
Working Capital (Deficiency)                          $693        $1,787       (12,670)       $4,047        $(3,047)
Resource Assets                                     $5,079       $29,721       $35,052       $25,568        $22,268

</TABLE>

                                       -6-

<PAGE>

<TABLE>
<CAPTION>

                                                                         Year Ended May 31,
                                                                 (in '000s, except per share data)
                                                  -----------------------------------------------------------------
                                                      2002          2001          2000          1999           1998
                                                      ----          ----          ----          ----           ----
<S>                                             <C>             <C>         <C>           <C>            <C>

Investment                                            $642          $807        $1,705             -              -
Other Assets                                          $213          $202          $272          $310         $2,811
Non-current Obligations                             $3,737        $3,482        $2,965       $16,256        $13,501
Non-Controlling Interest                                 -             -             -           $23            $23
Shareholders' Equity                                $2,901       $29,035       $21,394       $13,646         $8,507
Total Assets                                        $7,589       $36,055       $42,083       $33,637        $26,506
Capital Stock                                      $43,003       $41,152       $32,687       $22,699        $12,483

</TABLE>


ADJUSTMENT TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

DIFFERENCES  BETWEEN  CANADIAN AND UNITED STATES GENERALLY  ACCEPTED  ACCOUNTING
PRINCIPLES


The  consolidated  financial  statements  of  the  Company  have  been  prepared
according to Canadian  GAAP which differ in certain  material  respects  from US
GAAP. Material  differences between Canadian and US GAAP and their effect on the
Company's consolidated financial statements are summarized in the tables below.

<TABLE>
<CAPTION>


                                                                  2002           2001            2000
                                                                    $              $               $
<S>                                                       <C>              <C>             <C>
Consolidated Statements of Operations
 and Comprehensive Income

Loss for the year
  Canadian GAAP                                               (27,984,522)    (1,518,858)     (2,239,652)
  Write-down of investment (i)                                    575,000        956,253               -
  Impairment expense (ii), (iii)                               (1,846,667)             -               -
  Stock option plan (iv)                                                -       (213,116)        (48,608)
  Other compensation expense (vii)                               (181,769)      (151,495)       (460,394)
  Accretion of liability component of
    long-term debt (viii)                                         231,436         77,145               -
  Beneficial conversion feature on
    convertible debt securities (ix)                                    -       (377,814)              -
                                                            -------------   ------------    ------------
  US GAAP                                                     (29,206,522)    (1,227,885)     (2,748,654)
                                                            -------------   ------------    ------------

Other Comprehensive Income
  Unrealized holding gain (loss) on
    available-for-sale marketable securities (i)                 (600,361)    (1,216,041)      1,335,077
  Reclassification adjustment for gain (loss) on available
    for sale marketable securities included in net loss(i)          2,046        (25,345)              -
                                                            -------------   ------------    ------------
                                                                 (598,315)    (1,241,386)      1,335,077
                                                            -------------   ------------    ------------
Comprehensive (loss) for the year                             (29,804,837)    (2,469,271)     (1,413,577)
                                                            =============   ============    ============
  Loss per share basic and
    fully diluted - US GAAP                                  $  (0.80)      $  (0.04)        $  (0.11)
                                                            =============   ============    ============
</TABLE>

                                       -7-

<PAGE>

<TABLE>
<CAPTION>

                                                                                 2002             2001
                                                                                  $                $
<S>                                                                        <C>               <C>

Consolidated Balance Sheets
Total Assets
    Canadian GAAP                                                               7,589,312       36,055,162
    Available for sale securities (i)                                             (23,315)               -
    Capital contributions with respect to related party transactions (ii)               -        1,846,667
                                                                              -----------      -----------
    US GAAP                                                                     7,565,997       37,901,829
                                                                              ===========      ===========
Total Liabilities
    Canadian GAAP                                                               4,687,950        7,020,543
    Equity component of long-term debt (viii)                                     694,310          694,310
    Accretion of liability component of long-term debt(viii)                     (308,581)         (77,145)
                                                                              -----------      -----------
    US GAAP                                                                     5,073,679        7,637,708
                                                                              ===========      ===========
Shareholders' Equity
    Canadian GAAP                                                               2,901,362       29,034,619
    Available for sale securities (i)                                             (23,315)               -
    Cumulative capital contributions with
         respect to related party transactions (ii)                                     -        1,846,667
    Equity component of long-term debt (viii)                                    (694,310)        (694,310)
    Accretion of long-term component of long-term debt (viii)                     308,581           77,145
                                                                              -----------      -----------
    US GAAP                                                                     2,492,318       30,264,121
                                                                              ===========      ===========
</TABLE>
    (i)   Marketable Securities

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

    (ii)  Capital contributions with respect to related party transactions

          During the year ended May 31,  1999,  the Company  sold certain of its
          petroleum   interests  to  Trimark  Energy  Ltd.   ("Trimark")  for  a
          combination  of  monetary  and  non-monetary  consideration.  US  GAAP
          requires that certain  transfers of  non-monetary  assets to a related
          party by its promoters or shareholders should generally be recorded at
          the  transferor's   historical  cost,  whereas  under  Canadian  GAAP,
          transfers  of  non-monetary  assets may be recorded  based on the fair
          value of the consideration received under certain circumstances. Under
          Canadian GAAP, these  transactions were recorded at their fair values.
          The transactions have been adjusted in 2001 to reflect the sale of the
          petroleum interests based on the Company's historical cost basis. This
          adjustment  is no  longer  necessary  in  2002 as the  difference  was
          included in the  impairment  provision as a result of the ceiling test
          performed effective May 31, 2002.

    (iii) Ceiling test on petroleum interests

          US GAAP requires that the net book value of proved petroleum interests
          not  exceed  the sum of the  present  value of  estimated  future  net
          revenues (determined using current prices of petroleum production less
          estimated  future  expenditures  to  be  incurred  in  developing  and
          producing  the  proved  reserves,  discounted  at ten  percent).  This
          ceiling test was performed effective May 31, 2002 and an impairment of
          $27,753,746 was required to be recorded.


                                       -8-

<PAGE>



    (iv)  Stock options granted to consultants and non-employees

          The Company  grants stock  options  which  reserve  common  shares for
          issuance to consultants and other non-employees.  Under Canadian GAAP,
          such stock options are not recognized for accounting  purposes.  Under
          US GAAP the  Company  has  adopted the  provisions  of  Statements  of
          Financial  Accounting  Standards  ("SFAS") 123  "Accounting  for Stock
          Based  Compensation"  for stock  options  granted to  consultants  and
          non-employees.

          Accordingly,  the Company has recognized stock based  compensation for
          these stock option grants using the fair value method.

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

                                      2002              2001             2000
                                    -------           -------        -----------
          Risk-free interest rate    3.69%             4.50%            6.75%
          Expected volatility         125%              107%              92%
          Expected lives            3 years           3 years        2 - 3 years

    (v)   Stock option plan for employees and directors

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

          Loss - as reported under US GAAP                     (29,206,522)      (1,227,885)     (2,748,654)
          Loss - proforma                                      (29,352,135)      (1,918,509)     (2,824,740)

          Loss per share - as reported under US GAAP              (0.80)           (0.04)          (0.11)
          Loss per share - proforma                               (0.81)           (0.06)          (0.12)
</TABLE>

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

                                       2002             2001            2000

          Risk-free interest rate      3.69%            4.79%            6.75%
          Expected volatility           125%             109%             92%
          Expected lives             3 years          3 years        2 - 3 years

    (vi)  Private Placements of Common Stock and Special Warrants with Related
          Parties

          US GAAP  requires  disclosure of private  placements  conducted by the
          Company where directors and officers of the Company are  participants.
          During the year ended May 31, 2002, directors,  officers and companies
          controlled  by the  directors or officers  acquired  1,593,000  shares
          (2001 -  2,250,000;  2000 -  2,706,500)  of the  Company,  pursuant to
          private  placements  conducted  by the Company,  for cash  proceeds of
          $1,769,537 (2001 - $1,893,684; 2000 - $5,494,547);

                                       -9-

<PAGE>



    (vii) Private Placements of Common Stock

          The Company conducts the majority of its equity financings pursuant to
          private  placements.  Under the policies of the TSX Venture,  on which
          the  Company's  common  stock is listed,  the  Company  may  provide a
          discount off the market price of the Company's  common stock.  US GAAP
          does not permit a discount from the market price. US GAAP requires the
          recognition  of the market  value of the  Company's  common stock as a
          credit to share  capital,  with a charge to operations for the portion
          of the discount relating to equity financings  conducted with officers
          and directors of the Company and a charge to shareholders'  equity, as
          a capital  distribution,  for the discount  relating to the  remaining
          portion of the equity financings.

          Under US GAAP, loss and capital  distributions  for the year ended May
          31, 2002 would increase by $181,769 (2001 - $148,800; 2000 - $460,394)
          and $9,128  (2001 - nil;  2000 -  $231,117),  respectively,  and share
          capital,  as at May 31,  2002 would  increase  by  $1,913,486  (2001 -
          $1,731,717;   2000  -   $1,582,917).   There  is  no  net   change  to
          shareholders' equity.

    (viii)Accretion of Liability Component of Long-term Debt

          Under  Canadian  GAAP,   compound   financial   instruments   such  as
          convertible  debentures  are required to be accounted  for at the fair
          value of their  components.  Such accounting is not permitted under US
          GAAP unless the components are detachable,  which they are not in this
          case.

    (ix)  Beneficial Conversion Feature on Convertible Debt Securities

          Under  US GAAP,  additional  interest  expense  is  recognized  when a
          convertible  debt security is issued with an "in the money  conversion
          rate".  This additional  interest expense is recognized in the year of
          issue when, as in the Company's case, the debt security is convertible
          at the time of issue. No such charge is required under Canadian GAAP.

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

NEW TECHNICAL PRONOUNCEMENTS

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

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

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


                                      -10-

<PAGE>

EXCHANGE RATE HISTORY

The following table sets forth the average exchange rate for one Canadian dollar
expressed  in terms of one U.S.  dollar for the fiscal years ended May 31, 2002,
2001, 2000, 1999, and 1998.

     Period                                                  Average
     ---------------------------                             -------
     June 1, 2001 - May 31, 2002                              0.6377
     June 1, 2000 - May 31, 2001                              0.6596
     June 1, 1999 - May 31, 2000                              0.6792
     June 1, 1998 - May 31, 1999                              0.6616
     June 1, 1997 - May 31, 1998                              0.7068

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

     Month                           High                       Low
     --------------                 ------                    ------
     May 2002                       0.6547                    0.6366
     June 2002                      0.6619                    0.6452
     July 2002                      0.6603                    0.6297
     August 2002                    0.6442                    0.6264
     September 2002                 0.6433                    0.6304
     October 2002                   0.6407                    0.6272

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

The noon rate of  exchange on October 31,  2002,  reported by the United  States
Federal  Reserve Bank of New York for the  conversion  of Canadian  dollars into
United States dollars was CDN$1.5610 (US$0.6407 = CDN$1.00).

RISK FACTORS

The Company conducts business in the petroleum and natural gas industry, mineral
exploration industry and computer software industry.

FINANCING RISKS

As at May 31, 2002, the Company had working  capital of $692,973.  As at October
31,  2002,  the  Company's  working  capital  had  decreased  to  a  deficit  of
approximately $700,000 . The Company does not anticipate that current operations
will  provide  sufficient  cash flows to provide for ongoing  overhead,  capital
commitments or the discharge of its liabilities as they come due.

The  Company  has  primarily  relied  on the  sale  of its  equity  capital  and
disposition  of petroleum  interests to fund the  acquisition,  exploration  and
development of its petroleum  properties.  It has no assurance  that  additional
funding will be available to it for  exploration and development of its projects
or to fulfil its obligations  under any applicable  agreements.  There can be no
assurance  that the Company will be able to generate  sufficient  operating cash
flow or  obtain  adequate  financing  in the  future  or that the  terms of such
financing will be favorable.  Failure to generate additional operating cash flow
or obtain  additional  financing  could  result in  substantial  dilution of the
Company's petroleum  interests,  or delay or indefinite  postponement of further
exploration  and  development  of its projects  with the  possible  loss of such
properties.

See "Item 5.  Management's  Discussion  and  Analysis -  Liquidity  and  Capital
Resources".

                                      -11-

<PAGE>

UNINSURABLE RISKS

Although management believes the operator of any properties in which the Company
and  its  subsidiaries  may  acquire   interests,   will  acquire  and  maintain
appropriate  insurance  coverage in accordance with standard industry  practice,
the Company and its subsidiaries  may suffer losses from uninsurable  hazards or
from hazards which the operator has chosen not to insure against because of high
premium  costs or other  reasons.  The  Company and its  subsidiaries  intend to
engage in  participating  in the drilling of both  exploratory  and  development
wells. Exploratory wells have much greater dry hole risk than do wells which are
drilled offsetting established production.  The Company and its subsidiaries may
become subject to liability for pollution, fire, explosion, blow-outs, cratering
and oil spills  against which it cannot insure or against which it may elect not
to insure.  Such events could result in substantial damage to oil and gas wells,
producing  facilities and other property and personal injury. The payment of any
such liabilities may have a material,  adverse effect on the Company's financial
position.

As of October 31, 2002,  the Company is not the operator of any of its petroleum
and natural gas interests.

NO ASSURANCE OF TITLES

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

ENVIRONMENTAL REGULATIONS

In general, the exploration and production activities of the Company are subject
to  certain  federal,   state  and  local  laws  and  regulations   relating  to
environmental  quality and pollution control. Such laws and regulations increase
the costs of these  activities  and may  prevent  or delay the  commencement  or
continuance of a given operation. Compliance with these laws and regulations has
not had a material effect on the Company's  operations or financial condition to
date.  Specifically,  the Company is subject to legislation  regarding emissions
into the environment, water discharges, and storage and disposition of hazardous
wastes.  In addition,  legislation  has been  enacted  which  requires  well and
facility  sites to be  abandoned  and  reclaimed  to the  satisfaction  of state
authorities.  However,  such laws and regulations are frequently changed and the
Company  is  unable to  predict  the  ultimate  cost of  compliance.  Generally,
environmental  requirements  do not appear to affect the Company any differently
or to any greater or lesser extent than other companies in the industry.

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

GOVERNMENTAL REGULATIONS

Oil and gas exploration, development and production are subject to various types
of regulation by local,  state and federal agencies.  Legislation  affecting the
oil and gas industry is under constant review for amendment and expansion. Also,
numerous  departments  and agencies,  both federal and state,  are authorized by
statute to issue and have issued  rules and  regulations  binding on the oil and
gas  industry  and its  individual  members,  some of  which  carry  substantial
penalties  for  failure  to  comply.  The  regulatory  burden on the oil and gas
industry increases the Company's cost of doing business

                                      -12-

<PAGE>



and,  consequently,  affects its profitability.  There is no assurance that laws
and regulations  enacted in the future will not adversely affect the oil and gas
industry.  However,  since these regulations  generally apply to all oil and gas
producers,  management of the Company believes that these regulations should not
put the Company at a material disadvantage to other oil and gas producers.

Most states in which the Company and its subsidiaries own and operate properties
have statutes,  rules and regulations  governing  conservation matters including
the unitization or pooling of oil and gas properties,  establishment  of maximum
rates of production from oil and gas wells and the spacing of such wells.

Oil and gas mineral rights may be held by individuals  or  corporations  and, in
certain circumstances, by governments having jurisdiction over the area in which
such mineral rights are located. As a general rule, parties holding such mineral
rights grant licenses or leases to third parties to facilitate  the  exploration
and  development of these mineral  rights.  The terms of the leases and licenses
are generally  established to require timely  development.  Notwithstanding  the
ownership of mineral rights, the government of the jurisdiction in which mineral
rights are located generally retains authority over the manner of development of
those rights.

In addition to royalties paid to freehold owners, each state generally imposes a
production or severance  tax with respect to  production  and sale of crude oil,
natural gas and natural gas liquids within their respective  jurisdictions.  For
the most part,  state production taxes are applied as a percentage of production
or sales.  Payment of these taxes are in the normal  course of operations in the
oil and gas  industry  and should not have a  material  impact on the  Company's
financial condition.

NATURAL GAS AND OIL PRICES

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

The Company's financial results can be significantly affected by prices received
from production of oil and gas as commodity  prices fluctuate widely in response
to changing market forces.  Specifically,  a decrease in the price of oil or gas
may reduce the  revenue  the Company  receives  from its oil and gas  operations
and/or may increase the Company's  impairment or depletion  expenses for a given
period.  In  addition,  a decrease  in price may cause a decrease in the present
value of the Company's estimated oil and gas reserves.  Conversely,  an increase
in the price of oil or gas may increase the revenue  received from the Company's
oil and gas operations and/or may decrease the Company's impairment or depletion
expenses for a given period.  An increase in price may also cause an increase in
the present value of the Company's estimated oil and gas reserves.

Derivative  instruments  are  commonly  used by oil and gas  producers  to limit
exposure to fluctuations  experienced in the price of natural gas and crude oil.
From time to time the Company may utilize  derivative  instruments  to hedge its
petroleum  and natural gas  production.  As at October 31, 2002,  no  derivative
instruments are in place.

COMPETITION

The oil and gas industry is intensely  competitive and the Company competes with
other  companies which have greater  resources.  Many of such companies not only
explore  for and  produce  crude oil and  natural gas but also carry on refining
operations and market  petroleum and other products on a worldwide  basis.  Such
companies may be able to pay more for  productive oil and natural gas properties
and  exploratory  prospects,  and to define,  evaluate,  bid for and  purchase a
greater number of properties and prospects than the Company's financial or human
resources permit. The Company's ability to acquire additional  properties and to
discover  reserves in the future will be dependent  upon its ability to evaluate
and select suitable properties, to obtain funding and to consummate transactions
in a highly competitive  environment.  There is also competition between the oil
and gas industry and other  industries  with respect to the supply of energy and
fuel to industrial,  commercial and individual customers.  There is no assurance
that the Company will be able to effectively compete against such companies.

                                      -13-

<PAGE>



RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH

Because of its small  size,  the  Company  desires  to grow  rapidly in order to
achieve  certain  economies of scale.  Although  there is no assurance that this
rapid  growth  will occur,  to the extent  that it does  occur,  it will place a
significant  strain  on the  Company's  financial,  technical,  operational  and
administrative  resources.  As the Company  expands its activities and increases
the number of projects it is evaluating or in which it is  participating,  there
will  be  additional   demands  on  the  Company's   financial,   technical  and
administrative  resources.  The failure to  continue  to upgrade  the  Company's
technical,  administrative,  operating  and  financial  control  systems  or the
occurrence of unexpected expansion  difficulties,  including the recruitment and
retention of geoscientists  and engineers,  could have a material adverse effect
on the Company's business, financial condition and results of operations.

DEPENDENCE UPON KEY PERSONNEL

The  success of the  Company's  operations  and  activities  is  dependent  to a
significant  extent on the efforts and abilities of its management.  The loss of
services of any of its  management  could have a material  adverse effect on the
Company.  The  Company  has not  obtained  "key  man"  insurance  for any of its
management.

Mr. Busby is the Chairman and Chief Executive  Officer of the Company.  The loss
of the services of Mr. Busby may adversely  affect the business and prospects of
the Company.  Mr.  Busby's  services are provided  through Boone  Petroleum Ltd.
("Boone").

ADEQUATE LABOUR

Corporate  accounting,  management and administration are provided,  in part, by
Chase Management Ltd. ("Chase"),  a company owned by Mr. Nick DeMare, a director
of the Company.  In the event the Company needs to employ additional  personnel,
it will need to recruit qualified personnel to staff its operations. The Company
believes that such personnel  currently are available at reasonable salaries and
wages in the geographic areas in which the Company and its subsidiaries operate.
There can be no assurance, however, that such personnel will be available in the
future.  In addition,  it cannot be predicted whether the labour staffing at any
of the Company's  projects will be  unionized,  which may result in  potentially
higher operating costs.

DIVIDEND RISKS

The Company has not paid any  dividends on its common shares and does not intend
to pay dividends on its common shares in the immediate  future.  Any decision to
pay  dividends  on its common  shares in the future will be made by the board of
directors on the Company on the basis of earnings,  financial  requirements  and
other such conditions that may exist at that time.

PRICE FLUCTUATIONS:  SHARE PRICE VOLATILITY

In recent years, the securities  markets in Canada have experienced a high level
of price and volume  volatility,  and the market  prices of  securities  of many
companies,  particularly junior resource exploration companies like the Company,
have  experienced wide  fluctuations  which have not necessarily been related to
the  operating  performance,  underlying  asset  values  or  prospects  of  such
companies.  In  particular,  the per share price of the  Company's  common stock
fluctuated  from a low of  CDN$0.04 to a high of  CDN$0.62  during the  12-month
period ending October 31, 2002. The Company's share price closed at CDN$0.04 per
share  on  October  31,  2002.  There  can  be no  assurance  that  these  price
fluctuations will not continue to occur.

CURRENCY FLUCTUATIONS

For accounting  purposes,  the U.S.  dollar is used as the Company's  functional
currency.  To date, all equity financing and certain debt financing conducted by
the Company have been conducted in Canadian  dollars.  In addition,  the Company
maintains its head office in Vancouver, Canada, and will maintain certain of its
cash holdings in Canadian dollars.  Recently the Canadian dollar has experienced
a devaluation against the United States dollar.  Gains and losses resulting from
the   fluctuation   of  foreign   exchange  rates  have  been  included  in  the
determination of income. Continued devaluation of the Canadian dollar may have a
material and adverse  effect on the Company's  ability to conduct  financings in
the future.

                                      -14-

<PAGE>

CONFLICTS OF INTEREST

Certain of the  directors  also serve as  directors  of other  companies or have
significant  shareholdings in other companies and, to the extent that such other
companies may participate in ventures in which the Company may participate,  the
directors  of the Company may have a conflict  of  interest in  negotiating  and
concluding terms relating to the extent of such participation. In the event that
such a conflict of  interest  arises at a meeting of the board of  directors,  a
director  who has such a  conflict  will  disclose  the nature and extent of his
interest to the board of  directors  and abstain  from voting for or against the
approval of such a participation or such terms.

In accordance with the laws of the Yukon Territory, the directors of the Company
are required to act honestly and in good faith with a view to the best interests
of the  Company.  In  determining  whether the  Company  will  participate  in a
particular  program and the interest therein to be acquired by it, the directors
will  primarily  consider the degree of risk to which the Company may be exposed
and its financial position at that time.

CHANGE OF BUSINESS FOCUS

As of the date of this annual  report,  the Company is reviewing  its  continued
activities  and  participation  in the oil  and gas  industry.  The  Company  is
pursuing certain  opportunities in the proprietary software industry,  but those
prospects are in the start-up stage.  See "Item 4.  Information on the Company -
Subsidiaries","Item  4.  Information  on  the  Company  -  Business  Overview  -
Principal  Oil and  Gas  Properties  - Other  Properties  - China  and  Mongolia
Properties"  and "Item 4.  Information  on the Company - Principal  Properties -
Other Properties - China and Mongolia  Properties." There are no assurances that
these prospects will, if ever, develop into operating businesses and/or generate
revenues.  In  addition,  the  Company may acquire  certain  mineral  properties
(non-oil  and  gas)  located  in  China  and  Mongolia;  however,  there  are no
assurances  that the Company will complete  these  acquisitions  or, even if the
Company completes the acquisitions, that such properties will generate revenues.

If the Company is unable to generate  revenues,  either from (i) its investments
in  other  businesses,   (ii)  acquired  properties,  or  (iii)  other  business
opportunities  the Company  may  acquire (if any),  the Company may be forced to
cease operations.

RELIANCE UPON OTHERS

As of the date of this annual  report,  the  Company is  pursuing  opportunities
outside of the oil and gas  industry,  including  prospects  in the  proprietary
software industry and mineral exploration industry.  See "Item 4. Information on
the  Company -  Subsidiaries","Item  4.  Information  on the  Company - Business
Overview -  Principal  Oil and Gas  Properties  - Other  Properties  - China and
Mongolia  Properties"  and  "Item 4.  Information  on the  Company  -  Principal
Properties - Other Properties - China and Mongolia Properties." The Company does
not have expertise or resources  related to these industries and, in the case of
the mineral properties in China and Mongolia, the Company has no experience with
or expertise  relating to the  operation of businesses  in these  countries.  As
such,  the Company  will be  dependent  upon its ability to hire  employees  and
consultants  to assist with the  development of these  opportunities,  including
advise on the operation of businesses  in foreign  countries.  If the Company is
unable to hire  employees  or  consultants  to assist with these  projects,  the
Company may experience delays in the development of these projects and/or may be
unable to complete the acquisition or development of these projects.

PENNY STOCK REGULATION

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

                                      -15-

<PAGE>



the customer's account. In addition, the penny stock rules require that prior to
a  transaction  in a penny  stock not  otherwise  exempt from those  rules,  the
broker-dealer must make a special written  determination that the penny stock is
a suitable  investment  for the  purchaser and receive the  purchaser's  written
agreement to the transaction. These requirements may have the effect of reducing
the level of trading  activity in the secondary  market for a stock that becomes
subject to the penny  stock  rules.  Should a trading  market for the  Company's
stock  commence in the United  States,  the Company's  common stock could become
subject to the penny stock  rules,  the holders of the Common  Stock may find it
difficult to sell the Common Stock of the Company.  These rules may restrict the
ability of brokers to sell the common stock and may reduce the secondary  market
for the common stock. A limited secondary market may result in a decrease in the
shareholder value and/or a partial or total loss of an investor's investment.

ENFORCEMENT OF LEGAL PROCESS

Service of process upon individuals or firms that are not resident in the United
States may be difficult to obtain within the United States.  Some of the members
of the Board of Directors and senior  management of the Company  reside  outside
the United  States.  Any  judgment  obtained  in the United  States  against the
Company or such persons may not be  collectible  within the United  States.  The
Company has not appointed anyone to accept service of process on its behalf.


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


HISTORY AND DEVELOPMENT OF THE COMPANY

NAME AND INCORPORATION

The  Company  was  incorporated  under the Company  Act  (British  Columbia)  on
September 7, 1989, as "No. 207 Sail View Ventures  Ltd." On October 2, 1989, the
Company  changed  its name from  "No.  207 Sail  View  Ventures  Ltd." to "Ingot
Properties  Ltd." On June 26,  1992,  the  Company  changed its name from "Ingot
Properties  Ltd." to "San Pedro  Resources  Ltd." On July 15, 1994,  the Company
changed its name from "San Pedro Resources Ltd." to "Hilton Petroleum Ltd."

The Company was inactive until November 30, 1994, when it acquired approximately
96.63% of the issued and outstanding  shares of Hilton Petroleum,  Inc. ("Hilton
U.S.").  The Company  subsequently  made additional  capital  contributions  and
acquired  all  of  the  remaining  minority  interests.  Hilton  U.S.  is  now a
wholly-owned subsidiary of the Company. Hilton U.S. was incorporated on June 15,
1993 pursuant to the laws of the State of Nevada.

On April 1, 1999,  pursuant to an agreement (the "Arrangement  Agreement") dated
February 5, 1999,  the Company  completed a merger with  Stanford Oil & Gas Ltd.
("Stanford"),  a public company with common  management.  Under the terms of the
Arrangement  Agreement the Company  issued  8,462,140  shares of the Company for
16,078,569  issued  shares  of  Stanford.   As  a  result,   Stanford  became  a
wholly-owned  subsidiary of the Company.  In conjunction  with the  Amalgamation
with  Stanford  on April 1, 1999,  the  Company  changed  its  domicile  through
continuation  from British  Columbia to the Yukon  Territory  under the Business
Corporations  Act (Yukon).  See "Item 3. Key  Information  - Selected  Financial
Data."

The  Company's  registered  office and principal  business  office is located at
Suite 1305 - 1090 West Georgia Street, Vancouver, British Columbia, V6E 3V7.

The  Company's  registered  office is located at 3081 - 3rd Avenue,  Whitehorse,
Yukon,  Canada.  The phone number of the  Company's  registered  office is (867)
668-4405 and the corporate office is (604) 685-9316. The Company does not have a
registered agent in the United States.

The Company's  common shares were listed on the  Vancouver  Stock  Exchange (the
"VSE") through November 28, 1999.  Effective  November 29, 1999, the VSE and the
Alberta Stock  Exchange (the "ASE") merged and began  operations as the Canadian
Venture  Exchange  (the  "CDNX").  On April 8, 2002,  the CDNX was  renamed  the
Toronto Venture Exchange (the "TSX Venture").  The TSX Venture classifies listed
companies into two different tiers based on standards,  which include historical
financial performance, stage of development and financial resources. The Company
trades on the TSX Venture  under the symbol "HTP" and is  classified as a Tier I
company.  Tier I is the TSX  Venture's  premier tier and is reserved for the TSX


                                      -16-

<PAGE>


Venture's most advanced issuers with the most significant  financial  resources.
Tier I issuers benefit from decreased  filing  requirements and improved service
standards.  The majority of the companies  listed on the TSX Venture are Tier II
companies.

Effective  February 7, 2001, the Company's common stock was approved for trading
on the  Over-the-Counter  Bulletin Board operated by the National Association of
Securities Dealers under the symbol "HTPTF".

EXPLORATION EXPENDITURES

During fiscal 2000,  2001 and 2002, the Company  incurred  $11.7  million,  $8.3
million and $2.2 million,  respectively,  on the  acquisition,  exploration  and
development of its petroleum  interests.  During the period from June 1, 2002 to
October 31, 2002,  the Company  incurred  approximately  $505,000 in exploration
expenditures.  During the past three fiscal  years,  the Company has devoted its
resources in developing  its petroleum and natural gas prospects in  California,
as described in "Item 4. Information on the Company - Material Properties". With
the  disappointing  results  at  East  Lost  Hills,  San  Joaquin  and  Regional
California,  the Company has had to reassess  its options and  alternatives.  At
this time, no further  significant  exploration  or  development  activities are
anticipated to be funded by the Company.

BUSINESS OVERVIEW

The Company,  through  Hilton U.S. and STB Energy,  is primarily  engaged in the
business of acquiring  leasehold  interests in petroleum and natural gas rights,
and the  exploration for and  development,  production and sale of petroleum and
natural  gas in the  continental  United  States,  primarily  in the San Joaquin
Basin, California. See "Item 4. Information on the Company - Subsidiaries".

In November 1994, the Company acquired a property portfolio  assembled by Hilton
U.S.,  consisting  of  interests  in  significant  acreage  positions in several
different  areas  located  in  Adams  County,  Colorado.  As of the date of this
report, the Company had abandoned or sold all of these properties.

As a result of the  Arrangement  between the Company and  Stanford,  the Company
holds interests in various properties located in the United States. Prior to the
Amalgamation,  Stanford was involved in the drilling and  completion  of natural
gas wells,  principally in Alberta.  In July, 1997, Stanford sold all of its oil
and gas interests in Alberta.  In order to replace these oil and gas  production
assets,  in November,  1997,  STB Energy  entered into an agreement with Enserch
Exploration,  Inc.  ("Enserch")  whereby  STB Energy  purchased  an initial  90%
interest  in a  significant  producing  asset base  located in Texas,  Oklahoma,
Louisiana and New Mexico (the "Enserch  Properties") for the sum of $16,290,000.
Effective  September 1, 1998, STB Energy  acquired the remaining 10% interest in
the Enserch Properties for the sum of $2 million.  On March 8, 2001, the Company
sold the Enserch  Properties and other minor petroleum and natural gas interests
to Exco Resources Inc. ("Exco"), an arm's length party.

During 2002, the Company  identified a number of business  opportunities  in the
development of certain proprietary  software  technologies  employing artificial
intelligence.  The  research,  development  and  marketing  of  the  proprietary
software  programs were  contracted out to  arm's-length  parties.  See "Item 4.
Information on the Company - Subsidiaries".

                                      -17-

<PAGE>


                    [Hilton Prospect and Well Locations Map]



                                      -18-

<PAGE>


2002 - 2003 EXPLORATION BUDGET

As of the date of the annual  report the Company  maintains  its interest in the
East Lost Hills exploration  project. The Company farmed out its interest in the
East Lost Hills #4 and #9 wells and as a result other  participants  are funding
the Company's share of the current year's exploration budget. No additional work
programs have been proposed pending completion of testing of the East Lost Hills
#4 and #9 wells.

SALES AND REVENUE DISTRIBUTION

The Company's share of petroleum,  natural gas and natural gas liquids  produced
from its wells is sold to a variety of  purchasers at the wellhead in the United
States.  All of its sales  are  conducted  with  unaffiliated  customers.  These
purchasers  provide a ready market for all of the Company's  production  and pay
the local  market  price,  which can  fluctuate  based  upon  prevailing  market
conditions.  Due to the number of purchasers in each area,  management  does not
believe that the loss of one or a number of purchasers  would pose a significant
risk to the  continuity  of the  Company's  operations.  The  Company  does  not
maintain significant inventories of petroleum or natural gas liquids.

Total  revenues,  interest and other income  reported for fiscal 2002,  2001 and
2000, were as follows:
<TABLE>
<CAPTION>

                                                                     ($ in 000)
                                                    --------------------------------------------
                                                                Years Ended May 31,
                                                    --------------------------------------------
                                                       2002            2001             2000
<S>                                               <C>            <C>               <C>
Petroleum and Natural Gas Sales
     - United States                                 $      231       $   5,229        $   4,574
                                                    -----------     -----------      -----------
Interest and Other Income
     - United States                                        823              60              256
     - Canada                                                31              41               23
                                                    -----------     -----------      -----------
                                                            854             101              279
Total Revenue, Interest and Other Income             $    1,085     $     5,330       $    4,853
                                                    ===========     ===========      ===========
</TABLE>

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

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

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

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


                                      -19-

<PAGE>



GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL LAWS

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

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

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

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

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

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

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


                                      -20-

<PAGE>

PRINCIPAL OIL AND GAS PROPERTIES

MATERIAL PROPERTIES

EAST LOST HILLS JOINT VENTURE AND SAN JOAQUIN JOINT VENTURE, CALIFORNIA

During fiscal 2002, the Company was faced with significant  funding  commitments
for its  continued  participation  in the East Lost Hills and San Joaquin  Joint
Venture's exploration programs. The continued complications  encountered at East
Lost Hills had a negative impact on the Company's  common share price and on the
Company's ability to conduct either equity or debt financing.  In addition,  the
combination of reduced  commodity  prices and  constrained  production at ELH #1
further reduced the Company's  ability to meet its funding  commitments.  Due to
the lack of financial resources, the Company ceased further funding of its share
of costs at the East Lost Hills  Prospect and San Joaquin  Joint  Venture.  As a
result,  in February 2002, the Company  withdrew from  participation  in the San
Joaquin  Joint  Venture and, in May 2002,  concluded  an agreement  with Berkely
Petroleum, Inc. (a subsidiary of Anadarko) and certain other participants on the
ongoing  evaluation of the ELH #4 and ELH #9 wells,  whereby the funding parties
have assumed all of the unpaid amounts, estimated to be $4.9 million at the time
of the agreement,  and future costs in completing the evaluation of these wells.
In return, they will be entitled to recover their costs, plus a penalty, of 300%
of the costs, from production from these wells.

As of October 31,  2002,  the Company  holds a 9.5% working  interest  (9.1% net
revenue interest) in the East Lost Hills Joint Venture.

The Company acquired its initial interests in various oil and gas leases located
in Kern County,  California  (the "East Lost Hills Joint  Venture"),  in January
1998,  and in oil and gas leases  located in the San Joaquin  Basin,  California
(the "San Joaquin Joint  Venture"),  in February  1999.  Since then, the Company
conducted a number of sales and assignments of its interests.

As of October 31,  2002,  the Company had spent  approximately  $1.5  million in
leasehold  acquisition  costs and $13.9 million in exploration  and  development
expenditures on the East Lost Hills Joint Venture. In addition,  the Company had
spent approximately $2.0 million in leasehold acquisition costs and $1.9 million
in exploration  and  development  expenditures on the San Joaquin Joint Venture.
See "Item 4.  Information on the Company - Principal  Properties - Petroleum and
Natural Gas Properties - Material Properties - East Lost Hills Joint Venture and
San Joaquin Joint Venture, California."

OTHER PROPERTIES

REGIONAL CALIFORNIA

The Company  participated in a regional  exploration  program in the San Joaquin
Basin of California.  The prospects had much shallower  target horizons than the
East Lost Hills Joint  Venture and the San Joaquin  Joint  Venture.  The Company
originally held  approximately a 32% capital interest before payout (24% working
interest after payout) in the prospects tested.  During fiscal 2002, the Company
increased its ownership interest in the Basil Prospect to a 48% working interest
on the  side-track.  See  "Item  4.  Information  on  the  Company  -  Principal
Properties - Other Properties - Regional California".

CHINA AND MONGOLIA PROPERTIES

On June 24,  2002,  the  Company  entered  into an  agreement  to acquire a 100%
interest,  subject to a 7.5% net revenues  interest  payable to the vendors,  in
certain  resource  properties  located  in  China  and  Mongolia.  See  "Item 4.
Information on the Company - Principal Properties - Other Properties - China and
Mongolia Properties". Under the terms of the agreement the Company has agreed to
issue up to 8,000,000  common  shares and pay up to CDN $3.2 million to make the
acquisitions.  In  addition,  the  agreement  provides  that in the event the an
independent  engineering report shows that the internal rate of return on either
property is greater than 30%, the Company will issue  500,000  common  shares to
the vendors of such property for each 500,000  ounces over five million  ounces.
The due diligence period was to be completed by June 30, 2002. As of the date of
this report,  the due  diligence  is on-going.  The parties have not amended the
agreement  to  provide  for an  extension  of the due  diligence  period.  These
transactions are subject to filing with the TSX Venture Exchange.

                                      -21-

<PAGE>



Included  in  the  portfolio  are  two  properties,   which  are  identified  by
management,  as the  initial  properties  on which the  Company  will  focus its
efforts.  See "Item 4. Information on the Company - Principal Properties - Other
Properties - China and Mongolia Properties".

The  Company  has agreed to pay a 5% finders fee to an  arm's-length  party,  in
shares, subject to filing with regulatory authorities.

The Company is establishing a wholly-owned  subsidiary,  Hilton Resources (Asia)
Ltd.  ("Hilton Asia") through which it will pursue these  properties.  As of the
date of this annual  report,  management  believes the  technical  due diligence
indicates  that these are  properties  of merit which warrant  exploration.  The
legal due  diligence  regarding  title and tenure of the  vendors is ongoing and
management  expects  that once the  vendors  have  demonstrated  valid title the
overall terms of the proposed acquisition will need to be reassessed.

MISSISSIPPI PROSPECTS

The Company holds an undivided 25% working  interest (19% - 19.5425% net revenue
interests) in four oil and gas prospects known as the Smithtown, Hershey, Marble
Creek and Piave  Prospects which  originally  encompassed  approximately  10,454
gross acres (2,614 net acres) located in Greene County,  Mississippi.  As of the
date of this  report,  the number of acres has  decreased  due to the lapsing of
certain leases. See "Item 4. Information on the Company - Principal Properties -
Other Properties - Mississippi Prospects"

The  Mississippi  Prospects are located in the interior Salt Basin which is part
of the northeastern rim of the Gulf of Mexico. The Company had originally agreed
to farmout its  interest if the  operator  was able to commence  drilling on the
Mississippi  Prospects by February 12, 2002.  This was not  accomplished  and no
drilling has commenced.

ARTIFICIAL INTELLIGENCE TECHNOLOGY

During the fiscal year ended May 31,  2002,  the Company  identified a number of
business  opportunities  which  management  believes can be exploited  utilizing
certain proprietary software technologies  developed by Eyekon Technologies Inc.
("Eyekon"), a private company at arm's-length to the Company. The Company agreed
to work with Eyekon to develop  software  programs using Eyekon's  technologies,
which could be used in a number of business  applications  and  industries.  See
"Item 4. Information on the Company - Organizational Structure - A. I. Solutions
Ltd."

EMPLOYEES

As of the date of this  report,  the Company has no  employees.  The Company has
retained  Chase  Management  Ltd.  ("Chase") to provide  management,  financial,
accounting and administrative  services. Chase provides its services to a number
of public and private  companies and currently  employs six full-time  employees
and is a private company wholly-owned by Nick DeMare, a director of the Company.
See "Item 7. Major  Shareholders and Related Party  Transactions - Related Party
Transactions." The Company also retains  consultants to handle specific projects
on a case by case basis.

During fiscal 2002, the Company's business was administered principally from its
head office in Bakersfield,  California,  United States.  This office is used by
Donald  Busby,  the  Chairman  and CEO of the  Company.  With the  disappointing
results from its petroleum  interests and its current level of working  capital,
the Company is in the process of closing  the head  office in  Bakersfield.  See
"Item 7. Major  Shareholders  and Related  Party  Transactions  - Related  Party
Transactions."  The Company  maintains its corporate  office,  through Chase, in
Vancouver, British Columbia, Canada.

                                      -22-

<PAGE>



ORGANIZATIONAL STRUCTURE

The following chart sets forth the names of the significant  subsidiaries of the
Company,  their  respective  jurisdictions  of  incorporation  and the Company's
ownership  interests therein as of October 31, 2002. Unless otherwise  indicated
herein, the term "Company" means collectively the Company and its subsidiaries.

                               ORGANIZATION CHART


            -------------------------------------------------------
                              HILTON PETROLEUM LTD.
                                (Yukon Territory)
            --------------------------------------------------------
                |                       |                       |
                |                       |                       |
                |                       |                       |
----------------------       ------------------------       --------------------
 HILTON PETROLEUM INC.        STANFORD OIL & GAS LTD.        A.I. SOLUTIONS LTD.
     (Nevada)                   (Yukon Territory)             (British Columbia)
       100%                           100%                           80%
----------------------       ------------------------       --------------------
                                        |
                                        |
                              --------------------
                                STB ENERGY, INC.
                                     (Texas)
                                      100%
                              --------------------



SUBSIDIARIES

HILTON PETROLEUM, INC.

The Company owns 100% of the  outstanding  shares of Hilton  Petroleum,  Inc., a
Nevada corporation which was formed on June 15, 1993. Hilton U.S. currently owns
interests in oil and gas properties located in California and Mississippi.


STANFORD OIL & GAS LTD.

Pursuant to the Arrangement  Agreement,  the Company  acquired all of the issued
and outstanding shares of Stanford on April 1, 1999. As a result Stanford became
a  wholly-owned  subsidiary  of the  Company.  See "Item 4.  Information  on the
Company - Name and Incorporation".

Stanford has one  wholly-owned  subsidiary,  STB Energy Inc. ("STB  Energy"),  a
Texas corporation. STB Energy currently owns interests in oil and gas properties
located in California.


A. I. SOLUTIONS LTD.

The Company  owns 80% of the issued and  outstanding  shares of A. I.  Solutions
Ltd. ("A. I. Solutions"),  a British Columbia  corporation formed on November 5,
2001. A. I. Solutions was  incorporated  to pursue the business of  identifying,
developing and marketing of proprietary software technologies.

The  Company  formed  A.I.  Solutions  Ltd.  ("A.I.  Solutions"),  an 80%  owned
subsidiary,  to pursue this  business  activity.  As at October 31,  2002,  A.I.
Solutions has identified, with Eyekon, a number of opportunities and have formed
a  number  of  companies  in the  United  States  and  Canada  to  pursue  these
opportunities. These ownership interests, vary between 30% - 100%. The following
companies are active:


                                      -23-

<PAGE>



a)   50% ownership of Hilton Power Ltd.  ("Hilton  Power"),  a British  Columbia
     corporation,   which  owns  100%  of  Hilton   Power  Inc.,   a  California
     corporation.  Hilton Power was  incorporated to develop  software  programs
     using  intelligent  software  to build a "better  fuel cell".  To date,  no
     significant progress has been made, nor costs incurred.

b)   100% ownership of StaySafe Software Inc.  ("StaySafe"),  a British Columbia
     corporation,  which  owns 100% of  Lifesaver  Technologies  Inc.,  a Nevada
     corporation. StaySafe was formed to develop and market the Hazard Avoidance
     Software Program  ("HASP").  The HASP employs  artificial  intelligence and
     simulation  capabilities  into a CD-Rom /  Web-based  solution to deal with
     emergency  situations.  The  HASP  CD-Rom  contains  three  components:  i)
     StaySafe   Library  -  information  on  natural   disasters  and  the  most
     threatening  chemical,  biological  and  radioactive  agents;  ii) StaySafe
     Simulator  -  allows  the  users  to  generate   disaster   simulations  in
     preparation for emergency scenarios and the ability to visually monitor its
     progress  in real  time;  and iii) Early  Warning  Alert -  broadcast  text
     messaging   service   containing   actual  disaster  details  and  critical
     precautionary information.  As of October 31, 2002, Stay-Safe has completed
     the development of the HASP. No sales have been made.

c)   30%  ownership  of  Enabled  Simulations  Inc.   ("Enabled"),   an  Alberta
     incorporated  company.  Enabled  focuses on the research,  development  and
     marketing of process modeling and plant/process simulation software.


PRINCIPAL PROPERTIES

PETROLEUM AND NATURAL GAS PROPERTIES

The Company has  historically  engaged in the  business of  acquiring  leasehold
interests  in  petroleum  and natural gas rights,  and the  exploration  for and
development, production and sale of petroleum and natural gas in the continental
United  States.  The Company is a minority  interest  owner in its petroleum and
natural gas interests and is not an operator of any of these prospects. However,
during fiscal 2002, California  Exploration Ltd. ("Calex"),  the operator of the
Regional California Prospects, engaged the Company to contract out, at cost, the
drilling of the Regional California Prospects.

During 2002, the Company determined to also pursue other business opportunities,
which  now  includes   proprietary  software  activities  and  mineral  property
activities.

The Company owns interests in petroleum and natural gas properties as follows:

MATERIAL PROPERTIES

EAST LOST HILLS JOINT VENTURE AND SAN JOAQUIN JOINT VENTURE, CALIFORNIA

LOCATION AND INTEREST

The Company  holds a 9.5% working  interest  (9.1% net revenue  interest) in the
East Lost Hills  Joint  Venture  which is  situated  in the San  Joaquin  Basin,
approximately  45  miles  northwest  of  Bakersfield,  California.  The  Company
previously held an additional 2.625% reversionary working interest which has, as
a result of the Company's  withdrawal  from the San Joaquin Joint Venture,  been
returned.

PROPERTY DESCRIPTION

The San Joaquin  Basin has proved to be one of the most  productive  hydrocarbon
producing basins in the continental  United States.  To date, the  approximately
14,000  square mile basin has  produced in excess of 13 MMBOE,  and  contains 25
fields classified as giant,  with cumulative  production of more than 100 MMBOE.
The San Joaquin  Basin  contains  six of the 25 largest oil fields in the U.S.A.
and produces more than 75% of California's oil and gas production.

The Lost Hills Field is an anticlinal  structure  formed by what appears to be a
combination  of  compressional  forces from the west,  as well as  right-lateral
motion  associated  with movement of the San Andreas fault system.  The Monterey
and Temblor  formations are broken by a high angle thrust fault on the west side
of the structure. The East Lost Hills Joint Venture lies in the footwall side of
this thrust  fault,  directly east of and  structurally  below the existing Lost
Hills field.

                                      -24-

<PAGE>



To date,  the Lost Hills Field has produced over 115 MBO and 120 BCF of gas from
Pleistocene, Pliocene and Miocene-age sands buried at depths of between 2,000 to
6,000 feet.

The geological objectives at the East Lost Hills Joint Venture are stacked sands
(layers of sand stacked one over the other)  within the Temblor  Group which are
buried between 16,500 to 19,000 feet. The uppermost sand encountered by drilling
in the  Temblor  Group is called the Temblor  Sand.  Other sands which lie below
this  interval  have  various  local names,  and vary in  thickness  and lateral
distribution  from well to well.  The Temblor sands lie beneath the  Miocene-age
Monterey shale,  which is a proven source rock, as well as an excellent vertical
reservoir seal. Two  dimensional  ("2-D") seismic data reveals the presence of a
fault-bounded  structural  high at Temblor  level  situated  southeast of a well
drilled by Shell and Arco  (Shell-Arco  #1-23-22,  T25S,  R20,  section  22). An
interpretation  made by Armstrong  suggests that this well did not penetrate the
Temblor sands,  but reached total depth while still drilling in steeply  dipping
Monterey shales in the hanging wall of the Lost Hills thrust block.

EXPLORATION

EAST LOST HILLS JOINT VENTURE WORK PROGRAM

The East Lost Hills Joint Venture  holds an interest in a significant  number of
leases totaling in excess of 40,000 acres. In order to maintain these leases the
East Lost Hills Joint Venture has committed to drill certain lands.

The initial test well, the Bellevue #1-17,  commenced  drilling in May 1998, and
was designed to test  prospective  Miocene  sandstone  reservoirs in the Temblor
formation at depths to an anticipated  18,500 feet. On November 23, 1998,  while
drilling at 17,640 feet,  the well blew out and ignited.  An expert well control
team was engaged to contain the fire.

A relief well,  the Bellevue  #1R-ST-3,  was  commenced on December 18, 1998, in
order to "kill" the flow of water and  hydrocarbons  flowing out of the Bellevue
#1-17 well.  On May 29, 1999,  the kill  operation was  successfully  completed.
After the successful kill operation, the Bellevue #1R-ST-3 relief well continued
with drilling  towards a bottom hole location  approximately  800 feet away from
the bottom hole  location of the Bellevue  #1-17 well.  On August 24, 1999,  the
operator  announced  that the well would be  completed,  having  reached a total
depth of 17,428 feet, approximately 180 feet into the Temblor formation. Between
October 1, 1999, and October 22, 1999,  the Bellevue  #1R-ST-3 well was prepared
for a completion  test. On October 23, 1999, the completion test was implemented
by perforating the casing and establishing  communication  with the pay zones so
that gas could flow from the pay zones into the  casing.  Initial  results  were
positive and the well flowed gas,  albeit at restricted  rates.  The gas flowed,
but  only  for a short  period  of  time  as the  flow  was  cut  off  when  the
perforations  were  plugged  off. In an attempt to  re-establish  communication,
larger  perforations  were made but this too was  unsuccessful and the well bore
was plugged with formation sand,  shale, and perforating  debris.  The well bore
was  cleaned up and in  December  1999 was  production  tested and flowed gas at
rates  ranging  between 1.3 and 5.0 MMCFPD.  Condensate  and water was  obtained
during the test.  Pressure build-up  analysis  indicated that only the uppermost
sand unit  encountered  in the Bellevue  #1R-ST-3 well was  contributing  to the
flow.  The  operator had  considered  either a re-drill or re-entry of this well
bore.  Management  believes minimal maintenance costs will be incurred until the
decision to re-drill or re-enter the well bore is made.

On August 26, 1999,  drilling began on the ELH #1 well,  approximately two miles
northwest of the Bellevue  #1-17R well. On April 12, 2000, this well had drilled
to a total depth of 19,724 feet.  Production  testing began on May 28, 2000 and,
based on the results of the production testing and other analysis, a natural gas
discovery  was  determined  at the East Lost Hills field.  After  completion  of
production  facilities  and a connection  pipeline,  this well  commenced  first
production on February 6, 2001.  The ELH #1 well is currently  producing  from a
zone in the lower portion of the Temblor  formation.  Production from the ELH #1
well remains  constrained,  at current levels of approximately 1.8 MMCFE gas per
day,  still  requiring  water  disposal  facilities.  The Company  expects  this
production  curtailment  to  continue  until a  disposal  well is  drilled.  The
operator has indicated that it was unable to negotiate a contract with the owner
of the land at the original proposed site of the disposal well. The operator has
indicated that it has contracted an alternate surface owner in the same area and
that it is attempting to negotiate  access to this surface for a water  disposal
well. The inability to demonstrate  what production  could be, if a proper water
disposal  system were in place,  has had a negative impact on this project and a
significant  downgrade on the estimated  proven reserves for the ELH #1 well has
been made.

It is not known when this disposal  well will be completed  or, once  completed,
the impact the  availability of this extra capacity will have on production from
the ELH #1 well.

                                      -25-

<PAGE>


The ELH #2 well,  located  approximately 1.5 miles northwest of the ELH #1 well,
was  drilled  and cased to a total  depth of  18,011  feet.  Initial  production
testing,  in early March, of the upper Temblor  interval in the well resulted in
limited  wellbore  influx of hydrocarbons  (approximate  flow rate of 3 MMCF/d),
higher than expected fluid content,  and poorer than expected pressure response.
Many of the initial  production test results on the well have been influenced by
mechanical  difficulties  associated  with  drill  pipe  that was  inadvertently
cemented across the testing interval.  The ELH #2 well is currently suspended as
a potential producer pending availability of water disposal facilities.

The ELH #3R west flank exploration well was drilled to a total measured depth of
21,769 feet to test the Temblor  interval  in a  separate,  seismically  defined
structure from the East Lost Hills  structure.  Due to steep dips encountered in
the lower portion of the well, it was determined  that the underlying  secondary
objective,  the Point of Rocks  formation,  could not be reached in the existing
wellbore. The well was plugged back to 19,370 feet measured depth for testing of
the lower Temblor.  Multiple zones in the lower Temblor  section were perforated
and tested in the well.  Communication was established with the formation during
testing and no hydrocarbons were recovered.  The well has been suspended pending
analysis of new seismic data and additional offset well information.

The ELH #4 well commenced  drilling on November 26, 2000 and reached total depth
of 20,800 feet on August 7, 2001.  The ELH #4 well was  completed  and tested in
the Kreyenhagen  shale and Phacoides  sands. Gas and pressures began low peaking
at 1.56  MMCFPD with 16.9 BWPD and 2.3 BCPD at a flowing  tubing  pressure of 90
psi. From the peak,  rates  declined to zero and the well was dead. The well was
cleaned out of possible plugging slugs. The ELH #4 well remains shut-in awaiting
results  from the ELH #9 well.  Management  believes,  the Agua  sands  remain a
promising zone for the ELH #4 well and remain untested.  Significant  shows were
observed over several hundred feet of the Agua sands.

The  ELH #9  well  commenced  drilling  in  early  August  2001,  at a  location
approximately  two miles  southeast of the ELH #4 well. This well was drilled to
21,100  feet and was  designed to test the  continuation  of the East Lost Hills
structure in the south easterly direction.  The ELH #9 well was completed in the
Kreyenhagen  shale and Phacoides sands.  Testing  commenced with rates generally
less than 1 MMCFPD with one peak of 2.37 MMCFD. Rates continued to decline below
500  MCFPD.  The  Kreyenhagen  was  stimulated  with  acid to  attempt  improved
production.  Upon  re-testing,  rates remained well below 300 MCFGPD.  The zones
were re-perforated  with no improvement in production.  The results are negative
indicators of prolonged  economic  production  from the Kreyenhagen or Phacoides
sands.  Management believes some additional  potential remains in the upper Agua
sand that remains to be tested.  Gas shows in the Agua sands are limited to a 20
foot zone.

The Company is, however, also aware that there exists a difference of opinion as
to whether the testing procedures  employed by the operator were the appropriate
ones. It has been stated that a proper test has not completed on these wells and
conclusions  based on the test results to date cannot be relied upon. As of this
writing,  both ELH #4 and #9 wells are  suspended  pending a consensus  from the
participants as to what should be done next.

Due to the lack of financial  resources,  the Company ceased further  funding of
its  share of costs  at the East  Lost  Hills  Prospect  and San  Joaquin  Joint
Venture. As a result, the Company concluded an agreement with Berkely Petroleum,
Inc. (a subsidiary of Anadarko)  and certain other  participants  on the ongoing
evaluation  of the ELH #4 and ELH #9 wells,  whereby  the funding  parties  have
assumed all of the unpaid  amounts,  estimated to be $4.9 million at the time of
the agreement,  and future costs in completing the evaluation of these wells. In
return, they will be entitled to recover their costs, plus a penalty, of 300% of
the costs,  from  production from these wells.  See "Item 4.  Information on the
Company -  Business  Overview  -  Principal  Oil and Gas  Properties  - Material
Properties  - East Lost Hills  Joint  Venture  and San  Joaquin  Joint  Venture,
California."

SAN JOAQUIN JOINT VENTURE WORK PROGRAM

With respect to the San Joaquin Joint Venture,  the operator  commenced drilling
the initial  exploratory well on the first of the three initial  prospects,  Cal
Canal,  in June 1999.  The Cal Canal well  penetrated  1,230 feet of the Temblor
formation  with 775 feet of net sand and was  drilled to a total depth of 18,100
feet.  The  well  completion  commenced  on  January  20,  2000.  Non-commercial
hydrocarbon  flow rates were obtained from the initial  perforated 10 foot zone.
The leases were ultimately terminated by the San Joaquin Joint Venture in 2002.

The participants in the San Joaquin Joint Venture, on the recommendations of the
operator, Anadarko,  determined that the Lucky Dog Prospect would not be drilled
and accordingly, the San Joaquin Joint Venture relinquished its interest in this
prospect.

                                      -26-

<PAGE>


Drilling of the Pyramid Hills  Prospect  commenced in December 2001. In February
2002, the Company  withdrew from  participation in the San Joaquin Joint Venture
and, accordingly, no longer has an interest in the Pyramid Hills Prospect.

OTHER PROPERTIES

REGIONAL CALIFORNIA

The Company  participated in a regional  exploration  program in the San Joaquin
Basin of California and a number of prospects  were drill tested.  The prospects
had much  shallower  target  horizons that the East Lost Hills Joint Venture and
the San Joaquin  Joint  Venture and the costs to drill were  substantially  less
than the East Lost Hills prospects.

Drilling  of  exploratory  test  wells  commenced  in  fiscal  2001 on the Mica,
Sequoia,  Parsley and the Merlot Prospects and were completed in fiscal 2002. No
hydrocarbon  bearing  sands  were  encountered  and the wells were  plugged  and
abandoned. The Company had approximately a 23% working interest in the prospects
tested.

During  fiscal  2002,  the  Company  also  participated  in the  drilling  of an
exploratory  well on the Basil Prospect,  located in the southern portion of the
Sacramento  Basin.  This  prospect  is believed  to be a  structural  fault trap
documented with seismic and well data.  This well had to be drilled  directional
under a body of water from a land based  position.  The targets were believed to
be at 4,500 feet but the well had to be  drilled  6,000  feet  laterally  to the
target.  The  initial  test well on the Basil  Prospect,  the  Suisun  #25 well,
commenced  drilling on July 25, 2001 and was  completed  on August 28, 2001 at a
depth of 7,829 feet.  The Basil  Prospect  is  adjacent to the Suisun  producing
field and separated by a fault. The Suisun #25 well was directionally drilled to
a  measured  depth of 7,829  feet to test the  Suisun  and  Domengine  Sands for
natural gas. At 5,550 feet the well  encountered  the trapping  fault with a 440
unit gas spike  supporting  the sealing  ability of the fault.  The Suisun Sands
were  encountered  at 6,545 feet - 132 feet high to  prognosis.  The first sands
coming in high supports throw on the fault to be greater than expected. Once the
sands were  encountered the background gas increased by nearly 200 units (1 unit
= 50 ppm  Methane).  Throughout  the Suisun  Sands the  background  gas remained
between 100 and 200 units with several  connection gas readings in excess of 300
units.  The Domengine Sands were encountered at a measured depth of 7,120 feet -
162 feet  high to  prognosis.  In the  lower  Domengine  Sands,  background  gas
readings remained in excess of 500 units. When pulling out of the hole the drill
pipe became stuck at  approximately  2,300 feet and after three days of recovery
efforts the pipe,  below 3,216 feet remained stuck. It was therefore  determined
to temporarily suspend the well. The Company had originally held a 33.4% working
interest in the Basil Prospect.  It increased its working  interest to 48% under
the proposed side-track.

On August 19, 2002,  the operator  commenced  the sidetrack of the well from the
same  surface  location  using  the  existing  casing  down to 2,114  feet.  The
side-track  parallelled the original hole to the same total depth of 7,829 feet.
Only the Suisun  sands were  encountered  in this well.  Gas shows were  present
throughout the Suisun Sands from 6,480 feet to 7,170 feet measured  depth.  Once
again,  hole problems were  encountered  while pulling out to log preventing any
open hole logs.  While  performing  the clean-out trip for casing the drill pipe
became stuck at 6,248 feet.  Coiled  tubing was run through  drill pipe to 7,500
feet and cemented in place. Case hole logs and perforations were accomplished to
test several  zones within the shallow  objective of the Suisun  Sands.  Gas was
flowed to the surface at very low pressures.  It was  determined  that there was
insignificant  pressure  and volume to be  economic.  The well was  plugged  and
abandoned September 21, 2002.

MISSISSIPPI PROSPECTS

The  Mississippi  Prospects are located in the interior Salt Basin which is part
of the northeastern rim of the Gulf of Mexico. The Company had agreed to farmout
its interest if the operator  was able to commence  drilling on the  Mississippi
Prospects  by February 12,  2002.  Under the terms of the  proposed  farmout the
Company had agreed to farmout all of its working  interest in return for a 0.25%
overriding royalty interest convertible to a 3.75% working interest after payout
of the initial  test well.  The operator was unable to meet the deadline and the
proposed  farmout  was not  completed.  As of the  date of this  annual  report,
drilling on the Mississippi Prospects had not commenced and the operator has not
presented  any  exploration  programs.  During  fiscal 2002,  management  of the
Company  determined  to include  the  leasehold  acquisition  costs of  $879,563
attributable  to the  Mississippi  Prospects in its ceiling test and  impairment
write-down.  The majority of the leases underlying the Mississippi  Prospects do
not expire until 2005.


                                      -27-

<PAGE>



CHINA AND MONGOLIA PROPERTIES

On June 24,  2002,  the  Company  entered  into an  agreement  to acquire a 100%
interest,  subject to a 7.5% net revenues  interest  payable to the vendors,  in
certain  resource  properties  located  in  China  and  Mongolia.  See  "Item 4.
Information  on the  Company  -  Business  Overview  -  Principal  Oil  and  Gas
Properties - Other Properties - China and Mongolia Properties".

As of the date of this annual  report,  management  believes the  technical  due
diligence   indicates   that  these  are   properties  of  merit  which  warrant
exploration.  The legal due diligence  regarding title and tenure of the vendors
is ongoing and management  expects that once the vendors have demonstrated valid
title the overall terms of the proposed acquisition will need to be reassessed.

Included in the portfolio are two properties, which are identified by management
as the King Hill and Bonanza properties,  as the initial properties on which the
Company will focus its efforts. The vendors have made various representations to
the  Company  regarding  these  properties.  The  Company  is in the  process of
conducting its due diligence with regard to these representations. The following
description of the properties is based upon information  provided to the Company
by the vendors.  The Company is in the process of  performing  its due diligence
investigation  on the properties  and, as such, has not verified the correctness
of these statements.

KING HILL PROPERTY

Located  in the  People's  Republic  of  China,  the King Hill  Property  covers
approximately  3,000 square kilometers.  The exploration and exploitation rights
are held  through  leases,  valid  for an  initial  term of 25  years,  and then
renewable.

The property  covers a vast area with numerous and varied  mineral  occurrences.
This property was of particular interest to management due to the existence of a
gold  property  in the  Northern  portion  of the  property.  The  vendors  have
represented  that  at  this  gold  property  there  are  67  quartz   structures
outcropping at surface, with one being over 4,300 meters in length and nine over
2,000 meters in length. According to the vendors, in total there are over 40,000
meters of exposed quartz  structures  outcropping at surface.  Production at the
property  commenced  in 2000.  Ore is  processed  through  a mill  which has the
capacity to process 250 tonnes of ore per day.  Mining  operations are currently
centered on two quartz structures,  production is from three shafts, 2 meters by
2 meters and 80 meters in depth.  The  vendors  have  represented  that the head
grade has averaged 10 grams of gold per tonne, with recoveries averaging 8 grams
of gold per tonne.  The  vendors  have  represented  that the mill is  currently
operating at about 85 tonnes per day with cash costs of production  being $17.50
per tonne for mining and $15.00 per tonne for milling.

BONANZA PROPERTY

The Bonanza  Property is located in Mongolia and covers an area in excess of 700
square  kilometers.  Exploration and exploitation  rights are held through three
licences  which are in good  standing and valid for about 60 years with standard
government  holding costs. A payment of US$500,000 is due to the land owner once
an economic feasibility study has been prepared.

OTHERS

The  Company  also  holds  relatively  minor  interests  in  other  oil  and gas
leaseholds,  known as the East Blossom Project (San Joaquin County, California),
and South Haskell Field (Haskell County, Texas).

OIL AND GAS RESERVES

The following  tables set forth  information  regarding  the Company's  share of
estimated  proven oil and gas reserve  quantities,  reserve value and discounted
future net revenues. The reserve related information for the years ended May 31,
2002  and  2001  was  determined  through  independent  engineering  evaluations
completed by Petrotech Engineering Ltd. ("Petrotech"),  an independent petroleum
consulting firm. The reserve related information for the year ended May 31, 2000
was determined  through  independent  engineering  evaluations  completed by Lee
Keeling and Associates,  Inc. ("Lee Keeling"),  a firm of independent  petroleum
consultants.  The  Company  does  not  have  any  long-term  supply  or  similar
agreements with foreign  governments or authorities in which the Company acts as
producer.


                                      -28-

<PAGE>



There are numerous  uncertainties  inherent in  estimating  quantities of proved
reserves and  projecting  future rates of production  and timing of  development
expenditures.  The following reserve information  represents  estimates only and
should not be construed as being exact:
<TABLE>
<CAPTION>

                                                                                                          Present Value of
                                                                                                          Estimated Future
                                                                                          Estimated          Net Revenues
                                                                             Gas          Future Net     Before Income Taxes
                                                  Gas          Oil        Equivalent     Revenues (2)     Discounted at 10%
Period                                           (MMCF)       (MBO)       (MMCFE)(1)        ($000)              ($000)
<S>                                          <C>           <C>          <C>             <C>                  <C>

Year Ended May 31, 2002
Proved developed reserves                          265          12             277             230                  156
Proved undeveloped reserves                          -           -              -                -                    -
                                                ------        ----          ------          ------              -------
                                                   265          12             277             230                  156
                                                ======        ====          ======          ======              =======
Year Ended May 31, 2001
Proved developed reserves                        5,155         285           6,866          55,343               27,470
Proved undeveloped reserves                          -           -             -                 -                    -
                                                ------        ----          ------         -------              -------
                                                 5,155         285           6,866          55,343               27,470
                                                ======        ====          ======         =======              =======
Year Ended May 31, 2000
Proved developed reserves                       17,670         365          19,860          46,134               19,893
Proved undeveloped reserves                      1,332         381           3,618          11,816                6,989
                                                ------        ----          ------         -------              -------
                                                19,002         746          23,478          57,950               26,882
                                                ======        ====          ======         =======              =======
</TABLE>

(1)  Condensates  and natural gas liquids are  converted  to MCFE at the rate of
     seven  gallons of liquids per MCF of natural  gas.  These  conversions  are
     based upon the  approximate  energy content of natural gas  condensates and
     liquids.

(2)  Estimated future net revenue  represents  estimated future gross revenue to
     be  generated  from the  production  of proved  reserves,  net of estimated
     production and future  development  costs, using prices and costs in effect
     as of the date of the  estimates.  The amounts  shown do not give effect to
     non-property related expenses, such as general and administrative expenses,
     debt service and future income tax expense or  depreciation,  depletion and
     amortization.

During the year ended May 31, 2002, the Company recorded an impairment charge of
$26  million.   The  impairment   charge   reflected  a  number  of  significant
developments  which  occurred in fiscal 2002.  Production at the ELH #1 well was
significantly  curtailed  in 2002 as a  result  of the  lack of  adequate  water
disposal  facilities.  In  addition,  management  believes  there  has  been  an
inability to demonstrate what production could be, if a water disposal  facility
was put in place.  As a result,  the  estimated  proven  reserves at ELH #1 were
significantly  downgraded based on current production  levels.  During 2002, the
Company  also  withdrew  from  participation  in the Greater  San Joaquin  Joint
Venture. It also participated in the unsuccessful  drilling of four prospects in
Regional California.

ACREAGE

The following  table sets forth as of October 31, 2002,  the gross and net acres
of  developed  and  undeveloped  oil  and  gas  acreage  held  by  the  Company.
Additionally,  the data set forth below are based on the Company's before payout
working  interests.  In certain  cases,  the Company has a greater  after payout
working  interest.  In certain other cases, the Company has only an after payout
working interest.

                                 Developed                     Undeveloped
                          ---------------------         ----------------------
                           Gross           Net           Gross            Net
State                      Acres          Acres          Acres           Acres
----------                ------         ------         -------         ------
California                 640.0           60.8          37,000          3,515
                          ======         ======         =======         ======


                                      -29-

<PAGE>

PRODUCTIVE OIL AND GAS WELLS

The  following  table sets forth  certain  information  regarding  the Company's
ownership as of October 31, 2002 of productive  oil and gas wells,  operated and
non-operated, in the areas indicated. Additionally, the data set forth below are
based on the Company's before payout working interest. In some cases the Company
has a greater working interest after payout.  In certain other cases the Company
has only an after payout working interest.

                                                       Gross               Net
State                                                  Wells              Wells
----------                                             -----              -----
California                                                 1               0.12
                                                       =====              =====

VOLUMES, PRICES AND PRODUCTION COSTS

The following  table sets forth  certain  information  regarding the  production
volumes,  average prices received and average  production  costs associated with
the Company's sale of oil and gas for the periods.


                                                Year Ended May 31,
                                   ---------------------------------------------
                                    2002               2001                2000

Net production:
   Oil (Barrels)                    1,606             39,182              57,586
   Gas (MCF)                       54,931            925,635           1,112,734
   Natural Gas Liquids (Gallons)   54,516          1,039,099           1,294,115
   MCF equivalent                  72,354          1,309,172           1,643,124
Average sales price:
   Oil (per Barrel)                $20.68             $29.47              $22.89
   Gas (per MCF)                    $3.15              $6.09               $2.60
   NGL (per Gallon)                 $0.45              $0.60               $0.42

   Average production
   costs per MCFE                   $2.32              $1.45               $1.41

Principal Offices

The Company's corporate and principal business office is located at Suite #1305,
1090 West  Georgia  Street,  Vancouver,  British  Columbia,  Canada.  The office
facility is provided on a month-to-month basis by Chase as part of its agreement
with the Company. See "Item 7. Major Shareholders and Related Party Transactions
- Related Party Transactions."


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


The  following  discussion  of the results of  operations of the Company for the
fiscal  years ended May 31,  2002,  2001 and 2000 should be read in  conjunction
with the  consolidated  financial  statements  of the Company and related  notes
included therein.

The Company's  consolidated financial statements are prepared in accordance with
Canadian GAAP, the application of which, in the case of the Company, conforms in
all material  respects for the periods  presented  with U.S. GAAP except for the
differences  referred to in Note 12 of the consolidated  financial statements of
the Company  included  herein.  The noon rate of  exchange on October 31,  2002,
reported  by the  United  States  Federal  Reserve  Bank  of New  York,  for the
conversion  of Canadian  dollars  into  United  States  dollars  was  CDN$1.5610
(US$0.6407 = CDN$1.00).  The effects of inflation and price changes have not had
a material impact on the Company's  income or net sales revenues during the past
three years.

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


                                      -30-

<PAGE>



OVERVIEW

During  fiscal  2002,  the  Company  was  primarily  engaged in the  business of
exploring for and  developing oil and gas  prospects.  Substantially  all of the
Company's oil and gas exploration  activities are conducted  jointly with others
and the consolidated financial information reflects the Company's  proportionate
interest in such activities.

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

Depletion of exploration  and development  costs and  depreciation of production
equipment is provided using the unit-of-  production method based upon estimated
proven petroleum and natural gas reserves. The costs of significant  unevaluated
properties  are excluded  from costs  subject to  depletion.  For  depletion and
depreciation purposes,  relative volumes of petroleum and natural gas production
and reserves are  converted  into  equivalent  units based upon energy  content.
Depreciation of the gathering  facility is charged to earnings over an estimated
useful life of 10 years on a straight-line basis.

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

During fiscal 2002, the Company also engaged in the research, development and
marketing of proprietary software programs. The Company determined that, as of
May 31, 2002, these activities did not satisfy all of the criteria required
under Canadian GAAP for deferment and charged the costs to operations.

RESULTS OF OPERATIONS

YEAR ENDED MAY 31, 2002 COMPARED TO YEAR ENDED MAY 31, 2001

During the year ended May 31, 2002,  the Company  recorded a loss of $27,984,522
($0.77 per share)  compared  to a loss of  $1,518,858  ($0.05 per share) for the
comparable 2001 period.

A  number  of   significant   transactions   have  occurred   which  affect  the
comparability of the Company's performance to prior periods. Over the past three
years the Company's  focus has been on the  exploration  and  development of its
East Lost Hills Joint Venture and San Joaquin Joint  Venture  prospects.  Due to
this focus, the Company,  on March 8, 2001,  completed the sale of substantially
all of its  non-California  petroleum  and  natural  gas  interests  the Enserch
Properties to Exco.  Throughout  fiscal 2000,  and until the sale in March 2001,
the Enserch Properties represented  substantially all of the Company's producing
properties.  Production  commenced  from the ELH #1 on  February  6,  2001,  and
currently  represents the only significant  producing  petroleum and natural gas
interest to the Company.  Production  from the ELH #1 well,  during fiscal 2002,
has been significantly  curtailed as a result of water disposal  problems.  As a
result of the production curtailment in ELH #1 and the sale of the production of
the Enserch  Properties,  petroleum  and natural gas revenues  decreased by 96%,
from  $5,228,674  during 2001 to $230,624 in 2002.  Revenue from oil and liquids
production decreased 97% to $57,609 in 2002 from $1,774,758 in 2001.  Production
of oil and liquids in 2002  decreased  95% to 17,423  MCFE in 2002 from  383,537
MCFE in  2001.  The  average  price  received  for oil and  liquids  in 2002 was
$3.31/MCFE  compared to  $4.63/MCFE  in 2001,  a decrease of 29%.  Revenue  from
natural gas  production  decreased  97% to $173,015 in 2002 from  $5,638,478  in
2001.  Natural gas  production  decreased 94% to 54,931 MCF in 2002 from 925,635
MCF in 2001. The average price received in 2002 was $3.15/MCF, a decrease of 48%
from $6.09/MCF in 2001. A significant  portion of the Company's  fiscal 2001 oil
and natural gas  production was hedged.  These hedges  reduced  revenues for the
year ended May 31, 2001 by $2,180,341.


                                      -31-

<PAGE>



On an MCFE basis,  production  costs  increased 60%, from  $1.45/MCFE in 2001 to
$2.32/MCFE in 2002.  The  depreciation  and depletion  rate  increased 51%, from
$1.11/MCFE  in 2001 to  $1.68/MCFE  in  2002,  due to  unsuccessful  exploration
results in Regional  California and the abandonment of the Company's interest in
the San Joaquin Joint Venture.  In addition,  the Company recorded an impairment
of $25,907,079  in 2002 as a result of the ceiling test performed  effective May
31,  2002.  The  impairment  charge in 2002  reflects  a number  of  significant
developments   which  have   occurred.   Production  at  the  ELH  #1  well  was
significantly  curtailed  during 2002 as a result of the lack of adequate  water
disposal  facilities.  In  addition,  management  believes  there  has  been  an
inability to demonstrate what production  could be if a water disposal  facility
was put in place. As a result,  the estimated proven reserves at ELH #1 has been
significantly  downgraded based on current production  levels.  Estimated proved
reserves for ELH #1 (assuming success with water disposal  facility,  discounted
at 10%,  was $18.1  million at May 31,  2001,  compared  to  $175,000  (based on
current  production) at May 31, 2002).  During 2002,  the Company  withdrew from
participation in the Greater San Joaquin Joint Venture. The Company had recorded
a total of  $3,893,186  relating to its costs for the Greater San Joaquin  Joint
Venture.  The Company also  participated in the drilling of exploratory wells on
four prospects namely, Mica, Sequoia, Paisley and Merlot. Drilling was completed
in 2002. These wells were plugged and abandoned.  Costs totaling $1,564,927 were
incurred  relating to these prospects.  The ceiling test is a cost recovery test
and is not intended to result in an estimate of fair market value.

General and administrative  costs decreased by $475,976,  approximately 37% from
$1,292,431   in  2001  to  $816,455  in  2002.   The  decrease  in  general  and
administrative  costs in 2002  occurred  primarily  due to reduction of expenses
resulting  from the  closure of the Tulsa  office  after the sale of the Enserch
Properties to Exco subsequent to February 2001,  reduced office personnel at the
Bakersfield  office in 2002,  and a general  decrease of  activities  due to the
Company's reduced financial resources.

During 2002, interest and other income increased $752,324, from $101,354 in 2001
to $853,678 in 2002.  During 2002, an arbitration  decision was made in favor of
the Company  pertaining  to a contractual  dispute  between the Company and Exco
from the sale of certain of the  Company's  petroleum  interests  in 2001.  As a
result,  the  Company  received  $789,470,  representing  the  original  $811950
disputed,  plus interest income less associated legal and other costs.  Interest
income  in 2002 was  reduced  compared  to 2001 due to lower  levels of cash and
deposits held.

During 2002, the Company  identified a number of business  opportunities  in the
development of certain proprietary software  technologies  employing "artificial
intelligence".  The  research,  development  and  marketing  of the  proprietary
software  programs  were  contracted  out to  arm's-length  parties.  A total of
$505,827 was expended in 2002 relating to this business.  The Company determined
that, as at May 31, 2002,  these  activities did not satisfy all of the criteria
required under Canadian generally accepted  accounting  principles for deferment
and charged the costs to operations.

During 2002,  the Company  recorded a $575,000  write-down of its  investment in
Trimark  in  recognition  of a decline  in the value of the  Trimark  shares.  A
further $125,000 write-down was made in 2002 for other investments. In 2001, the
Company recorded an initial write-down of $956,253 relating to its investment in
Trimark.

Interest expense on long-term debt decreased by $786,047, approximately 53% from
$1,480,291  in 2001 to $694,244 in 2002,  reflecting  the  decrease in long-term
debt  during  2001 on the  retirement  of the  balance  of the Bank  One  credit
facility.

During 2002, the Company  recorded  $2,177,765 in  expenditures on its petroleum
interests compared to $8,332,486 in 2001.  Additions recorded for 2002 comprised
of $1,399,385 on the East Lost Hills Project and $778,380 for the exploration of
the Regional California Prospects. Overall, the level of capital expenditures in
2002  decreased  as a result of the lack of  progress at East Lost Hills and the
resulting  negative  impact  on the  Company's  ability  to raise  financing  to
continue  funding of its share of costs. As at result,  in May 2002, the Company
concluded  an agreement  on the ongoing  evaluation  of the ELH #4 and #9 wells,
whereby  the funding  participants  have  assumed all of the unpaid  amounts and
future costs in completing  evaluation of these wells.  Unpaid  billings for the
ELH #4 and #9 wells at the time of the agreement  totaled  $4,868,716,  of which
$713,674 was billed and had been  recorded as accounts  payable at May 31, 2001.
During 2002,  the Company  reversed the $713,674,  with an offsetting  credit to
petroleum and natural gas interests.


                                      -32-

<PAGE>



YEAR ENDED MAY 31, 2001 COMPARED TO YEAR ENDED MAY 31, 2000

During the year ended May 31, 2001,  the Company  recorded a loss of  $1,518,858
($0.05 per share)  compared  to a loss of  $2,239,652  ($0.09 per share) for the
comparable  2000 period,  an improvement of $720,794.  Petroleum and natural gas
revenues  increased by 14%, from $4,573,883 during 2000 to $5,228,674 in 2001. A
number of significant  transactions occurred during fiscal 2001 which affect the
comparability of the Company's  performance to fiscal 2000.  During fiscal 2001,
management  of the  Company  determined  to  focus  its  direction  towards  the
exploration,  development and production of its East Lost Hills, San Joaquin and
Regional California interests. A review of the Company's petroleum interests was
initiated and  discussions  held with  potential  buyers.  On March 8, 2001, the
Company completed the sale of substantially all of its non-California  petroleum
and natural gas interests to Exco. Throughout fiscal 2000, and until the sale in
March 2001,  these  properties  represented  substantially  all of the Company's
producing  properties.  Production commenced from the ELH#1 on February 6, 2001,
and currently  represents the only significant  producing  petroleum and natural
gas  interest to the Company.  The overall  increase in revenues  during  fiscal
2001, was  attributable to strong prices received by the Company for its oil and
gas  production.  Revenue  from  oil  and  liquids  production  decreased  5% to
$1,774,758  in 2001 from  $1,863,104  in 2000.  Production of oil and liquids in
2001  decreased  28% to  383,537  MCFE in 2001 from  530,390  MCFE in 2000.  The
average price  received for oil and liquids in 2001 was  $4.63/MCFE  compared to
$3.51/MCFE  in 2000,  an increase of 32%.  Revenue from  natural gas  production
increased  95% to  $5,638,478  in 2001  from  $2,895,736  in 2000.  Natural  gas
production  decreased 17% to 925,635 MCF in 2001 from 1,112,734 MCF in 2000. The
average price received in 2001 was $6.09/MCF, an increase of 134% from $2.60/MCF
in 2000. In January  2000,  the Company was required by its banker to enter into
oil and gas swap  contracts to hedge  70,000 MMBTU gas per month,  at $2.385 per
MMBTU,  and 3,000  barrels of oil per month,  at $22.51  per  barrel.  The hedge
contracts  were closed in February  2001,  as part of the sale of the  petroleum
interests  to Exco.  These  oil and  natural  gas  hedges  reduced  revenues  by
$2,184,564 for fiscal 2001 and $184,957 for fiscal 2000.

On an MCFE basis,  production  costs  increased  3%, from  $1.41/MCFE in 2000 to
$1.45/MCFE in 2001.  The  depreciation  and depletion  rate  increased 18%, from
$0.94/MCFE in 2000 to $1.11/MCFE in 2001.

General and administrative  costs increased by $143,386,  approximately 12% from
$1,149,045  in  2000  to  $1,292,431  in  2001.  The  increase  in  general  and
administrative costs in 2001 occurred primarily due to additional costs incurred
in opening a new office in Bakersfield.

Interest expense on long-term debt decreased by $305,912, approximately 17% from
$1,786,203 in 2000 to $1,480,291 in 2001, reflecting the decrease in long-term
debt on the retirement of the balance of the Bank One credit facility.

During  fiscal  2001,  the Company  expended in  expenditures  on its  petroleum
interests,  which was primarily  comprised of: i) $5,286,942 million towards the
development  of the East  Lost  Hills  Project,  mainly  in the  funding  of the
completion  of the ELH #1 well and the  drilling  of the ELH #2,  #3,  #4 and #9
wells;  ii) $775,961 for its share of the gas facility at East Lost Hills;  iii)
$1,570,379 for the acquisition, exploration and development of other oil and gas
prospects.

During fiscal 2001, the Company purchased additional shares of Berkley Petroleum
Corp.  ("Berkley"),  at a cost of  $175,568  and  subsequently  disposed  of its
holdings in Berkley for proceeds of $1,644,291, recognizing a gain of $25,345.

The  Company  recorded  a gain of  $212,473  in  fiscal  2001  from  the sale of
petroleum interests to Exco.

During fiscal 2001, the Company reviewed the carrying value of its investment of
2,080,000 common shares of Trimark. A write-down of $956,253 was made to reflect
the quoted value of the Trimark shares at May 31, 2001.

LIQUIDITY AND CAPITAL RESOURCES

With the disappointing developments at the East Lost Hills and San Joaquin Joint
Ventures and at Regional California,  the Company has had to review and reassess
its options and  alternatives.  Subsequent  to May 31,  2002,  the Company  paid
$517,000 for its share of the side-track well at the Suisan #25 well.

As  at  October  31,  2002,  the  Company  had  a  working  capital  deficit  of
approximately  $700,000 and approximately $1.1 million of convertible debentures
outstanding.  See "Item 6.  Directors,  Senior  Management and Employees - Other
Convertible Securities."

                                      -33-

<PAGE>


The Company is currently not generating sufficient cash flow from its operations
to meet ongoing  corporate  overhead,  capital  commitments  and  discharge  its
liabilities  as they come due. The future  viability of the Company is dependent
upon its ability to generate  additional  financing  to satisfy  future  working
capital requirements and debt repayment obligations and, in the longer term, the
generation of profit and positive cash flow from business operations. Unless the
Company is able to obtain  additional  financings,  it does not have  sufficient
working  capital to continue  funding the  activities  in A. I.  Solutions,  the
continued  exploration and  development of its petroleum  interests or, complete
the payments and exploration  commitments which will be required for the mineral
properties in China and Mongolia. There is no assurance that the Company will be
able to obtain sufficient financings.

RESEARCH AND DEVELOPMENT

During fiscal 2000,  2001 and 2002, the Company  incurred  $11.7  million,  $8.3
million and $2.2 million,  respectively,  on the  acquisition,  exploration  and
development  of its petroleum  interests.  During fiscal 2002,  the Company also
incurred  $506,000 on research,  development  and marketing costs related to the
development  of its  software  programs.  During the period from June 1, 2002 to
October 31, 2002, the Company had incurred approximately $550,000 in exploration
expenditures on its petroleum interests and $178,000 on research and development
of software programs.


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

DIRECTORS AND SENIOR MANAGEMENT

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

                                                            Term of Office
Name                   Position with the Company         (for each office held)
------------------     -------------------------         ----------------------
DONALD W. BUSBY(1)     Chairman                            Apr/99 to present
                       Chief Executive Officer             Apr/99 to present
                       President                           Sept/99 to Mar/98
                       Director                            Sept/95 to present

NICK DEMARE(1)         Director                            Oct/89 to present

WILLIAM LEE(1)         Director                            Sept/95 to present

NEIL DARLING(1)        Director                            May/99 to present

HARVEY LIM             Corporate Secretary                 Jun/97 to present

(1) Member of the Audit Committee.

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

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

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


DONALD W. BUSBY (AGE 65),
CHAIRMAN, CHIEF EXECUTIVE OFFICER, PROMOTER AND DIRECTOR

Since August 1990, Mr. Busby has been the owner and president of Boone Petroleum
Inc. ("Boone"),  a private company owned by Mr. Busby. Mr. Busby, through Boone,
provides  marketing,  financial  management and  consulting  services to various
mineral exploration companies, including the Company. Mr. Busby currently serves

                                      -34-

<PAGE>


as an officer and  directorof  other public  reporting  companies.  See "Item 7.
Major Shareholders and Related Party Transactions - Related Party Transactions -
Conflicts of Interest."

NICK DEMARE (AGE 48), DIRECTOR

Mr.  DeMare holds a Bachelor of Commerce  degree from the  University of British
Columbia  and is a  member  in  good  standing  of the  Institute  of  Chartered
Accountants  of British  Columbia.  Since  May,  1991,  Mr.  DeMare has been the
President of Chase  Management  Ltd., a private  company which  provides a broad
range of administrative, management and financial services to private and public
companies  engaged  in  mineral  exploration  and  development,  gold and silver
production,  oil and gas  exploration  and production and venture  capital.  Mr.
DeMare  indirectly owns 100% of Chase. Mr. DeMare currently serves as an officer
and  director  of  other  public  reporting   companies.   See  "Item  7.  Major
Shareholders  and Related  Party  Transactions  - Related Party  Transactions  -
Conflicts of Interest."

WILLIAM LEE (AGE 49), DIRECTOR

Mr. Lee holds a Bachelor  of  Commerce  degree  from the  University  of British
Columbia  and is a  member  in  good  standing  of the  Institute  of  Chartered
Accountants of British  Columbia.  He has been a financial officer or controller
of several public and private  companies since 1986 and, prior,  thereto,  was a
Senior Audit  Manager at Deloitte & Touche.  Prior to March,  1995,  Mr. Lee was
employed as the Chief Financial Officer of Sanctuary Woods Multimedia Corp. From
March 1995 to June 1996, Mr. Lee was employed as the Chief Financial  Officer of
Wildwood  Interactive  Inc.  Since June,  1996, Mr. Lee has been employed as the
Chief Financial Officer of IMA Exploration Inc., a public company engaged in the
exploration of mineral properties.

NEIL DARLING (AGE 43), DIRECTOR

Mr. Darling holds a Bachelor of Arts Degree (Economics),  from the University of
Calgary and is a member of the Canadian  Association of Drilling Engineers.  Mr.
Darling has worked  extensively  in the energy  sector with over twenty years of
project  management,  engineering  and  operations  experience  in drilling  and
completions.  From October 1997 to present,  Mr. Darling has been a principal of
Ramdar Resource  Management  Ltd., a private  company which provides  operations
consulting  services for numerous clients in the oil and gas industry in Canada,
the United States and  internationally.  From 1993 to October 1997,  Mr. Darling
was employed with Norwest Engineering as its operations manager.

HARVEY LIM (AGE 44), CORPORATE SECRETARY

Mr. Lim holds a Bachelor  of  Commerce  degree  from the  University  of British
Columbia  and is a  member  in  good  standing  of the  Institute  of  Chartered
Accountants of British Columbia.  Mr. Lim was employed by Coopers & Lybrand (now
PricewaterhouseCoopers  LLC) from 1981 to 1988.  From 1988 to 1991,  Mr. Lim was
employed as controller  with Ingot  Management Ltd. Since 1991, Mr. Lim has been
employed by Chase Management Ltd. as controller.  Mr. Lim currently serves as an
officer and director of other  public  reporting  companies.  See "Item 7. Major
Shareholders  and Related  Party  Transactions  - Related Party  Transactions  -
Conflicts of Interest."

COMPENSATION

During the fiscal year ended May 31,  2002,  the  directors  and officers of the
Company, as a group, had received or charged the Company a total of $189,438 for
services  rendered  by the  directors  and  officers or  companies  owned by the
individuals.

The Company is required,  under applicable securities  legislation in Canada, to
disclose to its shareholders  details of compensation  paid to its directors and
officers.  The  following  fairly  reflects all material  information  regarding
compensation  paid  by  the  Company  to  its  directors  and  officers,   which
information has been disclosed to the Company's  shareholders in accordance with
applicable Canadian law.

"Named  Executive  Officers"  means the Chief  Executive  Officer ("CEO") of the
Company, regardless of the amount of compensation of that individual and each of
the Company's four most highly compensated  executive  officers,  other than the
CEO, who were serving as executive officers at the end of the most recent fiscal
year and whose  total  salary and bonus  amounted  to  CDN$100,000  or more.  In


                                      -35-

<PAGE>


addition,  disclosure is also required for any individuals whose totalsalary and
bonus during the most recent fiscal year was CDN$100,000 whether or not they are
an executive officer at the end of the fiscal year.

EXECUTIVE COMPENSATION

During the fiscal year ended May 31, 2002,  the Company had one Named  Executive
Officer,  Donald W. Busby, Chairman and Chief Executive Officer. The table below
sets forth the compensation of the Named Executive Officer:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

                                       ANNUAL COMPENSATION                     LONG TERM COMPENSATION
                                 ------------------------------       --------------------------------------
                                                                                AWARDS               PAYOUTS
                                                                      --------------------------     -------
                                                                      SECURITIES      RESTRICTED
                                                        OTHER           UNDER         SHARES OR                     ALL
                       FISCAL                           ANNUAL         OPTIONS/       RESTRICTED                   OTHER
   NAME AND             YEAR                            COMPEN-          SARS           SHARE         LTIP        COMPEN-
   PRINCIPAL           ENDED     SALARY       BONUS     SATION         GRANTED          UNITS        PAYOUTS      SATION
   POSITION            MAY 31     (US$)       (US$)     (US$)            (#)            (US$)         (US$)        (US$)
--------------------   ------    -------      -----     -------       ----------      ----------     -------      -------
<S>                   <C>      <C>         <C>       <C>          <C>                <C>           <C>        <C>

Donald W. Busby,       2002       Nil          Nil        Nil           400,000           Nil          Nil         99,438
Chairman and Chief     2001       Nil          Nil        Nil           350,000           Nil          Nil        103,342
Executive              2000       Nil          Nil        Nil             Nil             Nil          Nil        150,965
Officer

</TABLE>

LONG TERM INCENTIVE PLAN AWARDS

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

STOCK APPRECIATION RIGHTS

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

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth  information  concerning grants of options to the
Named Executive Officer during the past fiscal year ended May 31, 2002:

<TABLE>
<CAPTION>

                                                 % OF TOTAL
                                                   OPTIONS                               MARKET VALUE OF
                                                  GRANTED TO                                SECURITIES
                                                  DIRECTORS,                                UNDERLYING
                         SECURITIES UNDER       EMPLOYEES AND         EXERCISE OR      OPTIONS ON DATE OF
                          OPTIONS GRANTED       ASSOCIATES IN         BASE PRICE              GRANT           EXPIRATION
NAME                            (#)             FISCAL YEAR(1)      (CDN$/SECURITY)      (CDN$/SECURITY)         DATE
----------------         ----------------       --------------      ---------------    ------------------     -----------
<S>                      <C>                   <C>                   <C>                  <C>             <C>

Donald W. Busby              400,000                40.0%                0.45                 0.37             Dec.21/04

</TABLE>

NOTE:

(1)  Percentage of all options granted during the last fiscal year ended May 31,
     2002.


                                      -36-

<PAGE>



OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

The following  table sets forth  details of all exercises of options  during the
past fiscal year ended May 31, 2002 and the value of  unexercised  options on an
aggregated basis as at May 31, 2002:

<TABLE>
<CAPTION>

                                                                                                  VALUE OF UNEXERCISED
                                                                       UNEXERCISED OPTIONS AT     IN-THE-MONEY OPTIONS
                                                                           FISCAL YEAR-END         AT FISCAL YEAR-END
                                  SECURITIES           AGGREGATE               (#)(3)                 (CDN$)(3)(4)
                                 ACQUIRED ON             VALUE
                                   EXERCISE            REALIZED             EXERCISABLE/              EXERCISABLE/
NAME                                (#)(1)             (CDN$)(2)            UNEXERCISABLE             UNEXERCISABLE
-------------------             ------------          ----------        -------------------        -------------------
<S>                              <C>                  <C>               <C>                        <C>

Donald W. Busby                      Nil                  N/A               750,000/Nil                   Nil/Nil

</TABLE>

NOTES:

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

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

(3)  As  freestanding  SARs have not been  granted,  the number of common shares
     relate  solely to the  options.  (4) Value using the  closing  price of the
     common  shares on the TSX Venture on May 31,  2002 of  CDN$0.30  per share,
     less the exercise price of the options.


PENSION PLANS

The Company  does not provide  retirement  benefits  for its  directors or Named
Executive Officer.


TERMINATION OF EMPLOYMENT, CHANGE IN RESPONSIBILITIES AND EMPLOYMENT CONTRACTS

During  the  fiscal  year  ended May 31,  2002,  Mr.  Donald W.  Busby  received
consulting  fees from the Company of $84,000 paid  directly to Boone,  a private
company  which is  wholly-owned  by Mr.  Busby.  Boone  provides  marketing  and
financial  management services to the Company. The Company also paid Mr. Busby's
health insurance premiums of $15,438.


TERMINATION OF EMPLOYMENT OR CHANGE OF CONTROL

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


PROPOSED COMPENSATION

The Company has no bonus,  profit  sharing or similar plans in place pursuant to
which cash or non-cash compensation is proposed to be paid or distributed to the
Named Executive Officer in the current or subsequent fiscal year.


COMPENSATION OF DIRECTORS

The following table sets forth  information  concerning grants of options to the
directors who are not Named Executive Officers during the past fiscal year ended
May 31, 2002:


                                      -37-

<PAGE>
<TABLE>
<CAPTION>


                                                % OF TOTAL
                                                  OPTIONS                               MARKET VALUE OF
                                                 GRANTED TO                               SECURITIES
                                                 DIRECTORS,                               UNDERLYING
                         SECURITIES UNDER      EMPLOYEES AND         EXERCISE OR        OPTIONS ON DATE
                          OPTIONS GRANTED      ASSOCIATES IN          BASE PRICE           OF GRANT
NAME                            (#)            FISCAL YEAR(1)      (CDN$/SECURITY)      (CDN$/SECURITY)    EXPIRATION DATE
------------             ----------------      --------------      ---------------      ---------------    ---------------
<S>                         <C>                 <C>                   <C>                 <C>             <C>
Nick DeMare                   174,000              17.4%                 0.45                0.37             Dec.21/04
William Lee                    75,000               7.5%                 0.45                0.37             Dec.21/04
Neil Darling                   75,000               7.5%                 0.45                0.37             Dec.21/04

</TABLE>


(1)  Percentage of all options granted during the last fiscal year ended May 31,
     2002.

The following  table sets forth  details of all exercises of options  during the
past  fiscal  year  ended May 31,  2002 by the  directors  who are not the Named
Executive  Officers and the value of unexercised  options on an aggregated basis
as at May 31, 2002:

<TABLE>
<CAPTION>
                                                                                                 Value of Unexercised
                                                                       Unexercised Options at     In-the-Money Options
                                                                          Fiscal Year-End          at Fiscal Year-End
                                  Securities          Aggregate                (#)(3)                 (CDN$)(3)(4)
                                 Acquired on            Value
                                   Exercise           Realized              Exercisable/              Exercisable/
Name                                (#)(1)            (CDN$)(2)            Unexercisable              Unexercisable
------------                     -----------          ---------        ----------------------    ---------------------
<S>                              <C>                  <C>                <C>                          <C>

Nick DeMare                          Nil                 N/A                314,000/Nil                  Nil/Nil
William Lee                          Nil                 N/A                115,000/Nil                  Nil/Nil
Neil Darling                         Nil                 N/A                100,000/Nil                  Nil/Nil

</TABLE>

NOTES:

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

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

(3)  As  freestanding  SARs have not been  granted,  the number of common shares
     relate  solely to the options.  (4) Value using the closing price of common
     shares on the TSX Venture on May 31, 2002 of CDN$0.30  per share,  less the
     exercise prices of the options.

During the fiscal year ended May 31, 2002,  Chase,  a private  company  which is
indirectly wholly-owned by Mr. Nick DeMare, was paid CDN$117,075. Chase provides
management,  administrative and accounting services to the Company.  The Company
also paid CDN$9,000 each to Mr. William Lee and Ramdar Resource  Management Ltd.
("Ramdar"),  for directors fees. Ramdar is a private company wholly-owned by Mr.
Neil Darling.

EMPLOYMENT AGREEMENTS

The Company has  directly  entered  into  management  contracts  with  companies
controlled  by  Messrs.  Busby  and  DeMare  for  accounting,  professional  and
management  services  provided to the Company.  Specifically,  the Company has a
management  contract  with Boone,  a company  owned by Mr.  Busby,  at a rate of
$7,000 per month and with Chase, a company  indirectly owned by Mr. DeMare, at a
rate of CDN$8,000 per month.

                                      -38-

<PAGE>

BOARD PRACTICES

AUDIT COMMITTEE

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

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


TERMINATION OF EMPLOYMENT, CHANGE IN RESPONSIBILITIES AND EMPLOYMENT CONTRACTS

During the fiscal year ended May 31, 2002,  Mr. Busby received  consulting  fees
from the Company of $84,000 paid directly to Boone,  a private  company which is
wholly-owned  by Mr. Busby.  Boone provides  marketing and financial  management
services to the Company.  The Company  also paid Mr.  Busby's  health  insurance
premiums  of  $15,438.  See  "Item  7.  Major  Shareholders  and  Related  Party
Transactions - Related Party Transactions."


TERMINATION OF EMPLOYMENT OR CHANGE OF CONTROL

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

EMPLOYEES

As of May 31,  2002,  the  Company  had no  full-time  employees  in the area of
management  and  administration.  As at May 31,  2001,  there  were 3  full-time
employees in the area of  management  and  administration  compared with 6 full-
time  employees  as at May 31, 2000.  Exploration  activities  are  conducted by
consultants,  laborers and technicians hired for the duration of the exploration
program.  Research,  development  and  marketing  activities  for the  Company's
software programs are contracted to arm's-length parties.

SHARE OWNERSHIP

The following table sets forth certain  information  regarding  ownership of the
Company's shares by the Company's officers and directors as of October 31, 2002.

<TABLE>
<CAPTION>
                                                                SHARES AND RIGHTS BENEFICIALLY
TITLE OF CLASS            NAME AND ADDRESS OF OWNER                 OWNED OR CONTROLLED (1)       PERCENT OF CLASS (1)
--------------            --------------------------            ------------------------------    ---------------------
<S>                     <C>                                          <C>                               <C>
Common Stock              Donald W. Busby                               9,041,824(2)(3)                  18.30%
                          Bakersfield, California

Common Stock              Nick DeMare                                   4,480,863(4)(5)                   9.45%
                          Burnaby, British Columbia

Common Stock              William Lee                                     130,000(6)                      0.29%
                          Delta, British Columbia

Common Stock              Neil Darling                                    100,000(7)                      0.22%
                          Calgary, Alberta

Common Stock              Harvey Lim                                       75,000(8)                      0.17%
                          Burnaby, British Columbia
</TABLE>

                                      -39-

<PAGE>

(1)  Where  persons  listed on this  table  have the right to obtain  additional
     shares of common  stock  through  the  exercise of  outstanding  options or
     warrants or through the conversion of debentures,  these additional  shares
     are deemed to be outstanding for the purpose of computing the percentage of
     common stock owned by such  persons,  but are not deemed to be  outstanding
     for the purpose of  computing  the  percentage  owned by any other  person.
     Based on 45,336,633  shares of common stock  outstanding  as of October 31,
     2002.

(2)  Includes  1,136,355 shares of common stock held by Boone, a private company
     wholly-owned by Mr. Busby and 3,834,914  shares held by the Donald W. Busby
     1999 Irrevocable Trust ("Busby Trust").

(3)  Includes  warrants  held by Boone to acquire an additional  500,000  common
     shares, warrants held by the Busby Trust to acquire an additional 2,705,000
     common shares, options held by Mr. Busby, to acquire 750,000 common shares,
     and a  $100,000  debenture,  held  by  Boone,  which  is  convertible  into
     approximately 115,555 common shares.

(4)  Includes 20,000 common shares held by Mr. DeMare directly, 1,675,410 common
     shares held by DNG Capital Corp. ("DNG"), a private company wholly-owned by
     Mr.  DeMare,  683,453  shares held by 888 Capital Corp.  ("888") and 25,000
     shares held by UEV Holdings Ltd. ("UEV"). 888 and UEV are private companies
     50% owned by Mr. DeMare.

(5)  Includes warrants held directly to acquire 623,375 common shares,  warrants
     held by DNG to acquire an additional  1,000,000  common shares and warrants
     held by 888 to acquire 159,625 common shares.

(6)  Includes options to acquire 115,000 common shares.

(7)  Consists of options to acquire 100,000 common shares.

(8)  Includes  options to acquire  60,000  common shares and warrants to acquire
     15,000 common shares.


STOCK OPTIONS

In order to comply with recent  amendments to the TSX Venture rules, the Company
adopted a stock option plan (the "Plan"). The Plan was approved by the Company's
shareholders  at  its  annual  general  meeting,  held  on  November  14,  2002.
Previously,  the  Company  did not have a formal  stock  option plan and granted
options in accordance with TSX Venture policies which provided for options up to
10% of the issued and outstanding  share capital of the Company.  The purpose of
the Plan is to provide the Company with a share related  mechanism to enable the
Company to attract, retain and motivate qualified directors, officers, employees
and other service providers, to reward directors,  officers, employees and other
service  providers  for their  contribution  toward  the long term  goals of the
Company and to enable and encourage  such  individuals  to acquire shares of the
Company as long term investments.

The Plan  provides  that it is  solely  within  the  discretion  of the Board to
determine who should receive options and in what amounts.  The Board may issue a
majority of the options to insiders of the Company.  However,  the Plan provides
that in no case will the Plan or any existing share compensation  arrangement of
the Company result, at any time, in the issuance to any option holder,  within a
one year period,  of a number of shares exceeding 5% of the Company's issued and
outstanding share capital.

The following information is a brief description of the Plan:

1.   The maximum  number of common  shares  that may be issued upon  exercise of
     stock options granted under the Plan will be that number of shares which is
     10% of the issued and outstanding shares of the Company.  As at October 31,
     2002,  the Company had  1,868,250  options  outstanding  which were granted
     prior  to the  adoption  of the  Plan.  These  options  form a part  of the
     foregoing 10%. The exercise  price of the stock  options,  as determined by
     the Board in its sole discretion,  shall not be less than the closing price
     of the Company's shares traded through the facilities of the TSX Venture on
     the  date  prior  to the  date  of  grant,  less  allowable  discounts,  in
     accordance  with the  policies  of the TSX Venture or, if the shares are no
     longer listed for trading on the TSX Venture,  then such other  exchange or
     quotation system on which the shares are listed and quoted for trading.

2.   The  Board  will not grant  options  to any one  person  which  will,  when
     exercised, exceed 5% of the issued and outstanding shares of the Company.

3.   Upon  expiry  of the  option,  or in  the  event  an  option  is  otherwise
     terminated  for any reason,  without  having been  exercised  in full,  the
     number of shares in respect of the expired or terminated option shall again


                                      -40-

<PAGE>



     be available  for the purposes of the Plan.  All options  granted under the
     Plan may not have an expiry date exceeding ten years from the date on which
     the Board grants and announces the granting of the option.

4.   If the option holder ceases to be a director of the Company or ceases to be
     employed  by the Company  (other than by reason of death),  as the case may
     be, then the option granted shall expire on the 90th day following the date
     that the option  holder ceases to be a director or ceases to be employed by
     the Company, subject to the terms and conditions set out in the Plan.

The Plan may be  administered  by the  Company's  secretary or such other senior
officer or employee as may be  designated  by the Board from time to time.  Upon
the approval of the Plan by the  Company's  shareholders,  shareholder  approval
will not be  required or sought on a  case-by-case  basis for the purpose of the
granting of options to and the  exercise of options by  employees of the Company
regularly  employed on a full-time or part-time basis,  directors of the Company
and persons who perform services for the Company on an ongoing basis or who have
provided, or are expected to provide, services of value to the Company.

As of October  31,  2002,  the Company had  granted an  aggregate  of  1,868,250
incentive stock options to purchase shares of the Company's  common stock to the
following persons:


                                NATURE       NO. OF       EXERCISE      EXPIRY
OPTIONEE                      OF OPTION      OPTIONS    PRICE/SHARE      DATE
-------------------------    ----------      -------    -----------   ----------
                                                            CDN$

Donald W. Busby               Director        50,000        1.80      Oct. 16/03
Nick DeMare                   Director        20,000        1.80      Oct. 16/03
Ted Carlsen                   Employee         6,250        2.70      Apr. 19/03
Harvey Lim                    Employee        10,000        1.34      Dec. 21/03
Betty Moody                   Employee        10,000        1.34      Dec. 21/03
Arabella Smith                Employee         5,000        1.34      Dec. 21/03
Linda Liu                     Employee         5,000        1.34      Dec. 21/03
Rosanna Wong                  Employee         5,000        1.34      Dec. 21/03
Jacqueline Hibbs              Employee         2,000        1.34      Dec. 21/03
Greystoke Investments Ltd.    Employee        40,000        1.60      Jan. 10/04
MDC Group Inc.                Employee        40,000        1.60      Jan. 10/04
Neil Darling                  Director        10,000        1.60      Jan. 10/04
William Lee                   Director        25,000        1.60      Jan. 10/04
Betty Moody                   Employee        20,000        2.68      Mar. 02/04
Des O'Kell                    Employee       100,000        2.68      Mar. 02/04
David Castaneda               Employee        70,000        2.68      Mar. 02/04
Donald W. Busby               Director       300,000        2.68      Mar. 02/04
Nick DeMare                   Director       120,000        2.68      Mar. 02/04
William Lee                   Director        15,000        2.68      Mar. 02/04
Neil Darling                  Director        15,000        2.68      Mar. 02/04
Kurt Johnson                  Employee        50,000        0.45      Dec. 21/04
Neil Darling                  Director        75,000        0.45      Dec. 21/04
William Lee                   Director        75,000        0.45      Dec. 21/04
Donald W. Busby               Director       400,000        0.45      Dec. 21/04
Nick DeMare                   Director       174,000        0.45      Dec. 21/04
Betty L. Moody                Employee        50,000        0.45      Dec. 21/04
Harvey Lim                    Employee        50,000        0.45      Dec. 21/04
Linda Liu                     Employee        15,000        0.45      Dec. 21/04
Rosanna Wong                  Employee        15,000        0.45      Dec. 21/04
Jacqueline Rowsell            Employee         6,000        0.45      Dec. 21/04
Arabella Smith                Employee        15,000        0.45      Dec. 21/04
Des O'Kell                    Employee        75,000        0.45      Dec. 21/04
                                           ---------
TOTAL:                                     1,868,250
                                           =========


                                      -41-

<PAGE>



As of October 31, 2002, the directors and officers of the Company, as a group (5
persons),  held options to purchase  1,339,000  shares of the  Company's  common
stock.

WARRANTS

As of October  31,  2002,  there were  non-transferable  common  share  purchase
warrants  exercisable for the purchase of 5,630,500 common shares,  which expire
at various  times  until  July 6, 2004 and may be  exercised  at various  prices
ranging from CDN $1.35 per share to CDN $1.88 per share, as follows:

  Common Shares Issuable          Exercise Price/Share
 On Exercise of Warrants                  CDN$                    Expiry
 -----------------------          --------------------        ----------------
       2,260,000                          1.35                December 18,2003
          31,250                          1.77                December 11,2002
          35,000                          1.48                December 7, 2003
         268,750                          1.35                January 24, 2004
         836,500                          1.88                July 6, 2004
       2,199,000                          1.85                March 27, 2003
       ---------
       5,630,500
       =========

As of October 31, 2002, the directors and officers of the Company, as a group (5
persons),  held warrants to purchase  5,003,000  shares of the Company's  common
stock.

OTHER CONVERTIBLE SECURITIES

DEBENTURES

(a)  10% Debentures

The debentures (the "10%  Debentures") were issued in fiscal 2001 and, as at May
31,  2002,  comprised of  $2,163,000  Series A and CDN  $1,500,000  Series B. An
aggregate of $300,000  principal amount of Series A were issued to the Donald W.
Busby 1999  Irrevocable  Trust (the "Busby Trust") which Mr. Donald W. Busby, an
officer and  director of the Company is the  settlor,  an  aggregate of $450,000
principal  amount of Series A were issued to Boone Petroleum Inc.  ("Boone"),  a
private company wholly-owned by Mr. Busby and an aggregate of $263,000 principal
amount of Series A were issued to DNG Capital Corp.  ("DNG"),  a private company
owned by Mr. Nick DeMare,  a director of the Company.  The 10%  Debentures  bear
interest at 10% per annum,  payable  quarterly,  and mature on January 24, 2004.
The 10% Debentures are  convertible,  at the option of the holders,  into common
shares of the Company, at a price of CDN$1.35 per share on or before January 24,
2003 and CDN$1.56 per share on or before January 24, 2004.

During the year ended May 31, 2002,  the Company  proposed to amend the terms of
its debentures,  such that, for a limited period, the debenture holders would be
able to convert their debentures into common shares of the Company at a price of
CDN$0.50 per share (the "Conversion Price"). In addition,  in order to encourage
the debenture  holders to convert the  debentures  when the common shares of the
Company were trading at a price  significantly  below the Conversion  Price, the
Company agreed to pay, as a bonus, interest on the converted debentures from the
last  interest  payment date through  December 31, 2002.  Subsequent  to May 31,
2002,  holders  of  $1,293,000  Series  A and  CDN$900,000  Series  B of the 10%
Debentures  elected to convert their debentures and the Company issued 5,774,504
common shares and paid $109,885 interest.

As of October 31, 2002,  $870,000  principal  amount of Series A and CDN$600,000
principal  amount of Series B remain  outstanding,  of which $100,000  principal
amount of Series A is held by Boone.


(b)  9% Debentures

In June  1999,  the  Company  issued  debentures  (the  "9%  Hilton  Convertible
Debentures")  totaling  CDN  $1,493,500,  which  mature  on April 30,  2003.  An
aggregate of CDN $1,100,000  principal amount were issued to the Busby Trust, an
aggregate of CDN $200,000  principal amount were issued to DNG, and an aggregate
of CDN $193,500  principal  amount were issued to E.J.  Holdings Ltd., a private


                                      -42-

<PAGE>



company  wholly-owned by E.J. Helsey, the son-in-law of Mr.Busby.  The 9% Hilton
Convertible  Debentures bore interest at 9.0% per annum, payable quarterly,  and
were convertible into common shares on the following basis:

(i)  on or  before  April  30,  2002,  at a  conversion  price  of CDN  $2.60 of
     principal per share; and

(ii) May 1,  2002 to April  30,  2003,  at a  conversion  price of CDN  $2.85 of
     principal per share.

Subsequent to May 31, 2002,  all of the holders of the 9% Debentures  elected to
convert their debentures and the Company issued 2,987,000 common shares and paid
$51,825 interest.


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

PRINCIPAL HOLDERS OF VOTING SECURITIES

The following table sets forth certain  information  regarding  ownership of the
Company's shares by the Company's  officers and directors as a group, as well as
all persons who own greater than five percent (5%) of the Company's  outstanding
shares, as of October 31, 2002.
<TABLE>
<CAPTION>
                                                                Shares and Rights Beneficially
Title of Class            Name and Address of Owner                 Owned or Controlled (1)       Percent of Class (1)
--------------            ----------------------------------    ------------------------------    --------------------
<S>                     <C>                                       <C>                               <C>

Common Stock              Donald W. Busby                              9,041,824(2)(3)                 18.30%
                          Bakersfield, California

Common Stock              Nick DeMare                                  4,480,863(4)(5)                  9.45%
                          Burnaby, British Columbia

Common Stock              Officers & Directors, as a group            13,827,687(2)(3)(4)(5)           26.70%
                          (5 persons)
</TABLE>

(1)  Where  persons  listed on this  table  have the right to obtain  additional
     shares of common  stock  through  the  exercise of  outstanding  options or
     warrants or through the conversion of debentures,  these additional  shares
     are deemed to be outstanding for the purpose of computing the percentage of
     common stock owned by such  persons,  but are not deemed to be  outstanding
     for the purpose of  computing  the  percentage  owned by any other  person.
     Based on 45,336,663  shares of common stock  outstanding  as of October 31,
     2002.

(2)  Includes  1,136,355 shares of common stock held by Boone, a private company
     wholly-owned by Mr. Busby and 3,834,914 shares held by the Busby Trust.

(3)  Includes  warrants  held by Boone to acquire an additional  500,000  common
     shares, warrants held by the Busby Trust to acquire an additional 2,705,000
     common shares,  options held by Mr. Busby to acquire 750,000 common shares,
     and a  $100,000  debenture,  held  by  Boone,  which  is  convertible  into
     approximately 115,555 common shares.

(4)  Includes 20,000 common shares held by Mr. DeMare directly, 1,675,410 common
     shares held by DNG, a private company  wholly-owned by Mr. DeMare,  683,453
     shares held by 888 and 25,000  shares held by UEV.  888 and UEV are private
     companies 50% owned by Mr. DeMare.

(5)  Includes warrants held directly to acquire 623,375 common shares,  warrants
     held by DNG to acquire an additional  1,000,000  common shares and warrants
     held by 888 to acquire 159,625 common shares.

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

CHANGES IN SHAREHOLDINGS

There have been no significant  changes to the above listed  persons'  ownership
during the past three fiscal years.


                                      -43-

<PAGE>



CHANGE OF CONTROL

As of the date of this annual  report,  there are no  arrangements  known to the
Company  which may at a  subsequent  date  result in a change of  control of the
Company.

UNITED STATES SHAREHOLDERS

As of October 31, 2002, there were  approximately 758 registered  holders of the
Company's  common  shares  in the  United  States,  with  combined  holdings  of
2,237,404  shares,  representing  4.94% of the issued  shares of the  Company on
October 31, 2002.

CONTROL BY FOREIGN GOVERNMENT OR OTHER PERSONS

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

RELATED PARTY TRANSACTIONS

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

1.   The Company has retained  Boone, a private  company  wholly-owned by Donald
     Busby, the Chairman, Chief Executive Officer and a director of the Company,
     to provide  marketing,  consulting  and management  services.  See "Item 6.
     Directors,   Senior   Management   and   Employees  -   Compensation."   In
     consideration therefor, Boone is currently paid a monthly fee of $7,000 and
     out-of-pocket  disbursements  incurred  by Boone on behalf of the  Company.
     Management  believes the arrangement  with Boone is fair to the Company and
     similar to terms which  could be obtained  from  unrelated  third  parties.
     During the year  ended May 31,  2002,  and the period  from June 1, 2002 to
     October 31, 2002, the Company paid Boone $84,000 and $35,000,  respectively
     on account of professional  services  rendered by Boone.  During the period
     from June 1, 2002 to October 31, 2002 the Company  also agreed to reimburse
     Boone for $36,000 of expenses.

2.   The Company has retained Chase, a company  wholly-owned by Mr. Nick DeMare,
     a director of the  Company,  to provide  office  premises,  administrative,
     accounting and management  services.  In consideration  therefor,  Chase is
     paid a monthly fee of CDN$8,000 and out-of-pocket disbursements incurred by
     Chase on behalf of the  Company.  In  addition,  Chase  also  provides  the
     Company  additional  services which are billed at rates which Chase charges
     to unrelated third parties.  Management believes the arrangement with Chase
     is fair to the Company  and  similar to terms which could be obtained  from
     unrelated third parties.  During the year ended May 31, 2002 and the period
     from June 1, 2002 to October 31,  2002,  the Company paid Chase CDN $56,875
     and CDN $60,700, respectively.

3.   The Company has completed  previous private  placements of common stock and
     convertible  debentures,  the  subscribers  of which  include i)  companies
     wholly-owned  by  current  and former  directors,  officers  and  principal
     shareholders of the Company. The securities issued pursuant to such private
     placements were issued in accordance  with the pricing  policies of the TSX
     Venture.  During  the year ended May 31,  2002 and the period  from June 1,
     2002 to October 31,  2002,  the Company  conducted  the  following  private
     placements of common stock:


                                      -44-

<PAGE>
<TABLE>
<CAPTION>

                                                                 PURCHASE      MARKET
                                               PARTICIPATION      PRICE       PRICE(1)
PLACEE                                          BY INSIDERS       CDN$         CDN$              COMMENTS
------                                         -------------     --------     -------   -------------------------
<S>                                             <C>             <C>          <C>      <C>
PERIOD FROM JUNE 1, 2002 TO OCTOBER 31, 2002
--------------------------------------------
N/A


FISCAL YEAR ENDED MAY 31, 2002
------------------------------
1,673,000 units (one common share                                   1.70        1.88
and one warrant)
  -  888 Capital Corp.                               125,000                             50% owned by Nick DeMare
  -  Nick DeMare                                     583,000
  -  Donald W. Busby                                 885,000
                                                  ----------
                                                   1,593,000
</TABLE>

(1)  Quoted closing price on date of announcement of private placement.

See also "Item 6.  Directors, Senior Management and Employees - Compensation."


INDEBTEDNESS OF DIRECTORS, OFFICERS, PROMOTERS AND OTHER MANAGEMENT

During the fiscal year ended May 31,  2000,  the Company  provided a  relocation
loan of  $125,000  to Mr.  Busby to assist  him in  relocating  to  Bakersfield,
California from Conifer,  Colorado.  The loan originally bore interest at 5% per
annum,  compounded monthly, and was to mature on March 27, 2002. During the year
ended May 31, 2002, the Company agreed to extend the term of the loan to January
24, 2004.  In addition,  the loan now bears  interest at 10% per annum,  payable
quarterly.  Interest  income of $3,793 was received and $25,000 of principal was
repaid  for the year  ended May 31,  2002.  As of  October  31,  2002,  $100,000
principal remained outstanding.

Other than as described above during the fiscal year ended May 31, 2002, none of
the  directors,  officers,  promoters or other  members of  management  or their
associates or affiliates of the Company was indebted to the Company.


CONFLICTS OF INTEREST

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

The following table  identifies the name of each director of the Company and any
company,  which is a  reporting  issuer in Canada,  and for which such  director
currently serves as an officer or director:

<TABLE>
<CAPTION>

PRINCIPAL            REPORTING COMPANY                        CAPACITY                  PERIOD
---------------      -----------------------                  ----------------------    -----------------------------
<S>               <C>                                       <C>                      <C>
Donald W. Busby      Aladdin Resources Corp.                  President and Director    January 2001 - present
                     Trimark Energy Ltd.                      Chairman                  April 1999 - present
                                                              President                 September 1999 - present; and
                                                                                        February 1997 - April 1999
                                                              Chief Executive Officer   February 1997 - present
                                                              Director                  December 1998 - present
</TABLE>

                                      -45-

<PAGE>

<TABLE>
<CAPTION>

PRINCIPAL            REPORTING COMPANY                        CAPACITY                  PERIOD
---------------      -----------------------------            ----------------------    -----------------------------
<S>               <C>                                      <C>                        <C>
Nick DeMare          Aladdin Resources Corp.                  Director                  January 2001 - present
                                                              Secretary                 January 2001 - November 2001
                     Andean American Mining Corp.             Secretary                 December 1995 - present
                     California Exploration Ltd.              Director                  October 2002 - present
                     Desert Holdings Inc.                     Director                  October 2002 - present
                     Dial Thru International Inc.             Director                  January 1991 - present
                     GGL Diamond Corp.                        Director                  May 1989 - present
                     Golden Peaks Resources Ltd.              Director                  January 1992 - present
                     Hydromet Technologies Limited            Director                  September 2000 - present
                     Kookaburra Resources Ltd.                Director                  June 1988 - present
                     Trimark Energy Ltd.                      Director                  January 1996 - present
                     Tumi Resources Limited                   Director                  January 2000 - present

William Lee          Aladdin Resources Corp.                  Director                  January 2001 - present
                     Desert Holdings Inc.                     Director                  October 2002 - present
                     IMA Exploration Inc.                     Director                  June 1996 to present

Harvey Lim           Aladdin Resources Corp.                  Director                  January 2001 - November 2001
                                                              Secretary                 November 2001 - present
                     Trimark Energy Ltd.                      Secretary                 December 1988 - present
                     Tumi Resources Limited                   Director                  January 2000 - present
</TABLE>

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

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


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

DESCRIPTION                                                              PAGE
-----------                                                              ----
Audited Consolidated Financial Statements for
the Years Ended May 31, 2002, 2001 and 2000                               F-1

SIGNIFICANT CHANGES

Subsequent to May 21, 2002, the Company incurred $549,033 in expenditures on its
petroleum properties. The majority of these costs related to the side-track well
on the Basil  Prospect.  The well was  uneconomic and was plugged and abandoned.
Accordingly, the Company will be recording an impairment charge of approximately
$1  million  to  reflect  the  drilling  costs  on the  Suisan  #25 well and the
side-track well.

The Company's working capital has decreased  significantly  from $692,973 at May
31, 2002, to a working capital deficit of approximately  $700,000 at October 31,
2002.

Subsequent to May 31, 2002, holders of $2.6 million of the Company's  debentures
converted  their  holdings  into  common  stock  of the  Company.  See  "Item 6.
Directors, Senior Management and Employees - Other Convertible Securities."

DIVIDEND POLICY

The Company has not paid any  dividends on its common shares and does not intend
to pay dividends on its common shares in the immediate  future.  Any decision to
pay  dividends  on its common  shares in the future will be made by the board of
directors on the Company on the basis of earnings,  financial  requirements  and
other such conditions that may exist at that time.

                                      -46-

<PAGE>


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

PRICE HISTORY

The TSX Venture  classifies  listed  companies into two different tiers based on
standards, including historical financial performance, stage of development, and
financial  resources.  Tier I is the TSX Venture's  premier tier and is reserved
for the TSX Venture's most advanced issuers with the most significant  financial
resources.  Tier I  issuers  benefit  from  decreased  filing  requirements  and
improved service standards.  The majority of companies listed on the TSX Venture
are Tier II companies.  The Company is classified as a Tier I company and trades
on the TSX Venture under the symbol "HTP".

The following table sets forth the market price ranges and the aggregate  volume
of trading  of the  common  shares of the  Company  on the TSX  Venture  for the
periods indicated:

                   TSX VENTURE EXCHANGE STOCK TRADING ACTIVITY

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

May 31, 2002                24,676,069               $1.71               $0.14
May 31, 2001                57,231,095               $4.25               $1.00
May 31, 2000                60,856,599               $5.60               $1.20
May 31, 1999                19,661,995               $5.10               $1.80
May 31, 1998                 2,949,370               $2.25               $1.45


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

August 31, 2002              7,078,077               $1.71               $0.43
May 31, 2002                20,443,779               $3.35               $1.42
February 28, 2002           16,978,516               $2.95               $1.15
November 30, 2001            4,515,334               $2.30               $1.00
August 31, 2001              7,074,077               $1.71               $0.43
May 31, 2001                20,443,779               $3.35               $1.42
February 28, 2001           16,978,516               $2.95               $1.15
November 30, 2000            4,515,334               $2.30               $1.00
August 31, 2000             15,293,466               $4.25               $1.40
May 31, 2000                18,713,432               $4.05               $1.30


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

October 31, 2002             1,440,012               $0.11               $0.04
September 30, 2002           1,333,716               $0.21               $0.10
August 31, 2002                520,431               $0.23               $0.16
July 31, 2002                1,432,524               $0.42               $0.19
June 30, 2002                1,502,534               $0.39               $0.26
May 31, 2002                 2,513,040               $0.31               $0.14

On February 7, 2001, the Company's  common shares were approved for quotation on
the  Over-the-Counter  Bulletin  Board  system  (the  "OTC-BB")  operated by the
National Association of Securities Dealers under the symbol "HTPTF".


                                      -47-

<PAGE>


                             OTC-BB TRADING ACTIVITY


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

May 31, 2002                 8,420,200               $1.09               $0.10
May 31, 2001(1)              2,488,400               $1.09               $0.32
(1)  Period from February 7, 2001 through February 28, 2001


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

August 31, 2002                934,194               $0.29               $0.10
May 31, 2002                 1,424,600               $0.23               $0.10
February 28, 2002            2,015,600               $0.30               $0.16
November 30, 2001            2,913,000               $0.38               $0.16
August 31, 2001              1,735,700               $1.09               $0.32
May 31, 2001                 2,254,700               $2.03               $0.96
February 28, 2001(1)           233,700               $1.91               $1.50
(1)     Period from February 7, 2001 through February 28, 2001


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

October 31, 2001              312,999                $0.06               $0.03
September 30, 2001            270,299                $0.14               $0.06
August 31, 2001               122,498                $0.20               $0.10
July 31, 2001                 115,899                $0.29               $0.14
June 30, 2001                 695,797                $0.22               $0.15
May  31, 2002                 708,900                $0.15               $0.10


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

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


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

ARTICLES OF CONTINUANCE AND BYLAWS

The  Company  was  incorporated  under the laws of British  Columbia,  Canada on
September 7, 1989 by  registration  of its Memorandum and Articles with the B.C.
Registrar of  Companies  (the "BC  Registrar")  under the  incorporation  number
372193.  On April 4, 1999,  the Company was  continued  to the Yukon  Territory,
Canada  by the  registration  of its  Articles  of  Continuance  with the  Yukon
Registrar of Corporations under the access number 27053 (the "Yukon Registrar").

The following is a summary of all material  provisions of the Company's Articles
of  Continuance  and  Bylaws  and  certain  provisions  of  the  Yukon  Business
Corporations Act (the "Yukon Act"), applicable to the Company:

Paragraph 5 of the Company's Articles of Continuance,  restrict the Company from
carrying  on  the  business  of a  railway,  steamship,  air  transport,  canal,
telegraph, telephone or irrigation company.


                                      -48-

<PAGE>

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

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

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

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

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

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

     5.   a contract with an affiliate.

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

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

C.   BORROWING POWERS EXERCISABLE BY THE DIRECTORS.

     The directors may, on behalf of the Company:

     1.   borrow money on the credit of the Company;

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

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

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

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

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

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

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

                                      -49-

<PAGE>



DESCRIPTION OF COMMON SHARES

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

Of the Company's  unlimited share capital,  a total of 45,336,663  common shares
were issued and  outstanding as of October 31, 2002. All of the common shares of
the Company rank equally as to voting rights, participation in a distribution of
the assets of the Company on a  liquidation,  dissolution  or  winding-up of the
Company and the  entitlement of dividends.  The holders of the common shares are
entitled to receive notice of all shareholder meetings and to attend and vote at
such meetings.  Shareholders are not entitled to cumulative voting.  Each common
share  carries  with it the right to one  vote.  The  common  shares do not have
preemptive  or  conversion  rights.  In  addition,  there are no sinking fund or
redemption provisions applicable to the common shares.

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

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

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

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

SHAREHOLDER MEETINGS

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

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

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

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

                                      -50-

<PAGE>


MATERIAL CONTRACTS

1.   Employment  Agreement  with DWB  Management  Ltd.  dated  September 1, 2000
     (subsequently  assigned to Boone Petroleum Inc.). See "Item 10.  Directors,
     Senior Management and Employees - Compensation - Employee Agreement."

2.   Purchase and Sale  Agreement  between STB Energy,  Inc. and Exco  Resources
     Inc. dated  February 21, 2001. See "Item 5. Operating and Financial  Review
     and Prospects - Liquidity and Capital Resources."

3.   10% Convertible Debentures.  See "Item 6. Directors,  Senior Management and
     Employees - Other Convertible Securities - Debentures."

4.   Heads  of  Agreement  by and  among  Hilton  Petroleum  Ltd.  and  Logistic
     Resources Ltd.,  Delta Rich Resources Ltd.,  Equity World  Resources,  Wing
     Hong Ng, Terry Wong and Anthony C.Y. Chow dated June 24, 2002.  See"Item 4.
     Information  on the  Company - Business  Overview -  Principal  Oil and Gas
     Properties - Other Properties - China and Mongolia Properties" and "Item 4.
     Information  on the Company - Principal  Properties  - Other  Properties  -
     China and Mongolia Properties."

5.   Agreement between Berkley Petroleum,  Inc., Hilton Petroleum, Inc., Trimark
     Resources Inc., STB Energy, Inc. and KOB Energy, Inc., dated June 10, 2002.
     See "Item 4. Information on the Company - Business Overview - Principal Oil
     and Gas  Properties - Material  Properties - East Lost Hills Joint  Venture
     and San Joaquin Joint Venture, California."

EXCHANGE CONTROLS

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

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

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

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

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

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

                                      -51-

<PAGE>


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

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

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

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

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

(2)  direct  acquisitions  of  control of  Canadian  businesses  with  assets of
     $152,000,000 or more by an American investor;

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

(4)  indirect  acquisitions  of control of  Canadian  businesses  with assets of
     $152,000,000 or more by an American  investor if such assets represent more
     than 50% of the total value of the assets of the  entities,  the control of
     which is being acquired;

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

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

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

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

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

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


                                      -52-

<PAGE>

TAXATION

MATERIAL CANADIAN FEDERAL INCOME TAX CONSEQUENCES

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

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

DIVIDENDS

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

CAPITAL GAINS

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

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

owned  not less  than 25% of the  issued  shares  of any  class or series of the
Company at any time during the five-year period  preceding the  disposition.  In
the case of a  non-resident  holder  to whom  shares  of the  Company  represent
taxable Canadian  property and who is resident in the United States, no Canadian
taxes will be payable on a capital gain realized on such shares by reason of the
Canada-U.S. Income Tax Convention (1980) (the "Treaty") unless the value of such
shares is derived principally from real property situated in Canada. However, in
such a case, certain transitional relief under the Treaty may be available.

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

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

The following discussion is based upon the sections of the Internal Revenue Code
of 1986,  as amended (the  "Code"),  Treasury  Regulations,  published  Internal
Revenue Service ("IRS") rulings,  published  administrative positions of the IRS
and court decisions that are currently applicable,  any or all of which could be
materially and adversely changed,  possibly on a retroactive basis, at any time.
In addition,  this  discussion  does not consider the  potential  effects,  both


                                      -53-

<PAGE>

adverse and beneficial of recently proposed legislation which, if enacted, could
be  applied,  possibly  on  a  retroactive  basis,  at  any  time.  Holders  and
prospective  holders of the Company's  common stock should consult their own tax
advisors  about the  federal,  state,  local and  foreign  tax  consequences  of
purchasing, owning and disposing of shares of common stock of the Company.

U.S. HOLDERS

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

DISTRIBUTIONS ON SHARES OF COMMON STOCK

U.S. Holders receiving dividend distributions (including constructive dividends)
with  respect to the  Company's  common  stock are  required to include in gross
income for United  States  federal  income tax purposes the gross amount of such
distributions to the extent that the Company has current or accumulated earnings
and profits,  without  reduction for any Canadian  income tax withheld from such
distributions.  Such  Canadian tax withheld may be credited,  subject to certain
limitations,  against  the  U.S.  Holder's  United  States  federal  income  tax
liability  or,  alternatively,  may be deducted in computing  the U.S.  Holder's
United States federal taxable income by those who itemize deductions.  (See more
detailed  discussion  at  "Foreign  Tax  Credit"  below.)  To  the  extent  that
distributions exceed current or accumulated earnings and profits of the Company,
they  will be  treated  first as a return  of  capital  up to the U.S.  Holder's
adjusted  basis in the  common  stock  and  thereafter  as gain from the sale or
exchange of such shares.  Preferential tax rates for long-term capital gains are
applicable to a U.S. Holder which is an individual,  estate or trust.  There are
currently  no  preferential  tax rates for  long-term  capital  gains for a U.S.
Holder which is a corporation. Dividends paid on the Company's common stock will
not  generally  be eligible for the  dividends  received  deduction  provided to
corporations receiving dividends from certain United States corporations.

FOREIGN TAX CREDIT

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

DISPOSITION OF SHARES OF COMMON STOCK

A U.S.  Holder  will  recognize  gain or loss  upon the sale of shares of common
stock equal to the difference,  if any,  between (i) the amount of cash plus the
fair market value of any property received; and (ii) the shareholder's tax basis
in the  common  stock.  This  gain or loss will be  capital  gain or loss if the
shares  are a capital  asset in the hands of the U.S.  Holder,  and such gain or
loss will be  long-term  capital  gain or loss if the U.S.  Holder  has held the
common  stock for more than one year.  Gains and losses are netted and  combined
according to special rules in arriving at the overall capital gain or loss for a
particular  tax  year.   Deductions  for  net  capital  losses  are  subject  to
significant limitations. For U.S.Holders who are individuals, any unused portion


                                      -54-

<PAGE>


of such net capital loss may be carried over to be used in later tax years until
such  net  capital  loss is  thereby  exhausted.  For  U.S.  Holders  which  are
corporations  (other than corporations  subject to Subchapter S of the Code), an
unused net capital  loss may be carried  back three years from the loss year and
carried forward five years from the loss year to be offset against capital gains
until such net capital loss is thereby exhausted.

OTHER CONSIDERATIONS

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

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

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

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

INFORMATION REPORTING AND BACKUP WITHHOLDING

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

INSPECTION OF DOCUMENTS

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



ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
--------------------------------------------------------------------------------

Not applicable.



ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
--------------------------------------------------------------------------------

Not applicable.

                                      -55-

<PAGE>

                                     PART II

ITEM 13.  ITEM DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
--------------------------------------------------------------------------------

Not applicable



ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
          PROCEEDS.
--------------------------------------------------------------------------------

Not applicable.



ITEM 15.   CONTROLS AND PROCEDURES.
--------------------------------------------------------------------------------

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


ITEM 16.   [RESERVED]
--------------------------------------------------------------------------------

Not applicable.


                                    PART III


ITEM 17.  FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
See pages 61 through 87.



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



ITEM 19.  EXHIBITS.
--------------------------------------------------------------------------------


Exhibit
Number    Description                                                      Page
------    --------------------------------------------------------         ----

 1.1      Certificate of Continuance and Certificate of                     N/A
          Registration for Hilton Petroleum Ltd. (1)

 1.2      By-Laws for Hilton Petroleum Ltd. (1)                             N/A

 2.1      8% Convertible Debenture (1)                                      N/A

 2.2      9% Hilton Convertible Debenture (1)                               N/A

 2.3      9% Stanford Convertible Debenture (1)                             N/A

 2.4      10% Convertible Debentures (6)                                    N/A

 4.1      Documents Relating to the Acquisition of Interestin East          N/A
          Lost Hills Joint Venture and Greater San Joaquin Basin
          Joint Venture (1)


                                      -56-

<PAGE>


Exhibit
Number    Description                                                      Page
------    --------------------------------------------------------         ----


 4.2      Agreement dated September 12, 1997, between                       N/A
          STB Energy Inc. and Trimark Resources, Inc.
          and Trimark Oil & Gas, Inc. (1)

 4.3      Documents Relating to the Acquisition of Mississippi              N/A
          Prospects (1)

 4.4      Operating Agreement of Hilton Petroleum Greater San               N/A
          Joaquin Basin Joint Venture LLC (1)

 4.5      Agreement between Kern County Oil & Gas Inc.,                     N/A
          STB Energy, Inc., Trimark Resources, Inc. and
          Valley Oil & Gas, L.L.C. dated January 13, 2000, as
          amended (3)

 4.6      East Blossom Property Agreement (3)                               N/A

 4.7      Employment Agreement with DWB Management Ltd. (4)                 N/A

 4.8      Purchase and Sale Agreement between STB Energy, Inc.              N/A
          and EXCO Resources, Inc. dated February 21, 2001 (5)

 4.9      Agreement between Berkley Petroleum, Inc., Hilton                  88
          Petroleum, Inc., Trimark Resources Inc., STB Energy, Inc.
          and KOB Energy, Inc., dated June 10, 2002

 4.10     Heads of Agreement by and among Hilton Petroleum Ltd.              92
          and Logistic Resources Ltd., Delta Rich Resources Ltd.,
          Equity World Resources, Wing Hong Ng, Terry Wong and
          Anthony C.Y. Chow dated June 24, 2002.

 8.1      List of Subsidiaries                                              101

 10.1     Certification of Donald W. Busby                                  103

 10.2     Certification of Nick DeMare                                      105


(1)  Previously filed as an exhibit to the Company's  registration  statement on
     Form 20-F,  filed with the  Commission  on November 26,  1999.  File number
     000-30390.

(2)  Previously filed as an exhibit to the Company's  registration  statement on
     Form 20-F/A  Amendment No. 1, filed with the  Commission on March 30, 2000.
     File number 000-30390.

(3)  Previously filed as an exhibit to the Company's  Registration  Statement on
     Form 20-F/A  Amendment  No. 3, filed with the  Commission  on September 28,
     2000. File number 000-30390.

(4)  Previously filed as an exhibit to the Company's Annual Report on Form 20-F,
     filed with the Commission on December 9, 2000. File number 000-30390.

(5)  Previously  filed with the  Company's  Form 6-K  Report of Foreign  Private
     Issuer, filed with the Commission on April 9, 2001. File number 000-30390.

(6)  Previously filed as an exhibit to the Company's annual Report on Form 20-F,
     filed with the Commission on December 10, 2001. File number 000-30390.


                                      -57-

<PAGE>


                                   SIGNATURES


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


                                              HILTON PETROLEUM LTD.


Dated: November 28, 2002                      / s / Nick DeMare
       -----------------                      ----------------------------------
                                              Nick DeMare, Director



                                      -58-

<PAGE>



                                  CERTIFICATION



I, Donald W. Busby, certify that:

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

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

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


Date:  November 28, 2002
       -----------------


Signed:  /s/ Donald W. Busby
         -----------------------------------------
         Donald W. Busby, Chief Executive Officer


                                      -59-

<PAGE>



                                  CERTIFICATION


I, Nick DeMare, certify that:

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

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

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


Date:  November 28, 2002
       -----------------


Signed:  /s/ Nick DeMare
         ------------------------------------
         Nick DeMare, Chief Financial Officer


                                      -60-

<PAGE>
















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




                              HILTON PETROLEUM LTD.


                        CONSOLIDATED FINANCIAL STATEMENTS
                               FOR THE YEARS ENDED
                           MAY 31, 2002, 2001 AND 2000

          (Expressed in United States Dollars, unless otherwise stated)


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











                                       F-1

                                      -61-

<PAGE>



AUDITOR'S REPORT




To the Shareholders of
Hilton Petroleum Ltd.


We have audited the  consolidated  balance sheets of Hilton Petroleum Ltd. as at
May 31, 2002 and 2001 and the consolidated statements of operations, deficit and
cash  flow for the years  ended May 31,  2002,  2001 and 2000.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted our audits in accordance with Canadian and United States  generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable  assurance whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the overall  financial  statements
presentation.

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

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


                                                  /s/ D&H Group

Vancouver, BC
September 4, 2002                             CHARTERED ACCOUNTANTS







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



                                       F-2

                                      -62-

<PAGE>



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




In the United States,  reporting  standards for auditors require the addition of
an explanatory  paragraph  (following the opinion  paragraph) when the financial
statements are affected by conditions and events that cast substantial  doubt on
the Company's ability to continue as a going concern, such as those described in
Note 1 to the  financial  statements.  Our  report  to  the  shareholders  dated
September 4, 2002 is expressed in accordance with Canadian  reporting  standards
which do not permit a reference to such events and  conditions  in the auditors'
report when these are adequately disclosed in the financial statements.


                                                   /s/ D&H Group

Vancouver, BC
September 4, 2002                             CHARTERED ACCOUNTANTS








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

                                       F-3

                                      -63-

<PAGE>



                              HILTON PETROLEUM LTD.
                           CONSOLIDATED BALANCE SHEETS
                                  AS AT MAY 31
              (Expressed in U.S. Dollars, unless otherwise stated)

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

Cash                                                                                       1,484,021           1,960,493
Amounts receivable (Note 3)                                                                   40,717           2,520,303
Prepaid expenses and deposits                                                                119,175             212,444
Inventories                                                                                        -             631,789
                                                                                        ------------        ------------
                                                                                           1,643,913           5,325,029
PETROLEUM AND NATURAL GAS INTERESTS (Note 4)                                               5,078,959          29,721,112

CAPITAL ASSETS                                                                                12,225              16,734

INVESTMENTS AND ADVANCES (Note 5)                                                            641,691             807,401

OTHER ASSETS (Note 6)                                                                        212,524             184,886
                                                                                        ------------        ------------
                                                                                           7,589,312          36,055,162
                                                                                        ============        ============
                                                 L I A B I L I T I E S

CURRENT LIABILITIES

Accounts payable and accrued liabilities                                                     950,940           3,538,045

LONG-TERM DEBT (Note 7)                                                                    3,737,010           3,482,498
                                                                                        ------------        ------------
                                                                                           4,687,950           7,020,543
                                                                                        ------------        ------------
                                         S H A R E H O L D E R S ' E Q U I T Y

SHARE CAPITAL (Note 8)                                                                    43,003,256          41,151,991

EQUITY COMPONENT OF LONG-TERM DEBT (Note 7)                                                  694,310             694,310

DEFICIT                                                                                  (40,796,204)        (12,811,682)
                                                                                        ------------        ------------
                                                                                           2,901,362          29,034,619
                                                                                        ------------        ------------
                                                                                           7,589,312          36,055,162
                                                                                        ============        ============
</TABLE>
NATURE OF OPERATIONS AND GOING CONCERN (Note 1)

COMMITMENTS (Note 4)


APPROVED BY THE BOARD

/s/ Donald W. Busby   , Director
----------------------

/s/ Nick DeMare       , Director
----------------------


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

                                       F-4

                                      -64-

<PAGE>



                              HILTON PETROLEUM LTD.
                CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
                           FOR THE YEARS ENDED MAY 31
              (Expressed in U.S. Dollars, unless otherwise stated)
<TABLE>
<CAPTION>



                                                                           2002               2001              2000
                                                                            $                  $                 $
<S>                                                                  <C>                 <C>             <C>

REVENUES

Petroleum and natural gas sales                                             230,624          5,228,674         4,573,883
                                                                       ------------       ------------      ------------

OTHER EXPENSES

Production                                                                  168,061          1,902,642         2,311,617
General and administrative                                                  816,455          1,292,431         1,149,045
Depreciation, depletion and impairment (Note 4)                          26,110,753          1,455,087         1,540,672
Research, development and marketing (Note 1)                                505,827                  -                 -
Legal and litigation costs                                                        -                  -           238,749
                                                                       ------------       ------------      ------------
                                                                         27,601,096          4,650,160         5,240,083
                                                                       ------------       ------------      ------------
OPERATING INCOME (LOSS)                                                 (27,370,472)           578,514          (666,200)
                                                                       ------------       ------------      ------------

OTHER INCOME (EXPENSES)

Interest and other income (Note 4)                                          853,678            101,354           278,803
Interest expense on long-term debt and other liabilities                   (694,244)        (1,480,291)       (2,024,771)
Gain on sale of petroleum and natural gas interests                               -            212,473                 -
Gain on sale of marketable securities                                             -             25,345           172,516
Loss on sale of investment                                                  (73,484)                 -                 -
Write-down of investments                                                  (700,000)          (956,253)                -
                                                                       ------------       ------------      ------------
                                                                           (614,050)        (2,097,372)       (1,573,452)
                                                                       ------------       ------------      ------------
NET LOSS FOR THE YEAR                                                   (27,984,522)        (1,518,858)       (2,239,652)

DEFICIT - BEGINNING OF YEAR                                             (12,811,682)       (11,292,824)       (9,053,172)
                                                                       ------------       ------------      ------------
DEFICIT - END OF YEAR                                                   (40,796,204)       (12,811,682)      (11,292,824)
                                                                       ============       ============      ============


BASIC AND DILUTED LOSS PER SHARE                                         $ (0.77)           $ (0.05)           $(0.09)
                                                                       ============       ============      ============

WEIGHTED AVERAGE NUMBER OF
     COMMON SHARES OUTSTANDING                                           36,410,151         31,702,355        23,983,605
                                                                       ============       ============      ============
</TABLE>




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

                                       F-5

                                      -65-

<PAGE>



                              HILTON PETROLEUM LTD.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           FOR THE YEARS ENDED MAY 31
              (Expressed in U.S. Dollars, unless otherwise stated)
<TABLE>
<CAPTION>

                                                                           2002               2001               2000
                                                                             $                  $                 $

CASH PROVIDED FROM (USED FOR)

OPERATING ACTIVITIES
<S>                                                                 <C>                <C>                <C>

Net loss for the year                                                  (27,984,522)        (1,518,858)        (2,239,652)
Items not involving cash
     Depreciation, depletion and impairment                             26,110,753          1,455,087          1,540,672
     Amortization of deferred financing charges                             71,068             76,336            126,389
     Accretion of liability component of long-term debt                    231,436             77,145                  -
     Gain on sale of petroleum and natural gas interests                         -           (212,473)                 -
     Gain on sale of marketable securities                                       -            (25,345)          (172,516)
     Loss on sale of investment                                             73,484                  -                  -
     Write-down of investments                                             700,000            956,253                  -
     Unrealized foreign exchange loss (gain)                                24,370            (59,203)                 -
                                                                      ------------       ------------       ------------
                                                                          (773,411)           748,942           (745,107)

Decrease (increase) in amounts receivable                                2,354,586         (1,529,900)         1,231,101
Decrease (increase) in prepaid expenses and deposits                        93,269            106,466           (168,315)
Decrease (increase) in inventories                                         631,789           (631,789)                 -
Increase (decrease) in accounts payable and accrued liabilities         (1,873,431)           718,316            374,903
                                                                      ------------       ------------       ------------
                                                                           432,802           (587,965)           692,582
                                                                      ------------       ------------       ------------
FINANCING ACTIVITIES

Issuance of common shares, net of issue costs                            1,851,265          6,361,338          9,337,563
Issuance of long-term debt                                                       -          3,160,871                  -
Retirement of long-term debt                                                     -        (14,903,857)          (962,737)
Decrease (increase) in other assets                                         25,000           (214,498)          (141,045)
Increase in other liabilities                                                    -                  -          1,966,740
                                                                      ------------       ------------       ------------
                                                                         1,876,265         (5,596,146)        10,200,521
                                                                      ------------       ------------       ------------
INVESTING ACTIVITIES

Proceeds from sale of investment                                            98,116                  -                  -
Investments and advances                                                  (705,890)           (58,765)        (1,004,889)
Capital asset additions                                                          -            (24,498)            (2,547)
Petroleum and natural gas interests expenditures                        (2,177,765)        (8,332,486)       (11,656,140)
Proceeds from sale of petroleum and natural gas interests                        -         12,695,208            655,763
Purchases of marketable securities                                               -           (175,568)        (1,281,633)
Proceeds from sale of marketable securities                                      -          1,644,291            682,572
                                                                      ------------       ------------       ------------
                                                                        (2,785,539)         5,748,182        (12,606,874)
                                                                      ------------       ------------       ------------
DECREASE IN CASH FOR THE YEAR                                             (476,472)          (435,929)        (1,713,771)

CASH - BEGINNING OF YEAR                                                 1,960,493          2,396,422          4,110,193
                                                                      ------------       ------------       ------------
CASH - END OF YEAR                                                       1,484,021          1,960,493          2,396,422
                                                                      ============       ============       ============
</TABLE>

Supplemental  disclosure  with respect to the  consolidated  statements  of cash
flows  (Note  14).

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

                                       F-6
                                      -66-


<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


1.   NATURE OF OPERATIONS AND GOING CONCERN

     Hilton  Petroleum  Ltd. (the  "Company") is an  independent  energy company
     primarily engaged in the acquisition,  exploration and development of crude
     oil and natural gas properties in the United States.

     During  the year  ended May 31,  2002,  the  Company  also  engaged  in the
     research,  development and marketing of proprietary  software  programs.  A
     total of  $505,827  was  expended  during  fiscal  2002  relating  to these
     activities.  The Company has  determined  that,  as at May 31, 2002,  these
     activities  did not satisfy all of the  criteria  required  under  Canadian
     generally accepted  accounting  principles for deferment and,  accordingly,
     has charged the costs to operations.

     During  the  year  ended  May 31,  2002,  the  Company  incurred  a loss of
     $27,984,522  and, as of May 31,  2002,  had a deficit of  $40,796,204.  The
     Company  is  currently  not  generating   sufficient  cash  flow  from  its
     operations to meet ongoing corporate overhead and discharge its liabilities
     as they come due. The future viability of the Company is dependent upon its
     ability to generate additional  financing to satisfy future working capital
     requirements  and debt repayment  obligations  and, in the longer term, the
     generation of profit and positive cash flow from business operations.

     These  consolidated  financial  statements  have been  prepared  on a going
     concern basis which assumes that the Company will be able to realize assets
     and  discharge  liabilities  in the  normal  course  of  business  for  the
     foreseeable  future.  Accordingly,  the  financial  statements  do not give
     effect to adjustments,  if any, that would be necessary  should the Company
     be unable to continue as a going  concern  and,  therefore,  be required to
     realize its assets and liquidate its  liabilities  in other than the normal
     course of business and at amounts  which may differ from those shown in the
     financial statements.


2.   ACCOUNTING POLICIES

     BASIS OF PRESENTATION

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

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

     The consolidated  financial  statements include the accounts of the Company
     and its subsidiaries. Intercompany balances and transactions are eliminated
     on consolidation.


                                       F-7

                                      -67-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


2.   ACCOUNTING POLICIES (continued)

     PETROLEUM AND NATURAL GAS INTERESTS

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

     Depletion  of  exploration  and  development   costs  and  depreciation  of
     production equipment is provided using the unit-of-production  method based
     upon  estimated  proven  petroleum and natural gas  reserves.  The costs of
     significant  unevaluated  properties  are  excluded  from costs  subject to
     depletion.  For depletion and  depreciation  purposes,  relative volumes of
     petroleum  and natural gas  production  and  reserves  are  converted  into
     equivalent  units based upon relative energy  content.  Depreciation of the
     gathering  facility is charged to earnings over an estimated useful life of
     10 years on a straight-line basis.

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

     Substantially  all of the Company's  petroleum and natural gas exploration,
     development  and production  activities  are conducted  jointly with others
     and, accordingly, the accounts reflect the Company's proportionate interest
     in such activities.

     REVENUE RECOGNITION

     The  Company  recognizes  petroleum  and  natural  gas  revenues  from  its
     interests in producing  wells as petroleum  and natural gas is produced and
     sold from these wells.  The Company has no gas  balancing  arrangements  in
     place.  Petroleum and natural gas sold is not significantly  different from
     the Company's product entitlement.

     CASH EQUIVALENTS

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

     INVENTORY

     Inventories consist of material inventory.  The material inventory balances
     include  equipment  held for future use and is  accounted  for based on the
     lower of moving average cost method or market.


                                       F-8

                                      -68-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


2.   ACCOUNTING POLICIES (continued)

     CAPITAL ASSETS

     Capital  assets are  depreciated  based on estimated  useful life using the
     declining balance method at annual rates of between 20% and 30%.

     INVESTMENT

     Portfolio investments are accounted for using the cost method.

     DEFERRED FINANCING CHARGES

     The costs of  obtaining  long-term  debt are  deferred  and  amortized on a
     straight-line  basis over the terms of these  loans.  The  amortization  of
     these charges is included in interest expense on long-term debt.

     TRANSLATION OF FOREIGN CURRENCIES

     Monetary  items are  translated  at the rate of  exchange  in effect at the
     balance sheet date.  Non-monetary  items are translated at average rates in
     effect  during the period in which they were earned or incurred.  Gains and
     losses  resulting from the fluctuation of foreign  exchange rates have been
     included in the determination of income.

     INCOME TAXES

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

     EARNINGS (LOSS) PER SHARE

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



                                       F-9

                                      -69-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


2.   ACCOUNTING POLICIES (continued)

     SHARE OPTION PLAN

     The Company grants share options in accordance with the policies of the TSX
     Venture  Exchange  (the "TSX  Venture"),  as  described  in Note  8(a).  No
     compensation  expense  is  recognized  for this plan  when  shares or share
     options are issued pursuant to the plan.  Consideration  paid for shares on
     exercise of the share options is credited to share capital.


3.   AMOUNTS RECEIVABLE

                                                       2002               2001
                                                        $                  $

     Trade accounts receivable                             -          1,022,862
     Insurance proceeds                                    -          1,156,730
     Due from Trimark Energy Ltd. ("Trimark")         17,530            115,452
     Loan to officer (Note 6)                              -            125,000
     Other                                            23,187            100,259
                                                ------------       ------------
                                                      40,717          2,520,303
                                                ============       ============


4.   PETROLEUM AND NATURAL GAS INTERESTS

                                                       2002               2001
                                                        $                  $
     Evaluated Properties
        Acquisitions and leasehold costs           5,830,622          2,540,077
        Exploration and development costs         18,375,485         15,539,937
        Gathering facility                           805,410            775,961
                                                ------------       ------------
                                                  25,011,517         18,855,975
                                                ------------       ------------
     Unevaluated Properties
        Acquisitions and leasehold costs             445,548          3,933,876
        Exploration costs                          7,077,093          8,280,216
                                                ------------       ------------
                                                   7,522,641         12,214,092
                                                ------------       ------------
                                                  32,534,158         31,070,067
     Less: accumulated depreciation,
           depletion and impairment              (27,455,199)        (1,348,955)
                                                ------------       ------------
                                                   5,078,959         29,721,112
                                                ============       ============

     Property  acquisition  costs include costs incurred to purchase,  lease, or
     otherwise  acquire  a  property.  Exploration  costs  include  the costs of
     geological and geophysical  activity,  dry holes and drilling and equipping
     exploratory wells.  Development costs include costs incurred to gain access
     to prepare  development  well locations for drilling and to drill and equip
     development wells.



                                      F-10

                                      -70-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


4.   PETROLEUM AND NATURAL GAS INTERESTS (continued)

     During May 2002,  the Company,  the operator of the East Lost Hills Project
     and certain  other  participants  in the ELH joint  venture,  concluded  an
     agreement on the ongoing evaluation of the ELH #4 and #9 wells, whereby the
     funding  parties have assumed all of the unpaid amounts and future costs in
     completing the evaluation of these wells. In return,  they will be entitled
     to recover their costs plus 300% of their costs, from the future production
     from these wells.  Unpaid  billings for the ELH #4 and #9 wells at the time
     of the agreement totalled $4,868,716,  of which $713,674 was billed and had
     been recorded by the Company as "accounts payable and accrued  liabilities"
     at May 31, 2001.  During the year ended May 31, 2002, the Company  reversed
     $713,674 of "accounts  payable and accrued  liabilities" with an offsetting
     credit to "petroleum and natural gas interests".

     As a result of the ceiling  test  performed  effective  May 31,  2002,  the
     Company has recorded an  impairment of  $25,907,079  for the year ended May
     31, 2002.  No  write-down  was required  during the year ended May 31, 2001
     from the ceiling test performed effective May 31, 2001. The ceiling test is
     a  cost-recovery  test and is not intended to result in an estimate of fair
     market value.

     On March 8, 2001, the Company  completed the sale of  substantially  all of
     its  non-California  petroleum and natural gas interests to Exco  Resources
     Inc.  ("Exco") for net proceeds of  $13,507,158,  of which  $12,695,208 was
     received  as of May 31, 2001 and  recorded in income  during the year ended
     May 31, 2001. The remaining  $811,950 was subject to a contractual  dispute
     between  the  Company  and Exco.  The  disputed  amount  was held in escrow
     pending  arbitration.  During the year ended May 31, 2002,  an  arbitration
     decision was made in favour of the Company and $789,470,  representing  the
     original disputed amount plus interest income and less associated legal and
     other costs,  was released to the Company.  The amount has been recorded as
     part of "interest and other income".

     See also Note 15.


5.   INVESTMENTS AND ADVANCES

                                                       2002               2001
                                                        $                  $

     Investment in Trimark (a)                        60,801            807,401
     Loan to Trimark (b)                             211,896                  -
     Receivable from California
        Exploration Ltd. ("Calex") (c)               179,958                  -
     Other                                           189,036                  -
                                                ------------       ------------
                                                     641,691            807,401
                                                ============       ============



                                      F-11

                                      -71-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


5.   INVESTMENTS AND ADVANCES (continued)

     (a)  During the year ended May 31, 2002,  the Company sold 62,857 shares of
          Trimark for net  proceeds of $98,116,  recognizing  a loss of $73,484.
          The Company  subsequently  wrote down its remaining  234,286 shares of
          Trimark (the "Trimark Shares") by $575,000, to a net carrying value of
          $60,801.  At May 31, 2002,  the quoted value of the Trimark Shares was
          $37,486.

          Certain  officers  and  directors  of Trimark are also  directors  and
          officers of the Company.

     (b)  During the year ended May 31, 2002,  the Company  received  regulatory
          approval  to  participate  in  a  private   placement  of  convertible
          debentures of Trimark. A total of $196,399  (CDN$300,000) was advanced
          pursuant to the proposed debenture financing. Due to market conditions
          the debenture  financing was not completed and the amounts advanced to
          Trimark have been recorded as a loan bearing interest at 10% per annum
          with no fixed term of  repayment.  The Company has  recorded  interest
          income of $15,497, which remained unpaid at May 31, 2002.

     (c)  During the year ended May 31, 2002, the Company acted as operator of a
          drilling program to test certain  prospects in California on behalf of
          Calex, a public company in which certain officers and directors of the
          Company  are  shareholders.  As at May 31,  2002,  $179,958  of  joint
          interest billings remained unpaid.


6.   OTHER ASSETS

                                                       2002               2001
                                                        $                  $

     Deferred financing charges                      112,524            184,886
     Loan to officer                                 100,000            125,000
                                                ------------       ------------
                                                     212,524            309,886
     Less current portion                                  -           (125,000)
                                                ------------       ------------
                                                     212,524            184,886
                                                ============       ============

     The loan to officer  originally  bore interest at 5% per annum,  compounded
     monthly, and was to mature on March 27, 2002. During the year ended May 31,
     2002,  the  Company  agreed to extend the term of the loan to  January  24,
     2004. In addition,  the loan now bears  interest at 10% per annum,  payable
     quarterly.  During the year ended May 31, 2002,  interest  income of $3,793
     (2001 - $6,215) was received and $25,000 of principal was repaid.



                                      F-12

                                      -72-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


7.   LONG-TERM DEBT

                                                      2002               2001
                                                        $                  $

     10% Debentures                                2,759,269          2,516,269
     9% Hilton Debentures
        (2002 and 2001 - CDN$1,493,500)              977,741            966,229
                                                ------------       ------------
                                                   3,737,010          3,482,498
                                                ============       ============

     As at May 31, 2002, the 10% debentures (the "10% Debentures") are comprised
     of $2,163,000 Series A and CDN $1,500,000 Series B. The 10% Debentures bear
     interest  at 10% per annum,  payable  quarterly,  and mature on January 24,
     2004.  The 10% Debentures  are  convertible,  at the option of the holders,
     into common shares of the Company,  at a price of CDN$1.35 per share during
     the first and second  years and  CDN$1.56  per share during the third year.
     The Company paid  commissions  and fees  totalling  $214,498 in connections
     with the financing.  The Company also issued a total of 268,750 warrants to
     agents and finders. Each warrant entitles the holder to purchase one common
     share of the  Company  at a price of CDN  $1.35  per  share for a period of
     three years, expiring January 24, 2004.

     In  accordance   with  Canadian  GAAP  relating  to  the   presentation  of
     convertible debt instruments,  the 10% Debentures were segregated, on their
     date  of  issuance,   between  long-term  debt  and  equity  components  of
     $2,439,124  and $694,310,  respectively.  The debt  component  reflects the
     present value of the principal  after  factoring out the conversion  option
     value.  The  debt  component  is  being  accreted  over the life of the 10%
     Debentures to the principal amount payable by periodic charges to earnings.

     The debt  component,  representing  the value allocated to the liability at
     inception,  is recorded as a long-term liability.  The remaining component,
     representing  the value  ascribed  to the  holders'  option to convert  the
     principal balance into common shares, is classified in shareholders' equity
     as  "equity  component  of  long-term  debt".  Over  the  term  of the  10%
     Debentures,  the debt  component  will be accreted to the face value of the
     10% Debentures by the recording of additional interest expense.

     As at May 31, 2002, the 9% debentures (the "9%  Debentures")  bear interest
     at 9% per annum,  payable  quarterly,  and mature on April 30, 2003. The 9%
     Debentures were  convertible,  at any time before maturity,  into shares of
     the Company at a conversion  price of CDN$2.85 per share on or before April
     30, 2003.

     At May 31, 2002,  $1,013,000 of the 10%  Debentures  and $851,064 of the 9%
     Debentures  were held by companies  owned by directors of the Company and a
     trust, the grantor of which is an officer of the Company.


                                      F-13

                                      -73-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


7.   LONG-TERM DEBT (continued)

     During the year ended May 31, 2002, the Company proposed to amend the terms
     of its debentures,  such that, for a limited period,  the debenture holders
     would be able to convert their debentures into common shares of the Company
     at a price of CDN$0.50 per share (the "Conversion Price"). In addition,  in
     order to encourage the debenture holders to convert the debentures when the
     common shares of the Company was trading at a price significantly below the
     Conversion  Price,  the Company agreed to pay, as a bonus,  interest on the
     converted  debentures from the last interest  payment date through December
     31, 2002.  Subsequent to May 31, 2002,  holders of $1,293,000  Series A and
     CDN$900,000  Series B of the 10%  Debentures  and all of the 9%  Debentures
     elected to convert their debentures and the Company issued 8,761,504 common
     shares and paid $161,710 interest.


8.   SHARE CAPITAL

     Authorized:  Unlimited common shares without par value
     Issued:
<TABLE>
<CAPTION>

                                                   2002                          2001                         2000
                                       ----------------------------  ----------------------------  ---------------------------
                                           SHARES          AMOUNT        SHARES          AMOUNT        SHARES          AMOUNT
                                                             $                              $                            $
   <S>                               <C>             <C>            <C>            <C>            <C>            <C>

     Balance, beginning of year          34,902,159      41,151,991    27,503,961      32,687,210    20,330,188     20,290,865
                                       ------------    ------------  ------------   -------------  ------------   ------------

     Issued during the year
     For cash
         Private placements               1,673,000       1,858,403     2,322,500       1,968,525     4,220,000      9,068,909
         Rights offering                          -               -     2,000,000       3,035,413             -              -
         Exercise of warrants                     -               -     1,346,380       1,698,270       502,615        682,191
         Exercise of options                      -               -             -               -        78,945         71,104
     For retirement of
          other liabilities                       -               -     1,558,730       1,966,740             -              -
     For interest on long-term debt               -               -       170,588         153,206             -              -
     For exercise of
          special warrants                        -               -             -               -     1,798,200      2,459,670
     For conversion of debentures                 -               -             -               -       574,013        657,920
     Less:  Share issue costs                     -          (7,138)            -        (357,373)            -       (543,449)
                                       ------------    ------------  ------------   -------------  ------------   ------------
                                          1,673,000       1,851,265     7,398,198       8,464,781     7,173,773     12,396,345
                                       ------------    ------------  ------------   -------------  ------------   ------------
     Balance, end of year                36,575,159      43,003,256    34,902,159      41,151,991    27,503,961     32,687,210
                                       ============    ============  ============   =============  ============   ============
</TABLE>

     (a)  The Company  grants share options in  accordance  with the policies of
          the TSX Venture.  Under the general guidelines of the TSX Venture, the
          Company may reserve up to 10% of its issued and outstanding  shares to
          its  employees,  directors or  consultants  to purchase  shares of the
          Company.

          Share   options  to  directors   and  employees  of  the  Company  and
          consultants to acquire  1,868,250  shares were granted and outstanding
          as at May 31, 2002.  These  options are  exercisable  on varying dates
          expiring from  calendar  2002 to calendar 2004 at prices  ranging from
          CDN$0.45 to CDN $2.70 per share.

                                      F-14

                                      -74-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


8.   SHARE CAPITAL (continued)

          Details of options outstanding are as follows:
<TABLE>
<CAPTION>
                                                      2002                            2001
                                          ----------------------------    ----------------------------
                                                            WEIGHTED                        WEIGHTED
                                                            AVERAGE                         AVERAGE
                                              NUMBER        EXERCISE           NUMBER       EXERCISE
                                            OF OPTIONS       PRICE           OF OPTIONS      PRICE
                                                               $                               $
        <S>                                <C>              <C>            <C>             <C>

          Balance, beginning of year          2,363,752       2.19            1,760,416       2.11
          Granted                             1,000,000       0.45            1,022,000       2.34
          Cancelled/expired                  (1,495,502)      2.04             (418,664)      2.39
                                           ------------                   -------------
          Balance, end of year                1,868,250       1.36            2,363,752       2.19
                                           ============                   =============
</TABLE>

     (b)  As at May 31,  2002,  the  Company  had  outstanding  warrants  issued
          pursuant to private placements,  rights offering, special warrants and
          debentures,  which may be exercised to purchase  7,055,594 shares. The
          warrants  expire at various  times until 2004 and may be  exercised at
          prices ranging from CDN$1.35 per share to CDN$2.75 per share.

          Details of warrants outstanding are as follows:
<TABLE>
<CAPTION>
                                                                                     2002             2001
                                                                                    NUMBER           NUMBER
                                                                                 OF WARRANTS      OF WARRANTS
        <S>                                                                    <C>              <C>

          Balance, beginning of year                                               8,371,917        6,379,215
          Issued pursuant to private placements                                    1,161,700        2,291,250
          Issued pursuant to rights offering                                               -        1,100,000
          Issued pursuant to financing advisory services                                   -           35,000
          Issued pursuant to convertible debenture finder's and agent's fees               -          268,750
          Exercised                                                                        -       (1,346,381)
          Expired                                                                 (2,478,023)        (355,917)
                                                                                ------------     ------------
          Balance, end of year                                                     7,055,594        8,371,917
                                                                                ============     ============
</TABLE>
     (c)  See also Note 7.



                                      F-15

                                      -75-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


9.   RELATED PARTY TRANSACTIONS

     (a)  During the year ended May 31,  2002  companies  controlled  by certain
          directors  and  officers  of the  Company  charged  $185,572  (2001  -
          $197,241;  2000 - $281,053) for accounting,  management,  professional
          and consulting fees.

     (b)  Other related  party  transactions  are  disclosed  elsewhere in these
          consolidated financial statements.


10.  INCOME TAXES

     Future income tax assets and  liabilities of the Company as at May 31, 2002
     and 2001 are as follows:
<TABLE>
<CAPTION>

                                                                                     2002               2001
                                                                                       $                  $
   <S>                                                                          <C>             <C>

     Future income tax assets
          Losses carried forward                                                  10,170,000        12,232,000
          Petroleum and natural gas interests                                      3,530,000                 -
          Other                                                                      290,000           210,000
     Future income tax liabilities
          Petroleum and natural gas interests                                              -        (6,700,000)
                                                                                ------------      ------------
                                                                                  13,990,000         5,742,000
     Valuation allowance                                                         (13,990,000)       (5,742,000)
                                                                                ------------      ------------
     Net future income tax asset                                                           -                 -
                                                                                ============      ============

     Income tax rate reconciliation
     Combined federal and provincial income tax rate                                   39.6%               44%
                                                                                ============      ============
     Expected income tax recovery                                                 11,100,000           668,000
     Foreign income tax rate differences                                          (1,300,000)         (137,000)
     Non-deductible depreciation and depletion                                    (9,100,000)         (452,000)
     Deductible loss on sale of petroleum and natural gas interests                        -         1,786,000
     Deductible petroleum and natural gas interest expenditures                      360,000           885,000
     Other                                                                          (556,000)          164,000
     Unrecognized benefit of income tax losses                                      (504,000)       (2,914,000)
                                                                                ------------      ------------
     Actual income tax recovery                                                            -                 -
                                                                                ============      ============
</TABLE>

     As at May 31,  2002,  the Company has  accumulated  non-capital  losses for
     Canadian income tax purposes of  approximately  CDN$3.2  million,  expiring
     from  2003  to  2009,   and  for  United  States  income  tax  purposes  of
     approximately  $27.8  million,  expiring  from  2009  to  2022,  which  are
     available  for  application  against  future  taxable  income,  the related
     benefits of which have not been recognized in these financial statements.


                                      F-16

                                      -76-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


11.  SEGMENTED INFORMATION

     As at May 31,  2002,  the  Company  and its  subsidiaries  operated  in two
     industry segments,  the exploration for, and the development and production
     of petroleum and natural gas and the research, development and marketing of
     proprietary  software  programs.  The  Company's  petroleum and natural gas
     interests  are located in the United  States and its  software  development
     activities and corporate assets are located in Canada. Identifiable assets,
     revenues and net loss in each of these industry segments are as follows:
<TABLE>
<CAPTION>


                                                                                2002
                                                      --------------------------------------------------------
                                                        IDENTIFIABLE                                 NET
                                                           ASSETS             REVENUES              LOSS
                                                             $                    $                   $
    <S>                                             <C>                <C>                   <C>

     Petroleum and natural gas                               5,253,847            1,040,536        (25,657,293)
     Software                                                        -                    -           (505,827)
     Corporate                                               2,335,465               31,287         (1,821,402)
                                                      ----------------    -----------------    ---------------
                                                             7,589,312            1,071,823        (27,984,522)
                                                      ================    =================    ===============



                                                                               2001
                                                     --------------------------------------------------------
                                                       IDENTIFIABLE                                 NET
                                                          ASSETS             REVENUES          INCOME (LOSS)
                                                            $                    $                   $

     Petroleum and natural gas                             35,045,041            5,289,381            301,014
     Corporate                                              1,010,121               40,647         (1,819,872)
                                                     ----------------    -----------------    ---------------
                                                           36,055,162            5,330,028         (1,518,858)
                                                     ================    =================    ===============



                                                                               2000
                                                     --------------------------------------------------------
                                                       IDENTIFIABLE                                 NET
                                                          ASSETS             REVENUES              LOSS
                                                            $                    $                   $

     Petroleum and natural gas                             38,762,395            4,829,209         (1,505,783)
     Corporate                                              3,320,312               23,477           (733,869)
                                                     ----------------    -----------------    ---------------
                                                           42,082,707            4,852,686         (2,239,652)
                                                     ================    =================    ===============

</TABLE>


                                      F-17

                                      -77-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


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

     (a)  The  consolidated  financial  statements  of  the  Company  have  been
          prepared  according to Canadian GAAP which differ in certain  material
          respects from US GAAP.  Material  differences  between Canadian and US
          GAAP  and  their  effect  on  the  Company's   consolidated  financial
          statements are summarized in the tables below.
<TABLE>
<CAPTION>

                                                                              2002            2001           2000
                                                                                $               $              $
        <S>                                                          <C>                <C>             <C>
         Consolidated Statements of Operations
           and Comprehensive Income
         Loss for the year
           Canadian GAAP                                                 (27,984,522)     (1,518,858)     (2,239,652)
           Write-down of investment (i)                                      575,000         956,253               -
           Impairment expense (ii), (iii)                                 (1,846,667)              -               -
           Stock option plan (iv)                                                  -        (213,116)        (48,608)
           Other compensation expense (vii)                                 (181,769)       (151,495)       (460,394)
           Accretion of liability component of
             long-term debt (viii)                                           231,436          77,145               -
           Beneficial conversion feature on
             convertible debt securities (ix)                                      -        (377,814)              -
                                                                       -------------   -------------   -------------
           US GAAP                                                       (29,206,522)     (1,227,885)     (2,748,654)
                                                                       -------------   -------------   -------------

         Other Comprehensive Income
           Unrealized holding gain (loss) on
             available-for-sale marketable securities (i)                   (600,361)     (1,216,041)      1,335,077
           Reclassification adjustment for gain (loss) on available
             for sale marketable securities included in net loss(i)            2,046         (25,345)              -
                                                                       -------------   -------------   -------------
                                                                            (598,315)     (1,241,386)      1,335,077
                                                                       -------------   -------------   -------------
         Comprehensive (loss) for the year                               (29,804,837)     (2,469,271)     (1,413,577)
                                                                       =============   =============   =============
           Loss per share basic and
             fully diluted - US GAAP                                     $  (0.80)       $  (0.04)       $  (0.11)
                                                                       =============   =============   =============
</TABLE>




                                      F-18

                                      -78-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)



12.  DIFFERENCES   BETWEEN  CANADIAN  AND  UNITED  STATES   GENERALLY   ACCEPTED
     ACCOUNTING PRINCIPLES (continued)
<TABLE>
<CAPTION>

                                                                                            2002            2001
                                                                                              $               $
         Consolidated Balance Sheets
        <S>                                                                          <C>              <C>
         Total Assets
             Canadian GAAP                                                                7,589,312      36,055,162
             Available for sale securities (i)                                              (23,315)              -
             Capital contributions with respect to related party transactions (ii)                -       1,846,667
                                                                                      -------------    ------------
             US GAAP                                                                      7,565,997      37,901,829
                                                                                      =============    ============
         Total Liabilities
             Canadian GAAP                                                                4,687,950       7,020,543
             Equity component of long-term debt (viii)                                      694,310         694,310
             Accretion of liability component of long-term debt(viii)                      (308,581)        (77,145)
                                                                                      -------------    ------------
             US GAAP                                                                      5,073,679       7,637,708
                                                                                      =============    ============
         Shareholders' Equity
             Canadian GAAP                                                                2,901,362      29,034,619
             Available for sale securities (i)                                              (23,315)              -
             Cumulative capital contributions with
                 respect to related party transactions (ii)                                       -       1,846,667
             Equity component of long-term debt (viii)                                     (694,310)       (694,310)
             Accretion of long-term component of long-term debt (viii)                      308,581          77,145
                                                                                      -------------    ------------
             US GAAP                                                                      2,492,318      30,264,121
                                                                                      =============    ============
</TABLE>
          (i)  Marketable securities

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



                                      F-19

                                      -79-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


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

          (ii) Capital contributions with respect to related party transactions

               During the year ended May 31,  1999,  the Company sold certain of
               its petroleum  interests to Trimark for a combination of monetary
               and  non-monetary  consideration.  US GAAP  requires that certain
               transfers  of  non-monetary  assets  to a  related  party  by its
               promoters  or  shareholders  should  generally be recorded at the
               transferor's   historical  cost,  whereas  under  Canadian  GAAP,
               transfers  of  non-monetary  assets may be recorded  based on the
               fair  value  of  the   consideration   received   under   certain
               circumstances.  Under  Canadian  GAAP,  these  transactions  were
               recorded  at  their  fair  values.  The  transactions  have  been
               adjusted in 2001 to reflect the sale of the  petroleum  interests
               based on the Company's  historical cost basis. This adjustment is
               no longer necessary in 2002 as the difference was included in the
               impairment  provision as a result of the ceiling  test  performed
               effective May 31, 2002.

          (iii) Ceiling test on petroleum interests

               US GAAP  requires  that the net book  value of  proved  petroleum
               interests  not exceed the sum of the present  value of  estimated
               future net revenues (determined using current prices of petroleum
               production less estimated  future  expenditures to be incurred in
               developing and producing the proved  reserves,  discounted at ten
               percent).  This ceiling test was performed effective May 31, 2002
               and an impairment of $27,753,746 was required to be recorded.

          (iv) Stock options granted to consultants and non-employees

               The Company  grants stock options which reserve common shares for
               issuance to consultants and other  non-employees.  Under Canadian
               GAAP,  such  stock  options  are not  recognized  for  accounting
               purposes. Under US GAAP the Company has adopted the provisions of
               Statements  of  Financial   Accounting   Standards  ("SFAS")  123
               "Accounting  for Stock  Based  Compensation"  for  stock  options
               granted to consultants and non-employees.

               Accordingly,  the Company has recognized stock based compensation
               for these stock option grants using the fair value method.

               The fair value of each option  granted to a  consultant  or other
               non-employee  is  estimated  on  the  date  of  grant  using  the
               Black-Scholes Option Pricing Model with the following assumptions
               used for grants  during the years  ended May 31,  2002,  2001 and
               2000:
<TABLE>
<CAPTION>
                                                                   2002              2001              2000
                                                                 -------           -------       -----------
             <S>                                                <C>              <C>           <C>
               Risk-free interest rate                             3.69%             4.50%             6.75%
               Expected volatility                                  125%              107%               92%
               Expected lives                                    3 years           3 years       2 - 3 years
</TABLE>

                                      F-20

                                      -80-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)



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

          (v)  Stock option plan for employees and directors

               The Company has a stock option plan which reserves  common shares
               for issuance to employees and directors.  The Company has adopted
               the disclosure  only provisions of SFAS No. 123 for stock options
               granted to employees and directors.  Accordingly, no compensation
               cost  has  been   recognized  for  the  stock  option  plan.  Had
               compensation  costs  for the  Company's  stock  option  plan been
               determined  based on the fair  value at the grant date for awards
               during the years  ended May 31,  2002,  2001 and 2000  consistent
               with the  provisions  of SFAS No.  123,  the  Company's  earnings
               (loss) and earnings (loss) per share would have been increased to
               the proforma amounts indicated below:
<TABLE>
<CAPTION>
                                                                        2002             2001            2000
                                                                          $                $               $
            <S>                                                   <C>               <C>             <C>
               Loss - as reported under US GAAP                     (29,206,522)      (1,227,885)     (2,748,654)
               Loss - proforma                                      (29,352,135)      (1,918,509)     (2,824,740)

               Loss per share - as reported under US GAAP              (0.80)           (0.04)          (0.11)
               Loss per share - proforma                               (0.81)           (0.06)          (0.12)
</TABLE>
               The fair market  value of each  option  granted to an employee or
               director  is  estimated  on the date of grant  using  the Black -
               Scholes Option Pricing Model with the following  assumptions used
               for grants during the years ended May 31, 2002, 2001 and 2000:
<TABLE>
<CAPTION>

                                                                       2002             2001            2000
            <S>                                                   <C>               <C>          <C>
               Risk-free interest rate                                 3.69%            4.79%            6.75%
               Expected volatility                                      125%             109%              92%
               Expected lives                                        3 years          3 years      2 - 3 years
</TABLE>
          (vi) Private  Placements  of Common  Stock and Special  Warrants  with
               Related Parties

               US GAAP requires  disclosure of private  placements  conducted by
               the  Company  where  directors  and  officers  of the Company are
               participants.  During  the year  ended May 31,  2002,  directors,
               officers and  companies  controlled  by the directors or officers
               acquired 1,593,000 shares (2001 - 2,250,000; 2000 - 2,706,500) of
               the  Company,  pursuant to private  placements  conducted  by the
               Company, for cash proceeds of $1,769,537 (2001 - $1,893,684; 2000
               - $5,494,547);


                                      F-21

                                      -81-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


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

          (vii)Private Placements of Common Stock

               The  Company  conducts  the  majority  of its  equity  financings
               pursuant  to private  placements.  Under the  policies of the TSX
               Venture,  on which the  Company's  common  stock is  listed,  the
               Company  may  provide  a  discount  off the  market  price of the
               Company's  common stock.  US GAAP does not permit a discount from
               the market price.  US GAAP requires the recognition of the market
               value of the Company's common stock as a credit to share capital,
               with a charge  to  operations  for the  portion  of the  discount
               relating  to  equity  financings   conducted  with  officers  and
               directors of the Company and a charge to shareholders' equity, as
               a  capital  distribution,   for  the  discount  relating  to  the
               remaining portion of the equity financings.

               Under US GAAP, loss and capital  distributions for the year ended
               May 31, 2002 would increase by $181,769 (2001 - $148,800;  2000 -
               $460,394) and $9,128 (2001 - nil; 2000 - $231,117), respectively,
               and  share  capital,  as  at  May  31,  2002  would  increase  by
               $1,913,486  (2001 - $1,731,717;  2000 - $1,582,917).  There is no
               net change to shareholders' equity.

         (viii)Accretion of Liability Component of Long-term Debt

               Under  Canadian  GAAP,  compound  financial  instruments  such as
               convertible  debentures  are required to be accounted  for at the
               fair value of their components.  Such accounting is not permitted
               under US GAAP unless the  components are  detachable,  which they
               are not in this case.

          (ix) Beneficial Conversion Feature on Convertible Debt Securities

               Under US GAAP,  additional  interest expense is recognized when a
               convertible  debt  security  is  issued  with  an "in  the  money
               conversion rate". This additional  interest expense is recognized
               in the year of issue when,  as in the  Company's  case,  the debt
               security is convertible  at the time of issue.  No such charge is
               required under Canadian GAAP.

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

     (c)  New Technical Pronouncements

          In June 2001,  the  Financial  Accounting  Standards  Board  ("FASB"),
          issued SFAS 143,  "Accounting for Asset Retirement  Obligations." SFAS
          143 addresses  financial  accounting  and  reporting  for  obligations
          associated with the retirement of tangible  long-lived  assets and the
          associated  asset  retirement  costs.  SFAS  143  generally   requires
          obligations associated with asset



                                      F-22

                                      -82-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


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

          retirements  to be  recognized  earlier and  displayed as  liabilities
          rather than as  contra-assets.  The  pronouncement  is  effective  for
          financial  statements issued for fiscal years beginning after June 15,
          2002.  Management  does not believe that the adoption of SFAS 143 will
          have any impact on its financial position or results of operations.

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

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


13.  FINANCIAL INSTRUMENTS

          The fair value of financial  instruments at May 31, 2002 and 2001, was
          estimated  based on  relevant  market  information  and the nature and
          terms of financial instruments. Management is not aware of any factors
          which would  significantly  affect the estimated fair market  amounts,
          however,  such  amounts  have not been  comprehensively  revalued  for
          purposes of these financial  statements.  Disclosure subsequent to the
          balance sheet dates and estimates of fair value at dates subsequent to
          May 31, 2002 may differ significantly from that presented.

          (a)  Commodity Price Risk Management

               As at May 31, 2002,  the Company has not entered into any forward
               contracts to hedge  against  general  reductions in petroleum and
               natural gas prices.

          (b)  Credit Risk Management

               Amounts receivable include accounts  receivable for petroleum and
               natural gas sales in the United States. These sales are generally
               made to large,  credit-worthy  purchasers.  The Company views the
               credit risks on these items as low.

                                      F-23

                                      -83-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


          (c)  Fair Value of Other Financial Instruments

               Fair value  approximates  the amounts  reflected in the financial
               statements  for  cash,   amounts   receivable,   investments  and
               advances,  accounts payable and accrued liabilities and long-term
               debt.

14.  SUPPLEMENTARY CASH FLOW INFORMATION

     Non-cash  investing and financing  activities were conducted by the Company
     as follows:
<TABLE>
<CAPTION>

                                                                           2002            2001            2000
                                                                             $               $               $
   <S>                                                               <C>            <C>            <C>
     Operating activities
        Decrease in amounts receivable                                     125,000               -         700,000
        Increase in prepaid expenses and deposits                                -        (153,206)              -
        Reversal of accounts payable and accrued liabilities              (713,674)              -               -
                                                                     -------------   -------------   -------------
                                                                          (588,674)       (153,206)        700,000
                                                                     =============   =============   =============
     Financing activities
        Increase in other assets                                          (125,000)              -               -
        Deferred debenture charges                                               -          16,503           7,757
        Common share issue costs                                                 -         (16,503)         (7,757)
        Conversion of debentures                                                 -               -        (657,920)
        Conversion of special warrants                                           -               -      (2,459,670)
        Issuance of common shares                                                -               -       3,117,590
        Petroleum and natural gas interest expenditures                          -               -         (22,932)
        Issuance of common shares for debenture interest                         -         153,206               -
        Issuance of common shares on retirement of other liabilities             -       1,966,740               -
        Retirement of other liabilities                                          -      (1,966,740)              -
                                                                     -------------   -------------   -------------
                                                                          (125,000)        153,206         (22,932)
                                                                     =============   =============   =============
     Investing activities
        Investment in affiliated corporation                                     -               -        (700,000)
        Acquisition of non-controlling interest in subsidiary                    -               -          22,932
        Reversal of petroleum and natural gas interests expenditures       713,674               -               -
                                                                     -------------   -------------   -------------
                                                                           713,674               -        (677,068)
                                                                     =============   =============   =============
</TABLE>
     Other supplementary cash flow information:

                                                        2002            2001
                                                          $               $

     Interest paid in cash                              391,740       1,326,811
                                                  =============   =============
     Income taxes paid in cash                                -               -
                                                  =============   =============


                                      F-24

                                      -84-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)

15.  SUBSEQUENT EVENTS

     Subsequent to May 31, 2002, the Company  participated  in the drilling of a
     side-track to an exploratory well which was initially  drilled in 2001. The
     results from the side-track  determined that the well was uneconomic and it
     was plugged and  abandoned.  As at May 31,  2002,  the Company had incurred
     $506,370  costs  associated  with the  acquisition  and  exploration on the
     prospect. A further $505,000 was paid by the Company, subsequent to May 31,
     2002, relating to the side-track. These costs will be charged to operations
     during fiscal 2003.


16.  SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)

     The  following  information,  pertaining  to  the  Company's  oil  and  gas
     producing  activities  for the years ended May 31,  2002,  2001 and 2000 is
     presented in  accordance  with SFAS No. 69,  "Disclosure  About Oil and Gas
     Producing Activities".

     COSTS INCURRED IN OIL AND GAS EXPLORATION AND DEVELOPMENT ACTIVITIES

     The  following  costs were  incurred by the Company in oil and gas property
     acquisition;  exploration and development activities during the years ended
     May 31:

                                     2002              2001              2000
                                       $                 $                 $
     Property acquisition costs
         Proved                          -                 -            164,597
         Unproved                        -           180,721          3,633,390
     Exploration costs           2,069,739         6,676,601          7,136,679
     Development costs                   -           699,203            524,212
     Other                         108,026           775,961            197,262
                              ------------      ------------       ------------
                                 2,177,765         8,332,486         11,656,140
                              ============      ============       ============

     Property  acquisition  costs include costs  incurred to purchase,  lease or
     otherwise  acquire  a  property.  Exploration  costs  include  the costs of
     geological and geophysical  activity,  dry holes and drilling and equipping
     exploratory wells.  Development costs include costs incurred to gain access
     to and prepare  development  well locations for drilling,  and to drill and
     equip development wells.

     OIL AND GAS RESERVES

     The following  reserve  related  information  are based on reserve  reports
     prepared by Petrotech Engineering Ltd. (May 31, 2002 and 2001), Lee Keeling
     and Associates (May 31, 2000),  independent  reservoir  engineers.  Reserve
     estimates are inherently imprecise and are continually subject to revisions
     based  on  production  history,   results  of  additional  exploration  and
     development, prices of oil and gas and other factors.


                                      F-25

                                      -85-

<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


16.  SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) (continued)

<TABLE>
<CAPTION>
                                              2002                        2001                        2000
                                    -------------------------   -------------------------   -------------------------
                                        Oil          Gas            Oil          Gas            Oil          Gas
                                      (Bbls)        (MCF)         (Bbls)        (MCF)         (Bbls)        (MCF)
     PROVED DEVELOPED AND
        UNDEVELOPED RESERVES
    <S>                            <C>          <C>            <C>          <C>            <C>          <C>
     Beginning of year                  285,217     5,154,732       746,443    19,002,112     1,267,531    21,988,428
     Revisions to previous estimates   (271,542)   (4,826,770)            -             -      (460,070)   (1,634,166)
     Purchase of minerals in place            -             -             -             -           648        57,965
     Extensions and discoveries               -             -       290,444     5,280,002             -             -
     Production                          (1,606)      (62,719)      (41,067)   (1,105,599)      (57,080)   (1,297,608)
     Sales of minerals in place               -             -      (710,603)  (18,021,783)       (4,856)     (112,507)
                                    -----------  ------------   -----------  ------------   -----------  ------------
     End of year                         12,069       265,243       285,217     5,154,732       746,443    19,002,112
                                    ===========  ============   ===========  ============   ===========  ============

     PROVED DEVELOPED RESERVES

     Beginning of year                  285,217    17,670,500       364,797    17,670,500       638,287    15,223,231
                                    ===========  ============   ===========  ============   ===========  ============
     End of year                         12,069       265,243       285,217     5,154,732       364,797    17,670,500
                                    ===========  ============   ===========  ============   ===========  ============

</TABLE>
     STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS

     The  standardized  measure of discounted  future net cash flows is based on
     estimated  quantities  of proven  reserves and the future  periods in which
     they are  expected to be  produced  and on  year-end  economic  conditions.
     Estimated future gross revenues are priced on the basis of year-end prices.
     Estimated future gross revenues are reduced by estimated future development
     and  production  costs,  as well as  estimated  future  income tax expense.
     Future income tax expenses have been computed  considering the tax basis of
     the oil and gas properties plus available carryforwards and credits.

     The standardized  measure of discounted future net cash flows should not be
     construed  to be an  estimate  of the fair  market  value of the  Company's
     proved  reserves.  Estimates  of fair value  would  also take into  account
     anticipated  changes  in future  prices  and costs,  the  reserve  recovery
     variances  from  estimate  proved  reserves  and  a  discount  factor  more
     representative  of the  time  value of  money,  and the  inherent  risks in
     producing oil and gas.  Significant  changes in estimate reserve volumes or
     product prices could have a material  effect on the Company's  consolidated
     financial statements.
<TABLE>
<CAPTION>
                                                                         2002               2001              2000
                                                                           $                  $                $
   <S>                                                             <C>               <C>                <C>
     Future cash inflows                                                   975,682        57,839,525        85,369,489
     Future production costs                                              (745,956)       (1,889,943)      (25,752,917)
     Future development costs                                                    -          (606,250)       (1,666,250)
     Future income tax expenses                                                  -        (4,908,565)       (6,375,052)
                                                                     -------------     -------------     -------------
     Future net cash flows                                                 229,726        50,434,767        51,575,270
     10% annual discount for estimated timing of cash flows                (54,745)      (24,239,302)      (26,260,476)
                                                                     -------------     -------------     -------------
     Standardized measure of discounted future cash flows                  174,981        26,195,465        25,314,794
                                                                     =============     =============     =============
</TABLE>

                                      F-26

                                      -86-
<PAGE>


                              HILTON PETROLEUM LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000
              (Expressed in U.S. Dollars, unless otherwise stated)


16.  SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) (continued)

     The  following  are the  principal  sources of changes in the  standardized
     measure of discounted future net cash flows:
<TABLE>
<CAPTION>
                                                                           2002              2001              2000
                                                                             $                 $                 $
   <S>                                                              <C>               <C>              <C>
     Net change in sales price and production costs                              -                 -        19,186,978
     Development costs incurred                                                  -           130,654           585,002
     Changes in estimated future development costs                               -           833,220         1,320,444
     Sales and transfers of oil and gas produced,
        net of production costs                                            (62,563)       (2,819,340)       (2,446,586)
     Net change due to extensions and discoveries                                -        28,689,011                 -
     Net change due to purchases and sales of minerals in place                  -       (28,870,962)         (205,530)
     Net change due to revisions in quantities                         (23,209,272)                -       (13,929,923)
     Net change in income taxes                                            126,732           292,012          (418,744)
     Accretion of discount                                               2,747,043         2,688,177         2,234,053
     Net change due to crude oil and natural gas hedge                           -          (141,208)       (2,006,317)
     Other                                                                       -            79,107          (196,877)
                                                                     -------------     -------------     -------------
     Net change                                                        (26,020,484)          880,671         4,122,500
     Beginning of year                                                  26,195,465        25,314,794        21,192,294
                                                                     -------------     -------------     -------------
     End of year                                                           174,981        26,195,465        25,314,794
                                                                     =============     =============     =============
</TABLE>


                                      F-27

                                      -87-

<PAGE>