UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 20-F



(  )

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 April 30, 2005



OR



(  )

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



OR



(  )

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from  to ______________



Commission File Number 0-30952



San Telmo Energy Ltd.

(Exact name of Registrant as specified in its charter)



British Columbia, Canada

(Jurisdiction of incorporation or organization)



Suite 430, 580 Hornby Street, Vancouver, British Columbia, Canada, V6C 2B3

(Address of principal executive offices)



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

| | Title of each class | Name of each exchange on which registered | 
| | ------------------- | ----------------------------------------- | 
| | None                | N/A                                       | 



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



Common Stock without par value

(Title of Class)



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



None



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.   44,768,502



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 12 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.    ( X )   Yes    (    )   No



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

( X )   Item 17   (    )   Item 18



If this is an annual report, indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    (   )  Yes     ( X )    No























































TABLE OF CONTENTS







|           | Page                                                                        
|---------- | ----------------------------------------------------------------------------
|           |                                                                             
|           | PART I                                                                      
|           |                                                                             
|Item 1     | Identity of Directors, Senior Management and Advisers                       
|Item 2     | Offer Statistics and Expected Timetable                                     
|Item 3     | Key Information                                                             
|Item 4     | Information on the Company                                                  
|Item 5     | Operating and Financial Review and Prospects                                
|Item 6     | Directors, Senior Management and Employees                                  
|Item 7     | Major Shareholders and Related Party Transactions                           
|Item 8     | Financial Information                                                       
|Item 9     | The Offer and Listing                                                       
|Item 10    | Additional Information                                                      
|Item 11    | Quantitative and Qualitative Disclosures About Market Risk                  
|Item 12    | Description of Securities Other than Equity Securities                      
|           |                                                                             
|           | PART II                                                                     
|           |                                                                             
|Item 13    | Defaults, Dividend Arrearages and Delinquencies                             
|Item 14    | Material Modifications to the Rights of Security Holders and Use of Proceeds
|Item 15    | Controls and Procedures                                                     
|Item 16    | Reserved                                                                    
|Item 16A   | Audit Committee Financial Expert                                            
|Item 16B   | Code of Ethics                                                              
|Item 16C   | Principal Accountant Fees and Services                                      
|Item 16D   | Exemption from Listing Standards for Audit Committees                       
|Item 16E   | Purchase of Equity Securities by the Issuer and Affiliated Purchasers       
|           |                                                                             
|           | PART III                                                                    
|           |                                                                             
|           |                                                                             
|Item 17    | Financial Statements                                                        
|Item 18    | Financial Statements                                                        
|Item 19    | Exhibits                                                                    
|           |                                                                             
|Signatures |                                                                             
|           |                                                                             









Forward Looking Statements



Certain statements in this annual report constitute forward-looking statements principally in ITEM #4, Information on the Company and ITEM #5, Operating and Financial Review and Prospects". Some, but not all, forward-looking statements can be identified by the use of words such as anticipate, believe, plan, estimate, expect, and intend, statements that an action or event may, might, could, should, or will be taken or occur, or other similar expressions.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Registrant, or other future events, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include, among others, the following risks: the risks associated with outstanding litigation, risks associated with project development; the need for additional financing; operational risks associated with oil and natural gas exploration and production; fluctuations in commodity prices; title matters; environmental liability claims and insurance; reliance on key personnel; the potential for conflicts of interest among certain officer, directors or promoters of the Registrant with certain other projects; the absence of dividends; currency fluctuations; competition; dilution; the volatility of the Registrants common share price and volume; and tax consequences to U.S. Shareholders.







PART I



ITEM 1. Identity of 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 fiscal years ended April 30, 2005, 2004 and 2003 were derived from the financial statements of the Company. The financial statements for those years were audited by Amisano Hanson, Chartered Accountants, as indicated in their report which is included elsewhere in this Annual Report.



The information in Table No. 1 was extracted from the more detailed financial statements and related notes included herein for FY 2005, 2004 and 2003 and should be read in conjunction with such financial statements and with the information appearing under the heading ITEM 5, OPERATING AND FINANCIAL REVIEW.



Reference is made to Note 17 of the financial statements of the Company included herein for a discussion of the differences, in the case of the Company, between Canadian GAAP and US GAAP, and their effect on the Companys financial statements.



To date, the Company has not generated sufficient cash flow from operations to fund ongoing operational requirements and cash commitments.  The Company has financed its operations principally through the sale of its equity securities.  While the Company believes it has sufficient capital and liquidity to finance current operations, nevertheless, its ability to continue operations is dependent on the ability of the Company to obtain additional financing.  Refer to ITEM 5, OPERATING AND FINANCIAL REVIEW.



Table No. 1 is derived from the financial statements of the Company, which have been prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP), the application of which, in the case of the Company, conforms in all material respects for the periods presented with US GAAP, except as disclosed in footnotes to the financial statements.



Table No. 1

Selected Financial Data

(CDN$ in 000, except per share data)

|                                      |                    |                                   |                    |                    |                   
|------------------------------------- | ------------------ | --------------------------------- | ------------------ | ------------------ | ------------------
|                                      | Year Ended
4/30/05 | Year Ended
4/30/04
(Reclassified) | Year Ended
4/30/03 | Year Ended
4/30/02 | Year Ended
4/30/01
|                                      |                    |                                   |                    |                    |                   
|Net Sales Revenue                     | $4,244             | $328                              | $164               | $0                 | $0                
|Net Income(Loss)Cdn. GAAP             | ($1,692)           | ($2,086)                          | ($1,884)           | ($1,097)           | ($138)            
|Earnings(Loss) Per Share Cdn GAAP     | ($0.04)            | ($0.06)                           | ($0.16)            | ($0.23)            | ($0.04)           
|                                      |                    |                                   |                    |                    |                   
|Net Income(Loss)US GAAP               | ($1,775)           | ($2,086)                          | ($1,878)           | ($1,073)           | ($96)             
|Earnings (Loss) Per Share US GAAP     | ($0.04)            | ($0.06)                           | ($0.16)            | ($0.22)            | ($0.03)           
|                                      |                    |                                   |                    |                    |                   
|Dividends Per Share Cdn GAAP          | $0                 | $0                                | $0                 | $0                 | $0                
|Dividends Per Share US GAAP           | $0                 | $0                                | $0                 | $0                 | $0                
|Wtd.Avg.No.Shares Cdn GAAP            | 42,975             | 37,604                            | 11,875             | 4,807              | 1,245             
|Wtd.Avg.No.Shares US GAAP             | 42,975             | 37,604                            | 11,875             | 4,807              | 1,069             
|                                      |                    |                                   |                    |                    |                   
|Working Capital                       | ($1,966)           | ($2,253)                          | $1,255             | $275               | $188              
|Mineral Properties  Cdn GAAP          | $0                 | $0                                | $0                 | $6                 | $29               
|Mineral Properties US GAAP            | $0                 | $0                                | $0                 | $0                 | $0                
|Oil and Gas Properties Cdn GAAP       | $7,481             | $6,244                            | $1,199             | $228               | $0                
|Oil and Gas Properties US GAAP        | $7,481             | $6,244                            | $1,199             | $228               | $0                
|Long Term Debt Cdn GAAP               | $0                 | $0                                | $0                 | $33                | $0                
|Asset Retirement Obligation, Cdn GAAP | $172               | $0                                | $0                 | $0                 | $0                
|                                      |                    |                                   |                    |                    |                   
|Shareholders Equity (Cdn GAAP)       | $5,380             | $4,017                            | $2,489             | $505               | $219              
|Shareholders Equity US GAAP          | $5,380             | $4,017                            | $2,489             | $499               | $190              
|Total Assets (Cdn GAAP)               | $9,253             | $6,717                            | $2,611             | $582               | $226              
|Total Assets (US GAAP)                | $9,253             | $6,717                            | $2,611             | $575               | $196              



Certain comparative figures for the year ended April 30, 2004 have been reclassified to conform to the presentation adopted during the year ended April 30, 2005.



All per share amounts have been adjusted to reflect a 3 for 1 forward stock split effective August 15, 2004, a 2 for 1 forward stock split effective July 11, 2001, and a 1 for 7 reverse stock split effective August 15, 2002.



In this Annual Report, unless otherwise specified, all dollar amounts are expressed in Canadian Dollars.  References in this document to $ and C$ refer to Canadian dollars, unless otherwise specified; references to US$ refer to United States dollars.



Table No. 2 sets forth the rate of exchange for the Canadian Dollar at the end of the five most recent fiscal periods ended July 31, 2004;the average rates for the periods; and the range of high and low rates for the periods. For purposes of this table, the rate of exchange means 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 table sets forth the number of Canadian Dollars required under that formula to buy one US Dollar. The average rate means the average of the exchange rates on the last day of each month during the period.



Table No. 2

U.S. Dollar/Canadian Dollar



Canadian Dollar/U.S. Dollar



|                            | Average | High  | Low  
|--------------------------- | ------- | ----- | -----
|                            |         |       |      
|Fiscal Year Ended 4/30/05   | $1.24   | $1.33 | $1.18
|Fiscal Year Ended 4/30/04   | $1.34   | $1.41 | $1.29
|Fiscal Year Ended 4/30/03   | $1.53   | $1.60 | $1.43
|Fiscal Year Ended 4/30/02   | $1.57   | $1.60 | $1.51
|Fiscal Year Ended 4/30/01   | $1.50   | $1.58 | $1.45
|                            |         |       |      
|Three Months Ended 7/31/05  | $1.24   | $1.27 | $1.20
|Three Months Ended 4/30/05  | $1.23   | $1.26 | $1.20
|Three Months Ended 1/31/05  | $1.21   | $1.24 | $1.18
|Three Months Ended 10/31/04 | $1.29   | $1.33 | $1.22
|                            |         |       |      
|Three Months Ended 7/31/04  | $1.35   | $1.40 | $1.31
|Three Months Ended 4/30/04  | $1.34   | $1.37 | $1.31
|Three Months Ended 1/31/04  | $1.31   | $1.33 | $1.27
|Three Months Ended 10/31/03 | $1.35   | $1.41 | $1.30
|                            |         |       |      
|Three Months Ended  7/31/03 | $1.38   | $1.42 | $1.33
|Three Months Ended  4/30/03 | $1.46   | $1.53 | $1.43
|Three Months Ended  1/31/03 | $1.56   | $1.59 | $1.52
|Three Months Ended 10/31/02 | $1.57   | $1.60 | $1.54
|                            |         |       |      
|September 2005              | $1.18   | $1.19 | $1.16
|August 2005                 | $1.20   | $1.22 | $1.19
|July 2005                   | $1.22   | $1.24 | $1.20
|June 2005                   | $1.24   | $1.26 | $1.23
|May 2005                    | $1.26   | $1.27 | $1.24
|April 2005                  | $1.24   | $1.26 | $1.21



The exchange rate was 1.16 on September 30, 2005.



Risk Factors



Oil and Gas Exploration Has A High Degree of Risk and Exploration Efforts May Be Unsuccessful Which Would Have A Negative Effect on The Companys Operations:

There is no certainty that the expenditures to be made by the Company in the exploration of its properties as described herein will result in discoveries of recoverable oil and gas in commercial quantities.  Most exploration projects do not result in the discovery of commercially recoverable reserves and no assurance can be given that any particular level of recovery of hydrocarbons will in fact be realized or that any identified reserves will ever qualify as a commercially recoverable (or viable) reserve which can be legally and economically exploited. There can be no assurance that hydrocarbons recovered in small scale tests will be duplicated in large scale tests under on-site conditions or in production. If exploration is unsuccessful, management would be required to evaluate and acquire additional projects which would require additional capital.



Hydrocarbon Exploration has Substantial Operating and Drilling Hazards:

Oil and natural gas exploration operations are subject to all the risks and hazards typically associated with such operations, hazards such as well fires, explosions, blowouts, and oil spills, each of which could result in substantial damage to oil and natural gas wells, producing facilities, other property and the environment or in personal injury. Although the Company's oil and gas subsidiary and/or the operators of the wells typically maintain liability insurance in an amount which they consider adequate the nature of these risks is such that liabilities could exceed policy limits, in which event the Company as a owner of an interest in these wells could incur significant costs that could have a materially adverse effect upon its financial condition. Oil and natural gas production operations are also subject to all the risks typically associated with such operations, including premature decline of reservoirs and the invasion of water into producing formations. Any unforeseen hazard could have a negative effect on the Companys operations and financial condition.



The Company Has Limited Cash Flow to Support its Business:

Five of the Companys properties have advanced to the commercial production stage and the Company has no history of earnings and limited cash flow from operations.  The Company has paid no dividends on its shares since incorporation and does not anticipate doing so in the foreseeable future.  Historically, the only sources of funds available to the company has been through the sale of its common shares and loans. Any future additional equity financing would cause dilution to current stockholders.



The Company has a History of Net Losses:

The Company has had net losses since October 7, 1996 (date of incorporation).



In Fiscal 2005, ended April 30th, the Company had a net loss of ($1,692,190); in Fiscal 2004, the Company had a net loss of ($2,086,616); in Fiscal 2003, ended April 30th, the Company had a net loss of ($1,884,545). The cumulative net loss from date of incorporation to April 30, 2005 has been ($7,570,815).



The Company Has a Working Capital Deficit and Will Require Additional Debt or Equity Financing to Complete its Business Plan:

As of April 30, 2005, the Company has a Working Capital Deficit of ($1,966,919). The Company intends to carry out exploration on certain of its properties during the current fiscal year as well as investigate the acquisition of additional exploration properties. The Company anticipates requiring additional funding to fulfill its plans as well as if its exploration programs are successful. There is no assurance that the Company will be able to obtain the required financing to meet its current obligations due as well as fund its anticipated work program.  Failure to obtain additional financing on a timely basis could cause the Company to forfeit its interest in its oil and gas properties, dilute its interests in the properties and/or reduce or terminate its operations. Any additional funding may be available at a price that is substantially lower than that paid by other shareholders which could cause excessive dilution to current shareholders. If the Company is unable to obtain additional financing at a price and/or time acceptable to management, it would have a negative effect on the Companys operations.



The Company Currently Has a Substantial Amount of Bank Indebtedness which is Repayable On Demand:

The Company has a revolving demand loan of up to $5,000,000 with the National Bank of Canada. As of April 30, 2005, $2,000,000 was outstanding under the agreement. The loans is repayable on demand. If the lender(s) were to demand repayment and the Company was unable to make repayment under the demand terms, the Company could be forced to relinquish its ownership in certain of its property interests. If this were to occur, it would have a significant negative effect on the Companys operations and its financial position.



The Companys Auditor has Expressed a Going Concern Opinion:

The Companys financial statements include a note relating to the uncertainty of the Companys ability to continue as a going concern. The Company has suffered losses from operations since inception and requires additional financing to continue operating.  These factors raise substantial doubt about the Companys ability to continue as a going concern. If the Company is unable to raise the required capital, management would be forced to curtail its operations and/or cease operations.



Commodity Prices May Not Support Corporate Profit:

The petroleum industry in general is intensely competitive and there is no assurance that, even if commercial quantities of oil or gas is discovered and developed, a profitable market will exist for the sale of same.  Factors beyond the control of the Company may affect the marketability of any substances discovered.  The price of natural resources are volatile over short periods of time, and is affected by numerous factors beyond the control of the Company, including international economic and political trends, expectations of inflation, currency exchange fluctuations, interest rates and global or regional consumption patterns, speculative activities and increased production due to improved recovery techniques.



The Companys Operations are Subject to Substantial Environmental Regulations:

The current and anticipated future operations of the Company require permits from various federal, territorial and local governmental authorities and such operations are and will be governed by laws and regulations governing various elements of the mining and petroleum industry.  The Companys exploration activities in Alberta are subject to various laws governing land use, the protection of the environment, prospecting, development, production, exports, taxes, labor standards, occupational health, waste disposal, toxic substances, and other matters. Such operations and exploration activities are also subject to substantial regulation under these laws by governmental agencies and may require that the Company obtain permits from various governmental agencies.  The Company believes it is in substantial compliance with all material laws and regulations which currently apply to its activities. All permits which the Company may require for future exploration may not be obtainable on reasonable terms or that such laws and regulations, or that new legislation or modifications to existing legislation, could have an adverse effect on any project that the Company might undertake.



Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment or remedial actions.



Amendments to current laws, regulations and permits governing operations and activities of oil and gas companies, or more stringent implementation thereof, could have a material adverse impact on the Company.



The Company has a Dependence on Key Personnel:

The Company strongly depends on the business and technical expertise of its management and key personnel.  There is little possibility that this dependence will decrease in the near term.  As the Companys operations expand, additional general management resources will be required, especially since the Company encounters risks that are inherent in doing business in several countries. Additional personnel may not be available on terms or conditions acceptable to the Company, which would have a negative effect on the Companys operations and financial condition.



The Company is Classified as a Penny Stock in the United States:

The Companys stock is subject to penny stock rules as defined by regulators in the United States.  The Commission has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks.  The Companys common shares are subject to these penny stock rules. Transaction costs associated with purchases and sales of penny stocks are likely to be higher than those for other securities.  Penny stocks generally are equity securities with a price of less than U.S. $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system).



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 that provides information about penny stocks and the nature and level of risks in the penny stock market.  The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customers account.  The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customers confirmation.



In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from such rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchasers written agreement to the transaction.  These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the Companys common shares in the United States and shareholders may find it more difficult to sell their shares.



U.S. Investors May Not Be Able to Enforce Their Civil Liabilities Against the Company or its Directors, Controlling Persons and Officers

It may be difficult to bring and enforce suits against the Company.  The Company is a corporation incorporated in British Columbia under the Business Corporations Act. A majority of the Companys directors and officers are residents of Canada and all of the Companys assets and its subsidiaries are located outside of the United States.  Consequently, it may be difficult for United States investors to effect service of process in the United States upon those directors or officers who are not residents of the United States, or to realize in the United States upon judgments of United States courts predicated upon civil liabilities under United States securities laws..  There is substantial doubt whether an original action could be brought successfully in Canada against any of such persons or the Company predicated solely upon such civil liabilities under the U.S. Securities Act.



As a "Foreign Private Issuer, San Telmo Energy is Exempt From the Section 14 Proxy Rules and Section 16 of the 1934 Securities Act May Result in Shareholders Having Less Complete and Timely Data

The submission of proxy and annual meeting of shareholder information (prepared to Canadian standards) on Form 6-K may result in shareholders having less complete and timely data.  The exemption from Section 16 rules regarding sales of common shares by insiders may result in shareholders having less data.



ITEM 4. Information on the Company



San Telmo Energy Ltd. (hereinafter also referred to as the "Registrant" or the "Company") is a natural resource company focused upon the acquisition, exploration and production of oil and gas properties in the Province of Alberta, Canada. Currently, the majority of the Companys properties are in the exploration stage and have only limited amounts of proven reserves. There is no assurance that any of its exploration projects contain commercially reserves of hydrocarbons until appropriate exploration work is done and a final evaluation based upon such work concluded economic and legal feasibility.



The Company's head office is located at Suite 430, 580 Hornby Street, Vancouver, British Columbia V6C 3B6.  The contact person is Chris Dyakowski, Director. The telephone number is (604) 687-4456 and the facsimile number is (604) 687-0586.



The Company currently leases its office in Calgary at $3,200 per month. The lease runs through December 2006. The Company also leases office space in Vancouver from a director at a cost of $1,200 per month.



The Company has 300,000,000 common shares authorized. These shares have no par value. As of April 30, 2004, the end of the Companys most recent fiscal year, there were 44,768,502 common shares issued and outstanding.



The Company was incorporated under the British Columbia Company Act on October 7, 1996 as San Telmo Resources by filing its memorandum and articles with the British Columbia Registrar of Companies. The memorandum and articles was subsequently amended on August 15, 2002 to reflect the change of name of the Company to San Telmo Energy Ltd and adopted new articles under the Business Corporations Act of British Columbia at the Companys Annual and Extraordinary General Meeting held on October 20, 2004.



The Company became a reporting issuer in British Columbia on November 6, 1997, upon receipt of its prospectus by the Superintendent of Brokers for British Columbia and its common shares became listed on the Vancouver Stock Exchange (now the TSX Venture Exchange) on December 1, 1997. In the initial public offering in Canada, the Company issued 1,000,000 shares for gross proceeds of $400,000. .  On July 11, 2001, the Company split its issued and authorized capital on the basis of two new for each old share.  On August 15, 2002, the Company changed its name to San Telmo Energy Ltd. and consolidated its issued and authorized capital on the basis of seven old for each new share. The Company began trading on the NASD Over-The-Counter Bulletin Board in the United States on November 26, 2002. On August 15, 2003, the Company completed a 3 for 1 forward stock split of its common shares.



The Company's common shares trade on the TSX Venture Exchange in Canada under the symbol "STU", and on the NASD Over-The-Counter Bulletin Board in the United States under the symbol STUOF. The Company is also listed for trading in Germany on the Frankfurt and Berlin Stock Exchanges under the identifying symbol 675088.



The Company's financial statements are stated in Canadian Dollars and are prepared in accordance with Canadian and United States Generally Accepted Accounting Standards (GAAS) and Canadian Generally Accepted Accounting Principles (GAAP), the application of which, in the case of the Company, conforms in all material respects for the periods presented with US GAAP except as noted in Note 17, Notes to the Financial Statements.



In this Annual Report, unless otherwise specified, all dollar amounts are expressed in Canadian Dollars.  References in this document to $ and CDN$ refer to Canadian dollars, unless otherwise specified; references to US$ refer to US dollars.



Capital Expenditures



The Company has financed its operations primarily through the sale of common shares. During Fiscal Year 2003 ended April 30, 2003, the Company wrote-off the remaining deferred exploration expenditures and several mineral properties and reduced the carrying value of these properties to a nominal amount. During Fiscal 2004, the Companys interest in the Condor property in Argentina was sold to a non-arms length party for $10,000, although the Company retains a 2% Net Smelter Royalty. The Company anticipates spending its capital on exploration and development of its oil and gas properties. Management also intends to investigate the possible acquisition and development of other oil and gas properties.



Business Overview



On December 20, 1996, the Company entered into an agreement whereby it was granted an option to acquire a 100% undivided interest in five contiguous claims consisting of 100 units in the Omineca Mining Division of British Columbia. During the year ended April 30, 1999, management terminated this option agreement due to discouraging exploration results and the acquisition cost of $60,950 and related deferred exploration cost of $300,357 were written off.



During the fiscal year ended April 30, 1999, the Company staked and then abandoned eight mining claims in the Similkameen Mining Division of British Columbia. The Company abandoned the claims in order to focus their efforts on more promising opportunities in Argentina.



Between November of 1998 and May of 1999, the Company acquired a 100% interest in ten mineral properties located in Argentina. Since January of 2000 the Company has dropped its interest in most of these properties in order to concentrate its efforts on what management considers the most prospective properties among its Santa Cruz land position. The Company currently has a 2% Net Smelter Royalty on one mineral exploration property in Argentina.



In September 2000, the Company acquired a 100% interest in 2 properties consisting of 36 units of mineral claims in the Kamloops Mining Division of British Columbia. The Company allowed these properties to lapse and wrote off the acquisition costs and deferred expenditures during the year ended April 30, 2002.



In April 2001, the Company made the decision to investigate possible investments in the oil and gas industry. On August 30, 2001 the Company the acquisition of all the issued and outstanding shares of Cobra Quest Petroleum in exchange for 277,140.42 post consolidated common shares of San Telmo common stock at a deemed post-consolidated price of $3.50 per share. The acquired units name was subsequently changed to San Telmo Energy. San Telmo Energys major asset was an interest in the Bellshill Property in southeastern Alberta. The property consisted of 19 producing oil wells where San Telmos interest in each well varied from a 10-50% working interest. The Company sold its interests in the Bellshill Property to the operator of the property, Tiverton Petroleums Ltd., in March 2002 for cash consideration of $625,000.



In December 2001, the Company entered into an agreement with CanScot Resources Ltd. covering 6400 acres. The Company agreed to acquire a 25% Working Interest in the land contained in T64 R4 W5M and a 12.5% Working Interest in T63 R4 W5M which are contained in a contiguous block in central Alberta approximately 40 km north of Barrhead. Consideration was the reimbursement of CanScots costs on the acquired interest totaling $67,500. The Company also agreed to provide 25% of the costs of the drilling of the first well on the property. The wells were determined to be dry wells and abandoned. Although the Company maintains its interest in the land, there are no current plans to resume exploration at the property.



In January 2002, the Company applied for and was awarded a 100% interest in 50 mining units totaling 2500 hectares in the Otish Mountian region of north-central Quebec. The property is considered a diamond exploration project. The Company has not conducted any exploration on the project to date and has written down its interest in the properties to a nominal amount.



Beginning in January 2002, the Company began to acquire interests in oil and gas prospects in Alberta through Crown Land Sales, joint ventures and farm-in agreements. During the year ended April 30, 2004, the Company and/or its partners conducted exploration, including drilling, on several of these prospects.



During Fiscal 2004, the Company sold its sole remaining mineral exploration property, Condor in Argentina, to Argentex Mining Corporation, a public corporation traded on the Over-The-Counter Bulletin Board. Argentex is a non-arms length party as Christopher Dyakowski, Director, is a former officer and director of Argentex. Consideration for the sale was $10,000 cash and a 2% Net Smelter Royalty (NSR) to the Company.



Additional acreage was acquired during Fiscal 2004. In November 2003, the Gold Creek prospect located approximately 10 miles southeast of the city of Grand Prairie, Alberta, was acquired through an Alberta Crown Land Sale. In March 2004, the Company acquired an additional section of land adjacent to the Companys existing Gordondale property, which doubled the size of Gordondale to 1,280 acres in total. In April 2004, the Company acquired, through Crown Land Sale, one land section immediately north of the Companys existing Boundary Lake property.



During Fiscal 2005, production facilities were constructed on the Teepee Creek project, and production from two wells on the project commenced in December 2004. Additional acreage was acquired through Alberta Crown Lease sale in February 2005. One section is adjacent to the Companys Boundary Lake prospect, and one section is adjacent to the Companys Teepee Creek property. Total consideration for the lease acquisitions was $230,000.



In April 2005, the Company entered into 4 agreements with Rolling Thunder Exploration Ltd. (Rolling Thunder) whereby Rolling Thunder can earn a working interest of 60% in the Companys Boundary Lake, Mitsue and Morrinville projects, and 55% of the Gold Creek property. To earn its interest, Rolling Thunder must acquire seismic data and assume 100% of the drilling and completion costs of the first well in each area. Rolling Thunder must commit to drill at Boundary Lake, Mitsue and Morrinville by November 15, 2005, and at Mitsue by December 15, 2005. These agreements are considered to be non-arms length as Brian Bass, President and CEO of San Telmo, serves as a Director of Rolling Thunder.



In September 2005, the Company acquired a 50% interest in an additional section of land at Gold Creek located in the Peace River Arch area of Alberta.



Company Subsidiaries



The Company has one subsidiary, San Telmo Energy Inc., an Alberta corporation whose directors are Brian Bass, George Stubos, and William E. Schmidt.  Its registered and records office is located at Suite 1400, 700  2nd Street S.W., Calgary, Alberta, Canada T2P 4V5. Its head office is located at 1120 144 8 Avenue S. W.., Calgary, Alberta, Canada T2P 3N4. San Telmo Energy was incorporated on November 27, 1998 under the name 808771 Alberta Ltd.  It changed its name to Cobra Quest Petroleum Inc. on April 7, 1999 and then changed its name to San Telmo Energy Inc. on August 30, 2001. The Company owns 100% of the issued and outstanding shares of San Telmo Energy.



Competition



Competition exists from other oil and gas companies with operations similar to those of the Company's. Many of the companies with which the Company competes have operations and financial strength many times that of the Company.  Nevertheless, the market for the Company's possible future production resources tends to be commodity oriented, rather than company oriented. Commodity prices fluctuate and there is no guarantee that market prices at any one time will be higher than production costs.



Oil and Gas Properties



The Company entered the oil and gas sector through an agreement dated August 30, 2001, where the Company signed a letter of intent to acquire Cobra Quest Petroleum, an oil and gas company with interests in the Bellshill area of Alberta.  Cobra Quests name was subsequently changed to San Telmo Energy. At the time of the acquisition, San Telmo Energys major asset was working interests in 19 oil wells. The working interests varied from 10% to 50% and all the wells were located in the Bellshill area of east central Alberta. On March 27, 2002, the Company sold its interests in the Bellshill properties to Tiverton Petroleums Ltd. in exchange for $625,000 cash.



The Company has acquired additional oil and gas prospects located in Alberta through Crown Land Sales, as well as through joint-venture and farm-in agreements with other Companies. The Companys properties and its interest is as follows:



[santelmoannual20ffy2005001.jpg]



GORDONDALE



Gordondale is located in Northwestern Alberta and consists of 2 sections of 1,280 acres total. The Company has a 73.6% working interest in 640 acres (471 net). In March 2004, the Company acquired a 100% working interest in an additional section adjacent to the original section.



[santelmoannual20ffy2005002.jpg]



During Fiscal 2004, the 14-22 well (73.6% WI) was drilled on Gordondale to a depth of 5,400 feet. The well has been cased and completed. Construction and installation of an oil storage facility and a 3.5 kilometer sour gas gathering system was completed in May 2004, and production commenced shortly afterward. In February 2005, the well was shut-in pending approval of the Companys application to produce from the well under a Good Practice License. This license would allow the Company to produce the well at an optimal production level to maximize the recovery of oil from the underlying reservoir. The license was granted and production from the well resumed on April 1, 2005. Production from the well averaged 252 boe/d (193 boe/d net to the Company) before royalties.



In August 2005, the Company spudded well 16-22-79-9 W6. The well reached its targeted depth of 5413 feet and was cased. It is currently in the testing phase. The Company has a 100% interest in this well.



Several follow-up well locations have been identified, and the Company intends to drill up to 3 additional wells based upon the success of the 2 wells drilled to date.



MCLEOD



The McLeod property is located in central Alberta.



[santelmoannual20ffy2005003.jpg]

The Company has a 70% working interest in the 960 acre (768 acres net) McLeod property through a farm-in agreement. During August 2003, the 6-18 well was drilled and completed as a gas well. In April 2004, construction and installation of a 5.1 kilometer gas gathering system and condensate storage facility were completed, and production from well 6-18 commenced.



The well commenced production at an initial restricted rate of 118 boe/d (82.6 to the Company). In April 2005, the well was producing at capacity at an average of 500 boe/d (350 boe/d net to the Company).



TEEPEE CREEK



Teepee Creek is located in west-central Alberta.



[santelmoannual20ffy2005004.jpg]



In December 2002, the Company acquired a 50% working interest in 2 sections totaling 1,280 acres at an Alberta Crown lease sale for total consideration of $154,000. In December 2003, the remaining 50% working interest was acquired, giving the Company a 100% interest in the prospect, subject to a 7.5% non-convertible Gross Override Royalty payable to Crescent Point Energy. In April 2004, the Company acquired a 100% Working Interest in an additional section of land at an Alberta Crown land sale for $41,200. Currently, the Teepee Creek property totals 2,560 acres.



The project is located along a Charlie Lake erosional edge in an area of historic gas production.  The first well drilled on the prospect, well 4-10, was completed as a gas well. An 86-hour production test was completed in January 2004 and the well flowed a maximum rate of 2.0 mmcfd (333 boe/d) and at a stabilized flow rate of 1.3 mmcfd (217 boe/d) on a 3/8 choke. A second well, 6-3, was drilled in July 2004 to offset the original 4-10 well and completed as an oil well after encountering both oil and gas from multiple pay zones. Both wells were tied into a neighboring processing plant and commenced production in late December 2004. Due to limited storage capacity, completion and testing operations were restricted to production of approximately 500 bbls of oil and 137,000 cubic feet of gas.  In February 2005, wet conditions and road bans in the Teepee Creek area required the shut-in of both wells, but production recommenced in April 2005 at an average of 93 boe/d combined.  To prevent the reoccurrence of the poor road conditions, the Company has constructed an all-weather road to the property which was completed in April 2005.



In July 2005, the third well on the project was spudded and drilled. This well, 8-3-74-4w6, was drilled to its target depth of 1,650 meters and cased. Testing has not yet been completed.



Teepee Creek remains one of the Companys primary projects, and intends to drill up to 5 additional wells on the project. Timing of the new wells is dependent upon the success of current wells.



MAHASKA



Mahaska is located in west-central Alberta.



[santelmoannual20ffy2005005.jpg]



The Company acquired a 30% working interest in a test well in November 2002 by agreeing to pay 50% of the total costs incurred in licensing, lease preparation, drilling, logging, testing and either casing or abandonment of the well. In conjunction with partners Integra Resources and Vaquero Energy, in December 2002 the Company drilled a well to a depth of 1900 meters which encountered 2.5 meters of net gas pay. The well was tied in to an existing pipeline and production commenced on February 15, 2003. Production from the well for the year ended April 30, 2005 averaged 38 boe/d (11.3 boe/d net to the Company)



GOLD CREEK



The Gold Creek property is located in west-central Alberta, approximately 10 miles southeast of the city of Grand Prairie, Alberta. Historical logs suggest the property is up-dip from a thick lower Charlie Lake carbonate unit that has a potential oil water contact that shales out to the northeast, which may set up a potential strategraphic oil trap.



[santelmoannual20ffy2005006.jpg]



In November 2003, the Company acquired 100% interest in one oil and gas lease through an Alberta Crown Land Sale at a cost of $80,500. In September 2005, the Company announced that it had purchased a 50% interest in an additional section of land adjacent to its existing lease at Gold Creek.



Under an agreement signed in April 2005, the Company granted Rolling Thunder Exploration Inc. the option to earn a 55% interest in the property from San Telmo. The agreement is considered to be non-arms length as Brian Bass, President and CEO of San Telmo, is a director of Rolling Thunder.



Under the agreement, Rolling Thunder must purchase, on or before September 15, 2005, 2 miles of seismic data on or within 1 mile of the Gold Creek property. If necessary, Rolling Thunder shall pay to have the data interpreted and reprocessed. On or before November 15, 2005, Rolling Thunder shall elect in writing to either drill a test well at a location of its choice at Gold Creek or relinquish its option. If Rolling Thunder elects to drill the test well, it must begin drilling a well within 60 days, subject to surface access, drill rig availability, and regulatory approval.



Upon the drilling of the test well to the contract depth, Rolling Thunder will provide San Telmo with all log and test information. San Telmo will have 24 hours to either



a)

elect to participate in the casing, completion, equipping and tying in of the well to maintain a 45% interest in the property; or

b)

farmout its entire interest in the property to Rolling Thunder in exchange for a gross non-convertible overriding royalty of 5-15% on oil and 15% on natural gas.



The agreement also established an area of mutual interest encompassing the lands within one mile of the property. The area of mutual interest will be as to the post farmout earned working interests and will be in force for a period of two years from the signing of the agreement.



Rolling Thunder is currently exploring the property under the option agreement.



BOUNDARY LAKE



The Boundary Lake property is located in west-central Alberta.



[santelmoannual20ffy2005007.jpg]



The Company originally acquired a 100% working interest in 320 acres of exploration land in January, 2003. In April 2004, the Company acquired, via provincial government land sale, an additional section of land immediately north of the original section. In February 2005, an additional section of land was acquired via Alberta Crown land sale.



Under an agreement signed in April 2005, the Company granted Rolling Thunder Exploration Inc. the option to earn a 60% interest in the property from San Telmo. The agreement is considered to be non-arms length as Brian Bass, President and CEO of San Telmo, is a director of Rolling Thunder.



Under the agreement, Rolling Thunder must purchase, on or before September 15, 2005, 2 miles of seismic data on or within 1 mile of the Boundary Lake property. If necessary, Rolling Thunder shall pay to have the data interpreted and reprocessed. On or before November 15, 2005, Rolling Thunder shall elect in writing to either drill a test well at a location of its choice at Boundary Lake or relinquish its option. If Rolling Thunder elects to drill the test well, it must begin drilling a well within 60 days, subject to surface access, drill rig availability, and regulatory approval.



Upon the drilling of the test well to the contract depth, Rolling Thunder will earn, to the base of the deepest formation penetrated



a)

In the spacing unit containing the test well, 100% San Telmos working interest, with San Telmo retaining a convertible gross overriding royalty of 5-15% on oil, and 15% on natural gas. Rolling Thunder will earn a 60% interest in the balance of the section containing the test well. San Telmo may convert its royalty at payout to a 40% working interest; and

b)

60% of San Telmos interest in N1/2 Section 21.



The agreement also estabilished an area of mutual interest encompassing the lands within one mile of the property. The area of mutual interest will be as to the post farmout earned working interests and will be in force for a period of two years from the signing of the agreement.



Rolling Thunder is currently exploring the property under the option agreement.



MITSUE



The Mitsue prospect is located in east-central Alberta and consists of 640 acres of exploration land. The Company acquired a 100% working interest in the property in January, 2003. The target is a 3,900 feet Lower Gething channel sand gas target.



[santelmoannual20ffy2005008.jpg]



Under an agreement signed in April 2005, the Company granted Rolling Thunder Exploration Inc. the option to earn a 60% interest in the property from San Telmo. The agreement is considered to be non-arms length as Brian Bass, President and CEO of San Telmo, is a director of Rolling Thunder.



Under the agreement, Rolling Thunder must purchase, on or before October 15, 2005, 2 miles of seismic data on or within 1 mile of the Mitsue property. If necessary, Rolling Thunder shall pay to have the data interpreted and reprocessed. On or before December 15, 2005, Rolling Thunder shall elect in writing to either drill a test well at a location of its choice at Mitsue or relinquish its option. If Rolling Thunder elects to drill the test well, it must begin drilling a well within 60 days, subject to surface access, drill rig availability, and regulatory approval.



Upon the drilling of the test well to the contract depth, Rolling Thunder will earn, to the base of the deepest formation penetrated



a)

In the spacing unit containing the test well, 100% San Telmos working interest, with San Telmo retaining a convertible gross overriding royalty of 5-15% on oil, and 15% on natural gas. Rolling Thunder will earn a 60% interest in the balance of the section containing the test well. San Telmo may convert its royalty at payout to a 40% working interest; and

b)

60% of San Telmos interest the balance of the earning block.



The agreement also estabilished an area of mutual interest encompassaing the lands within one mile of the property. The area of mutual interest will be as to the post farmout earned working interests and will be in force for a period of two years from the signing of the agreement.



Rolling Thunder is currently exploring the property under the option agreement.



MORINVILLE



The Morinville property is located in eastern Alberta.



[santelmoannual20ffy2005009.jpg]



The Company acquired a 50% working interest in 640 acres (320 acres net) of exploration land in February, 2002.  The target is a 3,900 feet Ellerslie Sand target. The concept is to drill into the existing Ellerslie gas pool which was abandoned in 1961 and which studies suggest was abandoned prematurely.



Under an agreement signed in April 2005, the Company granted Rolling Thunder Exploration Inc. the option to earn a 60% interest in San Telmos 50% interest. The agreement is considered to be non-arms length as Brian Bass, President and CEO of San Telmo, is a director of Rolling Thunder.



Under the agreement, Rolling Thunder must purchase, on or before September 15, 2005, 2 miles of seismic data on or within 1 mile of the Morinville property. If necessary, Rolling Thunder shall pay to have the data interpreted and reprocessed. On or before November 15, 2005, Rolling Thunder shall elect in writing to either drill a test well at a location of its choice at Morinville or relinquish its option. If Rolling Thunder elects to drill the test well, it must begin drilling a well within 60 days, subject to surface access, drill rig availability, and regulatory approval.



Upon the drilling of the test well to the contract depth, Rolling Thunder will earn, to the base of the deepest formation penetrated



a)

In the spacing unit containing the test well, 100% of San Telmos 50% working interest, with San Telmo retaining a convertible gross overriding royalty of 5-15% on oil, and 15% on natural gas. Rolling Thunder will earn a 60% interest in the balance of San Telmos 50% working interest the section containing the test well. San Telmo may convert its royalty at payout to a 40% working interest; and

b)

60% of San Telmos 50% interest (30% total) of the balance of the earning block.



The agreement also established an area of mutual interest encompassing the lands within one mile of the property. The area of mutual interest will be as to the post farmout earned working interests and will be in force for a period of two years from the signing of the agreement.



Rolling Thunder is currently exploring the property under the option agreement.



WESTLOCK

[santelmoannual20ffy2005010.jpg]



The Company acquired a 100% working interest in 640 acres of exploration land in January, 2003. The target is a 2,625 feet Viking sand target which offsets the Westlock Viking Pool which was abandoned in 1992 which studies suggest was abandoned prematurely. The property is being held for future exploration.



WHITECOURT (BLUERIDGE)



[santelmoannual20ffy2005011.jpg]



In April 2002 the Company agreed to a 40% farm-in agreement with Capio Petroleum Corporation on the 1280 acre (512 net acres) Blueridge prospect in West Central Alberta. To earn its 40% interest, the Company agreed to participate as to 50% of all of Capios obligations.



In March 2003, a 1,900 meter (6,200 foot) test well was drilled to offset a previously drilled natural gas well.  9.0 meters of potential gas pay were encountered over water. During a 72-hour test period, the well flowed at test rates up to 2.8 mmcfd of gas with significant water inflow. The Company has been in discussions with the operator of the well to initiate an engineering and economic evaluation of the project which is currently a standing cased gas well.



TIMEU



[santelmoannual20ffy2005012.jpg]



In December 2001, the Company entered into an agreement with CanScot Resources Ltd.. The Company agreed to acquire a 25% Working Interest in the land contained in T64 R4 W5M and a 12.5% Working Interest in T63 R4 W5M which are a contiguous block located in central Alberta approximately 40 kilometers north of Barrhead and 100 kilometers northwest of the city of Edmonton. Consideration was the reimbursement of CanScots costs on the acquired interest totaling $67,500. The Company also agreed to provide 25% of the costs of the drilling of the first well on the property. The Timeu 6-5-64-4 W5M well was drilled during December 2001 but was unsuccessful and was plugged and abandoned by the operator.



During the year ended April 30, 2005, the Company participated in the drilling of a well at Timeu for a 25% working interest. The well was determined to be dry. The Companys dry well costs totaled $81,438.



NISKU



The Company acquired a 100% working interest in 640 acres located in the West Pembina area in July, 2002. Through seismic data, the Company targeted the Nisku Pinnacle Reef as a possible hydrocarbon target.



In June 2003, the Company drilled an exploration well on the prospect to a final depth of 2,945 meters. The well did not encounter the targeted reef buildup and was determined to be dry. The well was abandoned.





Production and Reserves



All of the Companys oil and natural gas wells are located in the Province of Alberta, Canada. The Companys wells at the end of the fiscal year ended April 30, 2005 was as follows:



|              | Oil   | Natural Gas
|------------- | ----- | -----------
|              | Gross | Net        
|              |       |            
|Producing     | 2     | 1.73       
|Non-producing | 0     | 0          





At the close of the fiscal year ended April 30, 2004, the Companys sole producing well was a natural gas well at Mahaska (30% working interest).



During fiscal 2005, the Company completed the following wells:



|                      | Exploratory Wells | Development Wells
|--------------------- | ----------------- | -----------------
|                      | Gross             | Net              
|                      |                   |                  
|Oil                   | 1                 | 1.0              
|Natural Gas           | -                 | -                
|Dry Wells             | 1                 | 0.25             
|Service Wells         | -                 | -                
|                      |                   |                  
|Total Completed Wells | 2                 | 1.25             







The following is the Companys total net oil and gas production for Fiscal 2005 and 2004.



|Year Ended April 30, 2005 | Natural Gas
Oil
Natural Gas Liquids | 491,658 mcf
25,070 barrels
3,709 boe
|------------------------- | ----------------------------------- | ------------------------------------
|                          |                                     |                                     
|Year Ended April 30, 2004 | Natural Gas
Oil
Natural Gas Liquids | 56,924 mcf
None
None                



The following table includes the average prices the Company received for its oil and gas production for each fiscal year:



|                    | 2005        | 2004       
|------------------- | ----------- | -----------
|                    |             |            
|Oil                 | $52.72/bbl  | $34.09/bbl 
|Natural Gas         | $  6.99/mcf | $  7.12/mcf
|Natural Gas Liquids | $41.43/boe  | $26.20/boe 



The following is the Company oil and gas reserve estimates for the last 3 fiscal years.  The estimate for the Fiscal Year 2005 ended April 30, 2005 is from an independent resource calculation prepared by AJM Petroleum Consultants of Calgary, Alberta. The estimates for Fiscal Year 2004 ended April 30, 2004 is from an independent resource calculation prepared by Sproule Associates Limited. of Calgary, Alberta and dated September 28, 2004. The estimate for Fiscal Year 2003 ended April 30, 2002 is from an independent resource calculation prepared by McDaniel & Associates Consultants Ltd. of Calgary, Alberta and dated May 1, 2003.



|                                    |           | San Telmos Share of Remaining Reserves
as of April 30, 2005
(mboe)
|----------------------------------- | --------- | -------------------------------------------------------------------
|                                    | Gross (1) | Net (2)                                                            
|Proved Developed Producing Reserves |           |                                                                    
|Light and Medium Oil (mbbl)         | 89.9      | 74.7                                                               
|Natural Gas (mmcf)                  | 2,950.1   | 1,653.9                                                            
|Natural Gas Liquids (mbbl)          | 45.9      | 21.4                                                               
|Total Proved Reserves  (mboe)       | 627.5     | 371.8                                                              
|                                    |           |                                                                    
|Proved Undeveloped Reserves         |           |                                                                    
|Light and Medium Oil  (mbbl)        | 33.6      | 25.1                                                               
|Natural Gas (mmcf)                  | 1,411.4   | 1,015.7                                                            
|Natural Gas Liquids (mbbl)          | 17.0      | 10.7                                                               
|Total Developed Reserves (mboe)     | 285.8     | 205.1                                                              
|                                    |           |                                                                    





|                                    |           | San Telmos Share of Remaining Reserves
as of April 30, 2004
(mboe)
|----------------------------------- | --------- | -------------------------------------------------------------------
|                                    | Gross (1) | Net (2)                                                            
|Proved Developed Producing Reserves |           |                                                                    
|Light and Medium Oil (mbbl)         | 73.3      | 65.2                                                               
|Natural Gas (mboe)                  | 117.8     | 64.5                                                               
|Natural Gas Solution (mboe)         | 27.7      | 22.8                                                               
|Natural Gas Liquids (mbbl)          | 30.5      | 18.2                                                               
|Total Proved Reserves  (mboe)       | 249.3     | 170.7                                                              
|                                    |           |                                                                    
|Proved Undeveloped Reserves         |           |                                                                    
|Light and Medium Oil  (mbbl)        | 0.0       | 0.0                                                                
|Natural Gas (mboe)                  | 75.3      | 50.2                                                               
|Natural Gas Solution (mboe)         | 0.0       | 0.0                                                                
|Natural Gas Liquids (mbbl)          | 9.8       | 6.1                                                                
|Total Developed Reserves (mboe)     | 85.1      | 56.3                                                               
|                                    |           |                                                                    
|Total Proved Reserves               |           |                                                                    
|Light and Medium Oil  (mbbl)        | 73.3      | 65.2                                                               
|Natural Gas (mboe) (3)              | 193.1     | 114.7                                                              
|Natural Gas Solution (mboe) (3)     | 27.7      | 22.8                                                               
|Natural Gas Liquids (mbbl)          | 40.3      | 24.3                                                               
|Total (mboe) (3)                    | 334.4     | 227.0                                                              





|                                    |           | San Telmos Share of Remaining Reserves
as of April 30, 2003
(mboe)
|----------------------------------- | --------- | -------------------------------------------------------------------
|                                    | Gross (1) | Net (2)                                                            
|Total Proved Reserves               |           |                                                                    
|Natural Gas  (mboe)(3)              | 32.4      | 26.2                                                               
|Natural Gas Liquids (mbbl)          | 3.1       | 2.2                                                                
|Total Proved Reserves (mboe) (3)    | 35.5      | 28.4                                                               
|                                    |           |                                                                    
|Proved Developed Reserves           |           |                                                                    
|Natural Gas (mboe) (3)              | 32.4      | 26.2                                                               
|Natural Gas Liquids (mbbl)          | 3.1       | 2.2                                                                
|Total Developed Reserves (mboe) (3) | 35.5      | 28.4                                                               



(1)

Gross Figures are before expected royalty deductions

(2)

Net Figures are after expected royalty deductions

(3)

Natural gas and natural gas solution are reported in thousands of barrels of oil equivalent (mboe) at 1bbl = 6 mcf.



The Companys landholdings as of April 30, 2005 are as follows:



|                | Undeveloped | Developed | Total
|--------------- | ----------- | --------- | -----
|                | Gross       | Net       | Gross
|                |             |           |      
|Alberta (acres) | 8,320       | 7,680     | 4,640





Description of Mining Properties



Condor Property - Argentina



In Fiscal 2004, the Company sold its 100% interest in the Condor Property to Argentex Mining Corporation for $10,000 cash and a 2% NSR. Argentex is a non-arms length party as Christopher Dyakowski, Officer and Director of San Telmo, is a former officer and director of Argentex. The Company recorded a gain of $9,999 on the sale of the property as it had previously written-down the value of the property to a nominal value of $1.



Quebec Properties  Canada



In Fiscal 2004, the Company abandoned its mineral exploration properties located in Northern Quebec. The Company acquired the properties in fiscal 2002 for $4,400.  The claims were written down to a nominal amount of $1 in fiscal 2003.



Plan of Operations



The Companys primary source of funds since incorporation has been through the issuance of common stock, the exercise of common stock purchase warrants and options, and through short-term loans.  During Fiscal 2005, the Company retired its outstanding short-term loans and obtained a new revolving demand loan of $5,000,000 and a non-revolving acquisition/development demand loan of up to $1,500,000 from a Canadian national bank. As of April 30, 2005, the Company had $2,000,000 outstanding under the $5,000,000 revolving demand loan.



For Fiscal 2006, the Company anticipates spending between $6,000,000 and $8,000,000 on oil and gas exploration and development activities. These expenditures include the drilling of up to 5 wells on the Teepee Creek project and 3 wells on the Gordondale project. The Company will continue to search for additional exploration opportunities contingent on the Companys ability to finance them with existing cash flows and the existing bank loan arrangements.



The Company had a working capital deficit of ($1,966,919) at April 30, 2005. The balance of the Companys cash needs through Fiscal 2006 is expected to come from operating cash flow from oil and gas production, borrowings from the Companys demand loans, and the issuance of equity capital.





ITEM 5. Operating and Financial Review and Prospects



The following discussion of the financial condition, cash flows and results of operations of the Company for the for the years ended April 30, 2005, 2004 and 2003 should be read in conjunction with the financial statements of the Company and related notes included therein.



The Companys financial statements are in Canadian dollars (CDN$) and are prepared in accordance with Canadian Generally Accepted Accounting Principles (Canadian GAAP) the application of which, in the case of the Company, conforms in all material respects for the period presented with the United States GAAP, except as referred to in Note 17 of the financial statements of the Company included herein.



The Company is in the process of exploring and developing oil and gas properties in Alberta. The recoverability of the carrying values of the properties and related deferred costs is entirely dependent on the existence of economically recoverable reserves, the ability of the Company to obtain the necessary financing to complete the exploration and development of these properties, and upon profitable future production.



Financial Condition



In the last several years, the Company financed its activities through cash from operations, short-term borrowing and from equity financings. The Companys short-term loans met both current obligations and provided funds to acquire production equipment. The loans included:



In December 2003, the Company obtained a loan of $600,000 from a shareholder, Allstar Gold Ventures Ltd. The loan was at an interest rate of 12% annually and was due on June 30, 2004. The Company issued 37,500 common shares to the lender as a loan bonus. The loan remained unpaid at the due date. Subsequent to the year-end, the Company renegotiated the repayment terms of the loan. Commencing in September 2004, the Company will repay $100,000 monthly plus annual interest of 12%. As of April 30, 2004, the loan balance outstanding was $629,195, which included $29,195 in accrued interest.



In June 2004, the Company obtained $400,000 pursuant to a demand promissory note with a financial institution. The note bears interest at a rate prime plus 1.5% annually and a set-up and administration fee of $4,000. The note is payable on demand and unless and until otherwise demanded, in equal monthly installments of principal and interest of $8,334. The loan is secured with a general security agreement including a first priority security interest in San Telmo Energys present and after acquired real property.



Also in June 2004, the Company obtained a $500,000 demand revolving loan from a financial institution. The loan bears interest at prime plus 1.5%, payable monthly on the amounts outstanding. The loan may be repaid or prepaid at any time from operating cash flow or from the proceeds of the sale of assets without penalty. If repayment is made from any other source a fee of 0.5% of the amount being paid shall be paid to the bank. The loan is secured with a general security agreement including a first priority security interest in San Telmo Energys present and after acquired real property.



In February 2005, the Company acquired two petroleum and natural gas leases at a Province of Alberta crown lease sale. Total consideration was $230,000. The acquisition of these leases was financed by loans from two directors of the Company at an interest rate of 12% a year. The aquired leases were pledged as security against the loans. The loans were repaid in full in April 2005, including interest of $4,688.



During fiscal 2005, the above loans were all repaid in full.



To finance development work, funds were drawn from a new revolving operating demand loan from the National Bank of Canada to the Companys wholly-owned subsidiary, San Telmo Energy Inc. This loan is for up to $5,000,000, repayable monthly, interest only at the prime rate plus 0.5% per annum. The Company also obtained a non-revolving acquisition/development demand loan of up to $1,500,000, repayable in monthly payments over the half-life of the reserves being financed, including interest at the National Bank of Canada prime rate plus 0.75% per annum, a treasury risk line of up to $1,000,000. These facilities are secured by a General Security Agreement and by a $20,000,000 debenture with a floating charge over all the assets of the Company with a negative pledge and undertaking to provide fixed charges on the Companys major producing petroleum properties. Other securities include the assignment/endorsement by the Company of all risk insurance, revenues and monies under material contracts, if applicable.



Both facilities are repayable upon demand by the National Bank of Canada. As of April 30, 2005, the Company had borrowed $2,000,000 under the revolving operating demand loan and $0 under the non-revolving acquisition/development demand loan.



For Fiscal 2006, Management anticipates continuing its development and exploration activities, including drilling several follow-up wells at Gordondale and Teepee Creek. In addition, the Companys optionee Rolling Thunder will fund initial exploration on four of the Companys exploration projects.



The following is the current estimated capital acquisition, development, and exploration budget for Fiscal 2006:



|Activity                                                                                  | Budgeted Amount      
|----------------------------------------------------------------------------------------- | ---------------------
|                                                                                          |                      
|Teepee Creek Property
Drilling and completion of 5 wells
Facility construction and tie-in | $3,500,000
$2,500,000
|                                                                                          |                      
|Gordondale Property
Drilling and completion of 2 wells                                    | $1,500,000
$1,100,000
|                                                                                          |                      
|Gold Creek Property
Facility construction and tie-in                                      | $   320,000          
|                                                                                          |                      
|Land Acquisition                                                                          | $   300,000          
|                                                                                          |                      
|Purchase of computers and furniture                                                       | $       3,000        
|                                                                                          | $9,223,000           



Development at Teepee Creek and Gordondale will be dependent upon the success of the newly drilled wells.



Management is also investigating the acquisition of further oil and gas properties in Alberta and in other areas of North America. The amount and timing of additional exploration expenditures throughout the fiscal year are dependent upon the success of the evaluation of the Companys existing property positions for drill targets as well as the possible acquisition of further properties.



The Companys working capital position as of April 30, 2005 was ($1,966,919). In order to meet it current and anticipated financial obligations, the Company will require additional sources of funds during Fiscal 2006. Management anticipates these funds will come from operating cash flow from the production of oil and gas and additional borrowing under its bank loan facilities, as well as the issuance of additional equity.



Significant Uncertainties



Potential financing arrangements are subject to material risks. While the Company may raise funds through further equity offerings or an assignment of all or a portion of its property interests, there is no assurance that such funds will be available.  Further, equity financings also pose material risks to investors as such financings may result in substantial dilution to purchasers.



Results of Operations



The Company is in the business of acquiring oil and gas properties with the aim of developing them to a stage where they can be exploited at a profit.  At that stage, the Company's operations are, to some extent, dependent on the world market prices of any petroleum products produced.   The Company has also derived interest income on its bank deposits, which depend on the Company's ability to raise funds.



The Company is currently producing from three properties. During fiscal 2006, the Company intends to further develop its Teepee Creek and Gordondale properties through the drilling of new wells. Management expects little variation in operating results unless its exploration and development programs are successful in discovering sufficient reserves and it is able to bring them to production.



Management periodically, reviews the exploration results both internally and externally through oil and gas related professionals. Decisions to abandon, reduce or expand exploration efforts is based upon many factors including general and specific assessments of mineral deposits, the likelihood of increasing or decreasing those deposits, land costs, estimates of future oil and gas prices, potential extraction methods and costs, the likelihood of positive or negative changes to the environment, permitting, taxation, labor and capital costs.  There cannot be a pre-determined hold period for any property as geological or economic circumstances render each property unique.



Fiscal Year Ended April 30, 2005



During the year, the Company drilled one well at its 100% Teepee Creek property and participated in a well (25% WI) at Timeu. The well at Teepee Creek was completed as an oil well, while Timeu was a dry hole and abandoned.  Construction of production facilities at Teepee Creek was begun in October 2004 and production from two wells commenced in December 2004. Two additional leases were acquired at Alberta crown lease sale for consideration of $230,000. In April 2005, the Company reached an option agreement with Rolling Thunder Exploration where Rolling Thunder can earn a percentage of the Companys interest in 4 exploration properties by acquiring seismic data and funding 100% of the cost of drilling an initial well on each property.



Revenue from oil and gas sales, net of royalties, was $4,244,764 compared to $328,196. The increase was due to the commencement of production from Teepee Creek in December 2004 and increased production from the McLeod gas well. After deducting depletion of ($1,758,176), production expense of ($927,749), site restoration of ($54,851), and transportation expense of ($246,689), Gross operating income was $1,257,299. Expenses for the year was ($3,032,349) compared to ($2,113,510) in the prior year. Large increases in expenses occurred in Stock-based compensation, which totaled ($1,839,000) from ($697,500) which is related to the granting of stock options to officers and directors; Consulting fees, which rose to ($185,362) from ($116,684) due to increased financial and administrative consulting services; professional fees of ($167,879) compared to ($115,437) due to higher accounting and audit fees; Salaries and Benefits, which rose to ($106,639) from zero largely due to the hiring of a full-time Chief Financial Officer; Directors fees of ($57,500) compared to zero as the Company initiated paying Directors for service; Interest and bank charges, which rose to ($109,215) from ($33,177) as the Company incurred higher interest charges from short-term loans during fiscal 2005; and Office and miscellaneous of ($121,860) from ($82,938) due to higher levels of corporate activity.



Large decreases in expenses occurred in Business production and development, which fell to ($20,457) from ($334,592), and Investor relations, which declined to ($154,773) from ($339,757), largely due to a one-time investor relations program during fiscal 2004; Filing fees fell to ($14,410) from ($37,829), and Transfer agent fees declined to ($10,096) from ($15,473), due to fewer equity financings in fiscal 2005; and Lenders fees fell to zero from ($60,000) as the Company replaced short-term loans from fiscal 2004 with bank financing in fiscal 2005.



Total loss for the year was ($1,692,190) after Recovery of future income taxes of $82,860, compared to the prior years loss of ($2,086,616). Loss per share in fiscal 2005 was ($0.04) compared to ($0.06) in fiscal 2004.



Fiscal Year Ended April 30, 2004



During the year, the Company drilled 4 exploration wells and completed wells at Gordondale, McLeod and Teepee Creek. Construction of the required production, storage and pipeline facilities to bring the new wells on-line was begun for completion during fiscal 2005 with the Mcleod well commencing production in April of 2004. An additional 2,560 net acres of land was acquired through Alberta Crown land sales for future exploration, and the Companys working interest at Teepee Creek was increased to 100% from 50%.



Revenue from petroleum and natural gas sales, net of royalties, was $328,196. After deducting depletion of ($257,305), licenses, fees, taxes and lease rental of ($20,703) and operating expenses of ($33,293), gross operating income was $16,895. Expenses for the year totaled ($2,113,510), compared to ($2,016,406) recorded in the prior year. Large changes in expenses occurred in Consulting Fees, which fell to ($116,684) from ($395,171) and Property Investigations, which declined to ($1,594) from ($57,243) due to fewer new properties investigated for possible acquisition; Interest and Bank Charges, which rose to ($33,177) from ($1,405) as the Company accrued interest on a loan from a shareholder; Lenders Fees of ($60,000) compared to zero due to a loan granted to the Company; Investor Relations, which rose to ($339,757) from ($172,526) and Promotion, which fell to ($334,592) from ($808,651) as the Company increased its efforts to reach the investment community through the engagement of an investor relations firm while promotional fees were paid to an investors newsletter firm; Stock-based Compensation, which rose to ($697,500) from ($119,000) as the Company increased the number of options granted to non-employees. The Company also wrote off the remaining ($1) of its mineral properties and deferred exploration costs in the current year compared to ($7,366) when management determined it would not conduct further exploration on its mineral properties and wrote them down to nominal value.



Total loss for the year was ($2,086,616), or ($0.06) per share. The lower loss per share in the current year was due to a higher number of weighted common shares outstanding in the current year.



Fiscal Year Ended April 30, 2003



During the year, the Company concentrated on its oil and gas properties in the Province of Alberta. The Company acquired additional properties through land sales as well as joint-venture and farm-in agreements, and successfully completed and tied-in the Mahaska natural gas well in which the Company has a 30% working interest.



Revenue from natural gas sales, net of royalties, was $164,291. After deducting Depletion of ($32,430), Net Sales were $131,861. All the revenue during the year was due to production from the Mahaska well, which began production on February 15, 2003. Expenses for the year totaled ($2,016,406), which was an increase of ($1,468,723) recorded in the prior year. The increase in expenses was largely due to the higher level of corporate activity as the Company acquired and explored new oil and gas properties during the year. Large increases in expenses occurred in Consulting Fees, which rose to ($514,171) from ($170,916); Promotion and Investor Relations, which totaled ($172,526) and ($808,651), up from ($26,466) and ($22,601); Management Fees, which increased to ($160,410) from ($103,333); Office and Miscellaneous, which rose to ($92,155) from ($13,854); Property Investigations, which rose to ($57,243) from zero, and Travel, which increased to ($10,483) from ($4,507) as management conducted due diligence on new properties for possible acquisition; Filing Fees, which increased to $29,737 from $13,711, and Transfer Agent expenses, which rose to ($10,325) from ($5,942), due to the issuance of common shares; and Rent, which rose to ($38,542) from ($30,000). Large decreases in expenses occurred in Interest and Bank Charges, which declined to ($1,405) from ($8,506); Interest on Convertible Debentures, which fell to ($5,481) from ($9,686) as the Company repaid a portion of the debentures outstanding; and Mineral Properties and Deferred Exploration Costs written off declined to ($7,366) from ($28,672) as the majority of the Companys remaining capitalized mineral property costs were written off during 2002.



Total loss for the year was ($1,884,545), or ($0.16) per share after adjusting for the forward stock split completed in Fiscal 2004. The lower loss per share for the current year compared to the prior year was due to a higher weighted average number of common shares outstanding during 2003.



Liquidity and Capital Resources



The Company's primary source of funds since incorporation has been through the issue of its common shares and the exercise of common stock options and common share purchase warrants, as well as short-term loans.  During fiscal 2005, the Company also received higher cash flows from operations and arranged two bank loans. Operating cash flow is not expected to be sufficient for the Companys anticipated capital expenditures in fiscal 2006, with the balance of funds expected to be provided from its existing bank loan arrangements.



The Company does not know of any trends, demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, the Company's liquidity either materially increasing or decreasing at present or in the foreseeable future. Material increases or decreases in the Company's liquidity are substantially determined by the success or failure of the Company's exploration programs or the future acquisition of projects.



Fiscal 2005 ended April 30, 2005



The Companys working capital deficit as of April 30, 2005 was ($1,966,919). Total assets totaled $9,253,036 compared to $6,717,019. Cash was $58,474, which fell slightly from $66,733. GST payable was $73,639 compared to a receivable of $175,125. Accounts receivable rose to $1,219,047 from $125,373 due to amounts due from the Companys increased oil and gas production; Tax credit receivable was $293,623 compared to zero; and Prepaid expenses totaled $161,748, up from $78,558. Oil and Gas properties was $7,481,375, an increase of $1,237,276 from fiscal 2004s $6,244,099 due to newly acquired leases and development of existing properties.



Liabilities were ($3,872,473) compared to ($2,699,406). The increase was due to Bank indebtedness of ($2,124,106) as the Company borrowed $2,000,000 from its newly arranged demand loan facility with the National Bank of Canada, and ($124,106) of bank overdrafts; Asset retirement obligations were ($172,662) compared to zero in fiscal 2004 as the Company changed its policy on accounting for liabilities for site restoration and abandonment of oil and gas properties, effective May 1, 2004.  Accounts payables declined to ($1,490,293) from ($2,063,589), and Loans payable fell to zero from ($629,195) as the Company repaid its outstanding short-term loans during fiscal 2005.



The Net loss for the fiscal year was ($1,692,190). Operating Activities provided cash of $96,478. Non-cash charges included Depletion and accretion of $1,813,027 and compensation related to the grant of stock options of $1,839,000. Increase in Accounts receivable was ($1,093,674) and decrease of Accounts payable used cash of ($573,296). Financing Activities provided cash of $2,793,911. Bank indebtedness provided cash of $2,124,106 and issuance of shares provided cash of $1,299,000. The decrease in Loans payable used cash of ($629,195). Investing Activities used cash of ($2,898,648), as Oil and Gas property costs used cash of ($2,877,641) and Acquisition of equipment used cash of ($21,007).



The Companys cash position as of April 30, 2005 was $58,474, a decrease of ($8,259) during the year.



Fiscal 2004 ended April 30, 2004



The Company finished the year with a working capital deficit of ($1,323,617). Total assets totaled $7,879,519 compared to $2,611,852 in the prior year. Cash fell to $66,733 from $1,163,086 as the Company spent cash on drilling of 4 wells and acquisition of new properties. Oil and Gas properties totaled $6,244,099 compared to $1,199,651, with the increase due to newly acquired properties and monies spent on exploration and development of existing projects. Liabilities rose to ($2,699,406) from ($122,721). Accounts Payable and Accrued Liabilities was ($2,063,589) compared to ($88,574) as the Company acquired equipment; Loan Payable rose to ($629,195) from zero as the Company borrowed ($600,000) from a shareholder and accrued ($29,195) in interest. All of the Companys liabilities are classified as current.



Net Loss for the year was ($2,086,616). Operating Activities provided cash of $738,075 due to the rise in Accounts Payable of $1,975,015, non-cash compensation of $697,500 and depletion of $257,305. Financing Activities provided cash of $3,458,668, with $2,857,598 in cash provided by the issuance of common shares, $629,195 provided by Loans Payable and ($28,125) used by the repayment of convertible debentures. Investing Activities used cash of ($5,293,096), with the majority of the monies spent on Oil and Gas Property Costs, with Proceeds from the Sale of the Companys Condor Property in Argentina providing cash of $10,000.



The Companys cash position decreased by ($1,096,353) during the year to $66,733 as of April 30, 2004.



Fiscal 2003 ended April 30, 2003



The Company finished the year with working capital of $1,255,014. Total assets totaled $2,611,852 compared to $582,134 in the prior year. Cash and cash equivalents totaled $1,163,086 compared to $312,369 in the prior year. The increase was due to the issuance of common shares for cash. GST receivable was $36,228 compared to $5,681. Accounts receivable was $167,591 compared to zero in the prior year, while prepaid expenses totaled $10,830 compared to zero. The higher accounts receivable and prepaid expenses are related to the Companys oil and gas operations. Oil and Gas properties totaled $1,199,651 compared to $228,390, with the increase due to the acquisition of additional properties and capitalization of exploration expenditures. Mineral properties were $2 compared to $6,272 as the Company wrote-down each of its remaining mineral properties to the nominal value of $1 each.



Liabilities as of April 30, 2003 were ($122,721) versus ($76,724). The increase was due to higher Accounts Payable, which rose to ($88,574) from ($15,988), and Current Portion of Convertible Debentures, which totaled ($28,125) compared to ($18,750). Convertible debentures outstanding totaled zero compared to $33,750, as the entire remaining amount outstanding have been reclassified as current liabilities as they are due in September, 2003. All of the companies liabilities are classified as current.



Net loss for the year was ($1,884,545). Operating Activities used cash of ($1,809,421). Besides the net loss, Working Capital Items used cash of ($101,097), while items not involving cash included Depletion of $32,430, Write-off of mineral properties of $7,366, Write-off of capital assets of $9,178, Amortization of $8,247, and Non-cash compensation charge of $119,000. Financing Activities provided cash of $3,687,394, with the issuance of shares providing cash of $3,711,769 and the repayment of convertible debentures using cash of ($24,375). Investing Activities used cash of ($1,027,256), as Acquisition and exploration of Petroleum and Natural Gas properties used cash of ($1,080,691); Acquisition of capital assets used ($22,468); Deferred mineral exploration used ($1,097); and Proceeds from sale of oil and gas property, plant and equipment provided cash of $77,000.



The Companys cash position increased by $850,717 during the year to $1,163,086 as of April 30, 2003.



Differences Between Canadian and U.S. GAAP



The Company follows Canadian Generally Accepted Accounting Principals (Canadian GAAP) which are different in some respects from those applicable in the United States (US GAAP). The principal differences are summarized below.



In accordance with US GAAP, costs related to acquisition and exploration activities are generally expensed, whereas under Canadian GAAP such costs may be deferred until the properties are brought into production, at which time the deferred costs are to amortized on a unit of production basis over proven and probable reserves, or until the properties are abandoned or sold, at which time the deferred costs are written off. As a result, acquisition and exploration costs have been expensed under US GAAP in the year such costs were incurred.



Under US GAAP, proceeds from the sale of flow-through common shares are allocated amongst the fair value of the stock issued and the price paid by the investor. The difference between the fair value and the price paid is recognized as a liability for accounting purposes. The liability is relieved and the corresponding future tax liability is recorded when the Company renounces its exploration expenditures to the flow-through share investors.



For a more detailed explanation and quantification of the differences on the Companys reported financial results, the reader is referred to Note 17 of the Companys Audited Financial Statements, Differences Between Generally Accepted Accounting Principles in Canada and the United States of America.



Research and Development, Patents and Licenses



The Company conducts no Research and Development activities, and has no Patents and Licenses, nor is it dependent upon any for its business.



Trend Information



The Company is unaware of any trends which would have a material effect on its operations or financial position.



Off-Balance Sheet Arrangements



The Company has no off-balance sheet arrangements.



Tabular Disclosure of Contractual Obligations



The Company currently leases office space in Vancouver and Calgary, although the Company only has a contractual lease on its Calgary space.





|                                             | Payments Due by Period
|-------------------------------------------- | ----------------------
|Contractual Obligations
as of April 30, 2005 | Total                 
|                                             |                       
|Operating Lease Obligations(1)               | $ 64,000              
|                                             |                       
|Total                                        | $ 64,000              



(1)Operating lease obligations represent leases on the Companys current offices to December, 2006;





ITEM 6. Directors, Senior Management and Employees



Table No. 3 lists as of September 30, 2005, the names of the Directors of the Company.  The Directors have served in their respective capacities since their election and will serve until the next Annual General Meeting or until a successor is duly elected, unless the office is vacated in accordance with the Articles/By-Laws of the Company.



Table No. 3

Management and Directors



|Name                  | Position                       | Date First Appointed
|--------------------- | ------------------------------ | --------------------
|Brian Bass            | President and Director (1) (2) | July, 2001          
|Stanley Herdman       | Chief Financial Officer (2)    | May, 2004           
|Christopher Dyakowski | Secretary and Director         | November, 1996      
|William Schmidt       | Director (1) (2) (3)           | October, 1996       
|George Stubos         | Director (1) (3)               | September, 2000     



(1)

Member of the Audit and Finance Committee of the Board of Directors.

(2)

Member of the Disclosure Committee of the Board of Directors.

(3)

Member of the Corporate Governance Committee of the Board of Directors.



Brian Bass of Calgary, Alberta is a certified management accountant with over 20 years experience in the oil and gas sector. Mr. Bass has served as a landman as well as in management for several oil and gas companies. He was appointed President of the Company in October 2002. Mr. Bass is currently a director of Rolling Thunder Exploration Ltd., a public oil and gas exploration company listed on the TSX Venture Exchange. He spends approximately 98% of his time on Company business.



Stanley (Stan) Herdman was appointed Chief Financial Officer of San Telmo in May 2004. He graduated from the University of Calgary in 1967 with a B.Sc. in Psychology and received his Chartered Accountant designation in 1973 with KPMG. He also worked with PanCanadian Petroleum Limited (now EnCana) where he was manager of the financial and general accounting department. From December 1997 to December 1998, he was Manager of Accounting for TransCanada Pipelines Limited, and from January 1999 to September 2003 he was a senior accountant and auditor with R.W. St Louis, Chartered Accountant. He spends 100% of his time on Company business.



Christopher I. Dyakowski of Vancouver, British Columbia has been a Director of San Telmo since its founding and served as the Companys President until October 2002. He was appointed Corporate Secretary in January 2003.  Mr. Dyakowski is a professional Geoscientist and is President of Max Investments, a private investment company; a Director of Storm Cat Energy, a mineral exploration company listed on the TSX Venture Exchange and American Stock Exchange; and President and Director of Leroy Ventures Inc., a mineral exploration company listed on the TSX Venture Exchange. He spends 10% of his time on Company business.



William E. Schmidt of Vancouver B.C. has served as a Company director since the founding in October 1996. Mr. Schmidt is a barrister and solicitor in British Columbia. He serves as an officer and Director of several other public companies, including as a Director and Chief Financial Officer of Clifton Star Resources, a mineral exploration company listed on the TSX Venture Exchange; a director of Leroy Ventures Inc., a mineral exploration company listed on the TSX Venture Exchange; Secretary of Equus Energy, a junior oil and gas company listed on the TSX Venture Exchange; a director of Santa Cruz Ventures, a mineral exploration company listed on the TSX Venture Exchange; Secretary and Chief Financial Officer of Carat Exploration Inc., a mineral exploration company listed on the TSX Venture Exchange; and a Director and Chief Financial Officer of Exchequer Resources, a mineral exploration company listed on the TSX Venture Exchange; He spends 10% of his time on Company business.



George Stubos of Vancouver, British Columbia is a Director of the Company. He controls Prominex Financial Services, a private business consulting company. He is the editor of Insider Report, a financial newsletter, and is a former Investment Advisor with Canaccord Capital Corp. He spends 40% of his time on Company business.



The Directors of the Company are elected annually and hold office until the next Annual General Meeting.



Table No. 4 lists, as of September 22, 2005, Directors and Officers who beneficially own the Registrant's voting securities and the amount of the Registrant's voting securities owned by the Directors and Officers as a group.



Table No. 4

Shareholdings of Directors and Officers



|Title
of
Class | Name of Beneficial Owner     | Amount and Nature
of Beneficial
Ownership | Percent
of
Class
|-------------- | ---------------------------- | ----------------------------------------- | ----------------
|               |                              |                                           |                 
|Common         | Brian Bass (1)               | 3,537,176                                 | 7.68%           
|Common         | Stanley Herdman (2)          | 402,000                                   | 0.89%           
|Common         | Christopher Dyakowski (3)    | 350,000                                   | 0.78%           
|Common         | William Schmidt (4)          | 100,000                                   | 0.22%           
|Common         | George Stubos (5)            | 1,391,448                                 | 3.07%           
|               |                              |                                           |                 
|               | Total Officers and Directors | 5,780,624                                 | 12.19%          



# Based on 44,768,502 shares of common stock outstanding as of 9/22/05, including Performance Escrow Shares, the resale of which is regulated by the TSX Venture Exchange; and currently exercisable stock options and share purchase warrants owned by each beneficial holder.



(1)

1,000,000 of these shares represent stock options; and 300,000 of these shares represent currently exercisable stock options registered in the name of 999246 Alberta Ltd, which is wholly owned by Brian Bass.

(2)

400,000 of these shares represent stock options.

(3)

350,000 of these shares represent currently exercisable stock options.

(4)

50,000 of these shares represent currently exercisable stock options and 20,000 represent currently exercisable stock purchase warrants.

(5)

500,000 of these shares represent currently exercisable stock options registered in the name of Prominex Financial Services which is beneficially owned by George Stubos; 20,000 of these shares represent currently exercisable stock purchase warrants.



Table No. 5 lists the Compensation received by Directors and Executive Officers for the last 3 fiscal years. All share information has been adjusted for the 3 for 1 forward split effective August 15, 2003.



Table No. 5

Executive and Director Compensation



|Officer or
Director                              | Fiscal
Year    | Salary      | Management
Fees               | Directors
Fees  | Options
Granted       | Other
Payments         
|------------------------------------------------ | -------------- | ----------- | ----------------------------- | --------------- | --------------------- | -----------------------
|                                                 |                |             |                               |                 |                       |                        
|Brian Bass,
President and
Director(1)            | 2005
2004
2003 | Nil
Nil
Nil | $129,960
$129,960
$129,910    | $20,000
Nil
Nil | 1,000,000
Nil
300,000 | $15,850
$39,600
$27,700
|                                                 |                |             |                               |                 |                       |                        
|Christopher
Dyakowski,
Secretary and Director(2) | 2005
2004
2003 | Nil
Nil
Nil | $  12,000
$  36,000
$  30,500 | $20,000
Nil
Nil | Nil
350,000
957,000   | Nil
Nil
Nil            
|                                                 |                |             |                               |                 |                       |                        
|William
Schmidt,
Director(3)                     | 2005
2004
2003 | Nil
Nil
Nil | Nil
Nil
Nil                   | Nil
Nil
Nil     | Nil
50,000
75,000     | $25,439
$36,949
$45,303
|George
Stubos,
Director(4)                       | 2005
2004
2003 | Nil
Nil
Nil | Nil
Nil
Nil                   | $17,500
Nil
Nil | Nil
500,000
207,000   | $16,438
$13,644
$78,750
|                                                 |                |             |                               |                 |                       |                        
|Stanley
Herdman,
Chief Financial Officer(5)      | 2005           | $100,000    | Nil                           | Nil             | 400,000               | $20,000                
|                                                 |                |             |                               |                 |                       |                        
|Peter
McKenzie-Brown,
Former Director            | 2004
2003      | Nil
Nil     | Nil
Nil                       | Nil
Nil         | Nil
Nil               | Nil
Nil                
|                                                 |                |             |                               |                 |                       |                        
|Romaine
Gilliland,
Former Director               | 2004
2003      | Nil
Nil     | Nil
Nil                       | Nil
Nil         | Nil
Nil               | Nil
Nil                
|                                                 |                |             |                               |                 |                       |                        
|Peter
Colnett,
Former Director                   | 2004
2003      | Nil
Nil     | Nil
Nil                       | Nil
Nil         | Nil
Nil               | Nil
Nil                



(1)

999246 Alberta, a private company owned by Brian Bass, received $13,200 (Fiscal 2004 - $39,600; Fiscal 2003  $27,700) related to the rental of the Companys Calgary Offices. Mr. Bass management fees were paid to 999246 Alberta. Mr. Bass also received $2,650 in interest related to a loan provided to the Company during fiscal 2005. The loan was fully repaid by the Company in April 2005.

(2)

Christopher Dyakowskis management fees were paid to Max Investments Inc., a private management company owned by Mr. Dyakowski.

(3)

Hemsworth, Schmidt, Barristers and Solicitors, received $25,439 (2004 - $36,949; 2003 - $45,303) for legal fees. William Schmidt is a partner of Hemsworth Schmidt.

(4)

Stubos Holdings, a private company owned by George Stubos, received $14,400 (2004 - $13,644; 2003  Nil) for rent.  Mr. Stubos received $2,038 in interest related to a loan provided to the Company during fiscal 2005. The loan was fully repaid by the Company in April 2005.

(5)

Stanley Herdmans Other Payments was for Consulting Services provided to the Company.





Board of Director Committees



The Company currently has three Committees: The Audit and Finance Committee, the Corporate Governance Committee, and the Disclosure Committee. All of the committees operate under written charter.



The Audit Committees duties are to assist the Board of Directors in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing, reporting practices, systems of internal accounting and financial controls, the annual independent audit of San Telmos financial statements, and the legal compliance of San Telmo as established by management. The Audit Committee is expected to meet at least once each quarter. The current members of the Audit Committee are Brian Bass, William Schmidt, and George Stubos.



The Corporate Governance Committees purpose is to identify individuals qualified to become Board members; recommend director nominees for each annual meeting of San Telmo shareholders and fill any vacancies which may occur between meetings of shareholders; develop and oversee the annual Board and Board Committee evaluation process; and to develop and recommend to the Board a set of corporate governance standards regarding the conduct and affairs of the Company. The Current members of the Nominating and Corporate Governance Committee are William Schmidt and George Stubos.



The Disclosure Committee operates under a written charter. Its purpose is to ensure that information required to be disclosed by the Company under the United States Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms. The Committee also ensures accurate and timely disclosure of material changes in the Companys affairs. All news releases, quarterly and annual reports, information circulars and other communications to shareholders or securities regulatory authorities must be approved in advance by the Disclosure Committee. The CEO of the Company will ensure that all new non-financial information relating to the operations of the Company that is, or could be, material is provided to the Chairman of the Disclosure Committee. The Chairman shall have the primary responsibility for the preparation and release of non-financial disclosure in an accurate and timely manner. The current members of the Disclosure Committee are Brian Bass, Stanley Herdman, and William Schmidt.





Employees/Anticipated Changes to Employees



As of April 30, 2005, the Company had no employees and three executive officers, two of which are Directors. The Company anticipates no changes to its staffing levels and will continue to engage consultants for operational needs as necessary.





ITEM 7. Major Shareholders and Related Party Transactions



The Registrant is a publicly-owned Canadian corporation, the shares of which are owned by Canadian residents and residents of other countries.  The Registrant is not controlled directly or indirectly by another corporation or any foreign government, except as described below.



As of September 22, 2005 the Company had 44,768,502 shares of common stock outstanding. As of that date, the Company believes there is one person or entity holding 5% or more beneficial interest in the Registrant's outstanding stock, based upon the number of common shares and currently exercisable options and warrants held.



|Person/Company

Brian Bass (1) | Number Held

3,537,176 | % Outstanding

7.68%
|------------------------------ | ---------------------- | --------------------



(1)

1,000,000 of these shares represent stock options; and 300,000 of these shares represent currently exercisable stock options registered in the name of 999246 Alberta Ltd, which is wholly owned by Brian Bass.





Related Party Transactions



For the three most recent Fiscal Years Ended April 30, 2005, 2004 and 2003, the following Related Party Transactions occurred:



In April 2005, the Company reached an agreement to option its Gold Creek, Boundary Lake, Mitsue, and Morrinville exploration properties to Rolling Thunder Exploration Ltd., a public Company traded on the TSX Venture Exchange. Brian Bass, President, CEO and Director of San Telmo, serves as a Director of Rolling Thunder.



Legal Fees and disbursements of $25,439 (2004 - $36,949; 2003 - 45,308) were paid to Hemsworth Schmidt, a legal firm for which William Schmidt, Director, is a partner.



Consulting Fees of Nil (2004  Nil; 2003 - $78,750) and Rent of $14,400 (2004 - $13,644; 2003  Nil) were paid to Prominex Financial Services Ltd., a private business consulting corporation controlled by George Stubos, Director. Interest of $2,038 were paid to Mr. Stubos in relation to a loan provided to the Company in fiscal 2005. The loan was repaid in full in April 2005.



The Company paid rent of $13,200 (2004 - $39,600; 2003 - $29,700) to 999246 Alberta Ltd., a private company owned by Brian Bass, President and Director. Interest of $2,650 was paid to Mr. Bass in relation to a loan provided to the Company in fiscal 2005. The loan was repaid in full in April 2005.



Consulting Fees of $20,000 were paid to Stanley Herdman, Chief Financial Officer, during fiscal 2005.



During fiscal 2004 ended April 30, 2004, he Company sold its interest in the Condor mineral exploration property in Argentina to Argentex Mining for $10,000 cash. Christopher Dyakowski, an Officer and Director, is a former officer and director of Argentex.



The Company paid Nil (2004  Nil; 2003 - $12,500) to Lalach Management Inc., a private company controlled by Harvey Lalach, former officer, for management services.



The Company paid Nil (2004  Nil; 2003 - $28,833) to DRB Management, a private company owned by Dale Brand, a former senior officer of a subsidiary, for management services of San Telmo Energy.



ITEM 8. Selected Financial Data



See Item 17, Financial Statements.



Shareholder Information



The Registrant's common stock is issued in registered form and the following information is from the Registrant's registrar and transfer agent, Pacific Corporate Trust Company, located at 625 Howe Street, 10th Floor, Vancouver, British Columbia, V6C 3B8.



As of September 2, 2005, the Company had 44,768,502 common shares issued and outstanding. A search of the Companys registered and beneficial holders show 59 United States shareholders owning 5,288,215 common shares, or 11.81% of the issued and outstanding shares.  37,864,136 common shares were held in Canada, or 89.04% of the issued and outstanding shares. 23 shareholders in other countries owning 1,616,151 common shares, or 3.61% of the issued and outstanding common shares.



As of September 2, 2005, the Company was aware of 17 holders of its Share Purchase Warrants, none of which were located in the United States.  These warrants were issued in conjunction with private placement unit offerings and are non-transferable.



The Registrant has not declared any dividends since inception and does not anticipate that it will do so in the foreseeable future. The present policy of the Registrant is to retain future earnings for use in its operations and the expansion of its business.



Legal Proceedings



The Company was named in a legal claim brought against it and third parties by a former officer of the Companys wholly owned subsidiary arising in part from the plaintiffs employment with the subsidiary. The Company settled the suit to avoid further litigation, and the settlement did not have a material effect on the Company or its financial position.



During Fiscal 2005, the Company was named as one of two defendants in a suit by Pacific International Securities. The suit claimed the Company was negligent in declaring the record date of the 3 for 1 stock split in August 2003. In October 2004, the Company announced that it had settled the suit to avoid further litigation. The settlement did not have a material effect on the Company or its financial position.



ITEM 9. The Offer and Listing



Trading Markets



The Company's common shares trade on the TSX Venture Exchange ("TSX-V") in Vancouver, British Columbia, Canada, having the trading symbol "STU" and CUSIP # 799549100. The Company began trading on the NASD Over-The-Counter Bulletin Board in the United States on November 26, 2002 under the symbol STUOF. The Company is also listed for trading in Germany on the Frankfurt and Berlin Stock Exchanges under the identifying symbol 675088.



Table No. 6 lists the high, low and closing sales prices on the TSX Venture Exchange for the Company's common shares for the latest 6 months, the last ten fiscal quarters and the last 5 fiscal years.



Table No. 6*

TSX Venture Exchange Stock Trading Activity

(Canadian Dollars)





|Period
Ended                   | High  | Low   | Close
|------------------------------ | ----- | ----- | -----
|                               |       |       |      
|September 2005                 | $0.64 | $0.49 | $0.50
|August 2005                    | $0.55 | $0.46 | $0.54
|July 2005                      | $0.53 | $0.40 | $0.50
|June 2005                      | $0.50 | $0.41 | $0.41
|May 2005                       | $0.50 | $0.36 | $0.47
|April 2005                     | $0.65 | $0.49 | $0.49
|                               |       |       |      
|Quarter ended April 30, 2005   | $0.65 | $0.49 | $0.49
|Quarter ended January 31, 2005 | $0.79 | $0.48 | $0.61
|Quarter ended October 31, 2004 | $0.80 | $0.50 | $0.65
|Quarter ended July 31, 2004    | $1.24 | $0.67 | $0.67
|                               |       |       |      
|Quarter ended April 30, 2004   | $1.55 | $0.94 | $1.08
|Quarter ended January 31, 2003 | $2.38 | $1.25 | $1.60
|Quarter ended October 31, 2002 | $2.63 | $0.85 | $2.00
|Quarter ended July 31, 2003    | $1.00 | $0.57 | $0.63
|                               |       |       |      
|Quarter ended April 30, 2003   | $2.61 | $2.27 | $2.60
|Quarter ended January 31, 2003 | $2.15 | $0.72 | $2.15
|Quarter ended October 31, 2002 | $1.05 | $0.12 | $0.95
|Quarter ended July 31, 2002    | $1.26 | $0.35 | $0.35
|                               |       |       |      
|Fiscal Year 2005               | $1.24 | $0.48 | $0.49
|Fiscal Year 2004               | $2.61 | $0.12 | $2.60
|Fiscal Year 2003               | $0.60 | $0.04 | $0.60
|Fiscal Year 2002               | $1.15 | $0.35 | $0.35
|Fiscal Year 2001               | $0.80 | $0.35 | $0.52



Table Number 7 lists the high, low and closing prices of the Companys common share trading on the NASD Over-The-Counter Bulletin Board for the last 6 months and for each fiscal period since the shares began trading on November 26, 2002.



Table No. 6a*

NASD Bulletin Board Stock Trading Activity

(United States Dollars)





|Period
Ended                   | High  | Low   | Close
|------------------------------ | ----- | ----- | -----
|                               |       |       |      
|September 2005                 | $0.54 | $0.41 | $0.42
|August 2005                    | $0.46 | $0.36 | $0.46
|July 2005                      | $0.43 | $0.34 | $0.40
|June 2005                      | $0.40 | $0.34 | $0.35
|May 2005                       | $0.40 | $0.33 | $0.36
|April 2005                     | $0.54 | $0.38 | $0.39
|                               |       |       |      
|Quarter ended April 30, 2005   | $0.54 | $0.38 | $0.39
|Quarter ended January 31, 2005 | $0.63 | $0.40 | $0.50
|Quarter ended October 31, 2004 | $0.63 | $0.39 | $0.50
|Quarter ended July 31, 2004    | $0.91 | $0.50 | $0.51
|                               |       |       |      
|Quarter ended April 30, 2004   | $1.22 | $0.67 | $0.81
|Quarter ended January 31, 2004 | $1.83 | $0.95 | $1.14
|Quarter ended October 31, 2003 | $1.93 | $0.57 | $1.57
|Quarter ended July 31, 2004    | $0.73 | $0.40 | $0.46
|                               |       |       |      
|Quarter ended April 30, 2003   | $1.81 | $1.35 | $1.80
|Quarter ended January 31, 2003 | $1.40 | $0.82 | $1.38
|                               |       |       |      
|Fiscal Year 2005               | $0.91 | $0.38 | $0.39
|Fiscal Year 2004               | $1.93 | $0.40 | $0.81
|Fiscal Year 2003               | $1.81 | $0.82 | $1.80





Table No. 6b*

Berlin Stock Exchange Stock Trading Activity

(Euros)





|Period
Ended                   | High | Low  | Close
|------------------------------ | ---- | ---- | -----
|                               |      |      |      
|September 2005                 | 0.40 | 0.34 | 0.34 
|August 2005                    | 0.35 | 0.31 | 0.35 
|July 2005                      | 0.34 | 0.30 | 0.32 
|June 2005                      | 0.30 | 0.28 | 0.29 
|May 2005                       | 0.27 | 0.26 | 0.26 
|April 2005                     | 0.40 | 0.30 | 0.31 
|                               |      |      |      
|Quarter ended April 30, 2005   | 0.40 | 0.30 | 0.31 
|Quarter ended January 31, 2005 | 0.45 | 0.32 | 0.38 
|Quarter ended October 31, 2004 | 0.47 | 0.30 | 0.40 
|Quarter ended July 31, 2004    | 0.75 | 0.39 | 0.39 
|                               |      |      |      
|Quarter ended April 30, 2004   | 0.96 | 0.59 | 0.65 
|Quarter ended January 31, 2004 | 1.54 | 0.70 | 0.92 
|Quarter ended October 31, 2003 | 1.67 | 0.54 | 1.26 
|Quarter ended July 31, 2003    | 0.63 | 0.38 | 0.42 
|                               |      |      |      
|Quarter ended April 30, 2003   | 0.54 | 0.42 | 0.53 
|Quarter ended January 31, 2003 | 0.43 | 0.38 | 0.43 
|                               |      |      |      
|Fiscal Year 2005               |      |      |      
|Fiscal Year 2004               | 0.54 | 0.38 | 0.53 





Table No. 6c*

Frankfurt Stock Exchange Stock Trading Activity

(Euros)





|Period
Ended                   | High | Low  | Close
|------------------------------ | ---- | ---- | -----
|                               |      |      |      
|September 2005                 | 0.41 | 0.33 | 0.35 
|August 2005                    | 0.36 | 0.30 | 0.35 
|July 2005                      | 0.35 | 0.28 | 0.33 
|June 2005                      | 0.32 | 0.27 | 0.29 
|May 2005                       | 0.31 | 0.26 | 0.29 
|April 2005                     | 0.42 | 0.30 | 0.31 
|                               |      |      |      
|Quarter ended April 30, 2005   | 0.43 | 0.33 | 0.31 
|Quarter ended January 31, 2005 | 0.48 | 0.33 | 0.39 
|Quarter ended October 31, 2004 | 0.50 | 0.30 | 0.37 
|Quarter ended July 31, 2004    | 0.75 | 0.39 | 0.42 
|                               |      |      |      
|Quarter ended April 30, 2004   | 0.95 | 0.58 | 0.70 
|Quarter ended January 31, 2004 | 1.54 | 0.75 | 0.93 
|Quarter ended October 31, 2003 | 1.67 | 0.50 | 1.33 
|Quarter ended July 31, 2004    | 0.63 | 0.39 | 0.41 
|                               |      |      |      
|Quarter ended April 30, 2003   | 0.54 | 0.42 | 0.54 
|                               |      |      |      
|Fiscal Year 2005               | 0.75 | 0.30 | 0.31 
|Fiscal Year 2004               | 0.54 | 0.42 | 0.54 





*Prices in all stock trading tables have been adjusted to reflect a 3 for 1 forward stock split effective August 15, 2004; a 2 for 1 forward stock split effective July 11, 2001; and a 1 for 7 reverse stock split effective August 15, 2002.



ITEM 10. Additional Information



As of April 30, 2005, the Company was authorized to issue 300,000,000 common shares without par value and had 44,768,502 shares issued and outstanding.



All of the authorized shares of common stock of the Company are of the same class and, once issued, rank equally as to dividends, voting powers, and participation in assets.  Holders of common stock are entitled to one vote for each share held of record on all matters to be acted upon by the shareholders.  Holders of common stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors, in its discretion, out of funds legally available therefore.



Upon liquidation, dissolution or winding up of the Company, holders of common stock are entitled to receive pro rata the assets of Company, if any, remaining after payments of all debts and liabilities.  No shares have been issued subject to call or assessment. There are no preemptive or conversion rights and no provisions for redemption or purchase for cancellation, surrender, or sinking or purchase funds.



Provisions as to the modification, amendment or variation of such shareholder rights or provisions are contained in the Business Corporations Act of British Columbia.  Unless the Corporations Act or the Company's Articles or memorandum otherwise provide, any action to be taken by a resolution of the members may be taken by an ordinary resolution or by a vote of a majority of the shares represented at the shareholders' meeting.



The Company has not declared any dividends since incorporation and does not anticipate that it will do so in the foreseeable future. The present policy of the Company is to retain future earnings for use in its operations and the expansion of its business.



Escrowed Shares



Pursuant to an Escrow Agreement dated November 3, 1997, the 750,000 Common Shares of the Company issued to the principal shareholders prior to the initial public offering of the Company in Canada, pursuant to a prospectus dated November 3, 1997, were deposited with Pacific Corporate Trust Company of Canada as escrow agent.



The restrictions contained in the Escrow Agreement provide that the Escrowed Shares may not be traded in, dealt with in any manner whatsoever, or released, nor may the Issuer, its transfer agent, or escrow holder make any transfer or record any trading of the Escrowed Shares without the consent of the Executive Director of the British Columbia Securities Commission (BCSC), or, while the common shares are listed on the Exchange, without the consent of the TSX Venture Exchange.



A holder of Escrowed Shares who ceases to be a principal, as that term is defined in Local Policy Statement 3-07 of the BCSC, dies or becomes bankrupt, shall be entitled to retain any Escrowed Shares held by him and shall not be obligated to transfer or surrender the Escrowed Shares to the Company or any other person.



Generally, the British Columbia Securities Commission and the TSX Venture Exchange policies provide that holders of performance shares of a natural resource issuer will be entitled to the pro-rata release of those performance shares on the basis of 15% of the original number of performance shares for every $100,000 expended on exploration and development of a resource property by an issuer, or by a person other that the issuer in order to earn an interest in the resource property, but only in respect of that proportion of the expenditures equal to the issuers remaining proportionate interest in the resource property after the persons interest has been earned. No more than 50% of the original number of performance shares; however, may be released in any 12 month period.  Where administrative expenses exceed 33% of total expenditures during the period on which the calculation is based, (a) the pro-rata release factor of 15% will be reduced to 7.5%, and (b) the percentage of the original number of performance shares available for release in any 12 month period will be reduced to 25%.  Any escrowed shares not released at the expiration of ten years from August 21, 1998 will be automatically cancelled.



As of April 30, 2005, the end of the most recent Fiscal Year, there were 321,427 (2004  528,105) common shares of the Company remaining in escrow. It is anticipated the remaining shares will be released from escrow in 2006.



Flow-Through Shares



Proceeds from the sale of Flow-Through common shares that are used to fund exploration work in Canada may qualify for tax credits under Section 66 of the Income Tax Act of Canada. Qualifying expenditures made by eligible individuals and corporations conducting exploration in Canada may receive tax credits.



Common shares of exploration companies which are issued under the program are known as Flow-Through shares as the Company making the qualified expenditures flow-through such tax credits received to the purchasers of these specific common shares. During fiscal 2004, the Company issued 345,000 Flow-Through common shares for proceeds of $586,500. During fiscal 2005, the Company issued 330,000 Flow-Through common shares for proceeds of $231,000. Under the sales, it is the Companys intention to distribute any credits received under the program to the purchasers of the Flow-Through shares.



Stock Options



At the Annual and Extraordinary General Meeting of Shareholders scheduled for October 17, 2005, shareholders have been asked to approve a new stock option plan (the Plan) for the Company. This Plan will replace the previous stock option plan approved by shareholders at the Annual and Extraordinary General Meeting held on October 20, 2004.



Under the Plan, 8,953,700 common shares will be reserved for issuance pursuant to the exercise of options granted pursuant to the Plan. Eligible persons under the Plan will include any director, officer, employee, consultant or management company employee of the Company or any affiliate of the Company designated by the directors under the Plan. The Plan will be administered by the Board of Directors or a committee thereof. At the time an option is granted, the board will also determine the exercise price of the option which, subject a minimum price of $0.10, shall be equal to the closing price of the common shares on the TSX Venture Exchange on the day immediately preceding the date of grant, and any vesting criteria or other restrictions with respect to the exercisability of the option.



Options will vest in equal installments as approved by the Board of Directors and as under the policies of the TSX Venture Exchange. Currently, those policies provide that minimum vesting requirements shall be 12.5% of the option grant upon TSX Venture Exchange approval and 12.5% for every three months thereafter.



For approval, a majority of Disinterested Shareholders must vote to approve the Plan. The Plan will become effective upon approval by both shareholders and the TSX Venture Exchange. A copy of the proposed Plan has been filed as an exhibit to this annual report.



As of September 5, 2005, Table No. 7 details the number of common stock options outstanding.



Table No. 7

Stock Options Outstanding





|Name                                           | Title                           | Number of
Shares of
Common
Stock* | Exercise
Price                     | Expiration
Date 
|---------------------------------------------- | ------------------------------- | --------------------------------- | ---------------------------------- | ----------------
|                                               |                                 |                                   |                                    |                 
|Brian Bass (1)                                 | President, CEO and Director     | 300,000
1,000,000                 | $0.25
$0.82                        | 11/08/07
5/17/09
|                                               |                                 |                                   |                                    |                 
|Stanley Herdman                                | Chief Financial Officer         | 400,000                           | $0.82                              | 5/17/09         
|                                               |                                 |                                   |                                    |                 
|Christopher Dyakowski                          | Secretary and Director          | 300,000
50,000                    | $0.25
$0.82                        | 11/08/07
5/17/09
|                                               |                                 |                                   |                                    |                 
|William Schmidt                                | Director                        | 50,000                            | $0.82                              | 10/31/08        
|                                               |                                 |                                   |                                    |                 
|George Stubos                                  | Director (2)                    | 500,000                           | $0.82                              | 10/31/08        
|                                               |                                 |                                   |                                    |                 
|Consultants (4 persons)                        | 300,000
500,000
100,000
500,000 | $0.25
$0.82
$0.82
$0.82           | 8/11/07
10/31/08
10/31/08
05/17/09
|                                               |                                 |                                   |                                    |                 
|Total Officers/Directors/Employees/Consultants | 3,700,000                       |                                   |                                   



* All share numbers reflect a 3 for 1 forward split effective August 15, 2003



(1)

The 300,000 options exercisable at $0.25 until 8/11/07 are registered in the name of 999246 Alberta Ltd. which is owned by Brian Bass.

(2)

These options are registered in the name of Prominex Financial Services which is owned by George Stubos.

(3)

During fiscal 2005, 100,000 options issued to consultants had the exercise price adjusted to $0.82 from $1.95.



Stock Purchase Warrants



As of September 5, 2005, the Company had 2,010,736 warrants (after adjusting for the 3 for 1 forward stock split) outstanding at the following exercise price and expiry dates:



|Number of
Warrants/Shares | Exercise Price | Expiry Date      
|------------------------- | -------------- | -----------------
|                          |                |                  
|390,736                   | $2.00          | December 31, 2005
|1,620,000                 | $0.82          | June 11, 2006    
|                          |                |                  
|2,010,736 Total           |                |                  





Changes in Share Capital



In the past 3 Fiscal Years, the Company has issued common stock for the following:



During the fiscal year ended April 30, 2004, the Company completed one private placement:



On June 14, 2004, the Company completed a non-brokered private placement of 1,620,000 common share units at a price of $0.70 for net proceeds of $1,134,000. Each unit consists of one common share and one common share purchase warrant, with each warrant exercisable at $0.82 until June 11, 2006. 330,000 of the units were flow-through common shares.



In addition to the private placement, the Company issued 1,500,000 common shares pursuant to the exercise of common stock warrants for proceeds of $90,000; and issued 300,000 common shares pursuant to the exercise of common stock options for proceeds of $75,000.



During the fiscal year ended April 30, 2004, the Company completed three private placements:



On October 21, 2003, the Company completed a non-brokered private placement of 857,142 shares at $0.95 per share.



On January 8, 2004, the Company completed a non-brokered private placement of 213,262 units at a price of $1.70 per unit. Each unit consisted of one common share and one common share purchase warrant, with each warrant exercisable into one common share at a price of $2.00 until December 31, 2005. 345,000 of these units consisted of flow-through common shares. Under the Income Tax Act of Canada, Section 66, the funds from the flow-through shares must be used for exploration in Canada, and the tax advantages of such exploration will be passed on to the buyers of these shares.



On February 18, 2004, the Company completed a non-brokered private placement of 324,900 units at a price of $1.32 per unit. Each unit consisted of one common share and one-half of a common share purchase warrant, with each full warrant exercisable into one common share at a price of $2.00 until February 22, 2005. A Finders Fee of 30,049 shares and 15,024 warrants were issued to Kevin Torudag.



In addition to the private placements listed above, the Company also issued 37,500 common shares at a deemed value of $60,000 for a lenders fee for a loan issued to the Company; issued 829,000 common shares pursuant to the exercise of stock options for proceeds of $227,250; and issued 750,000 common shares pursuant to the exercise of common stock warrants for proceeds of $45,000.



During the fiscal year ended April 30, 2003, the Company completed seven private placements:



On September 3, 2002, the Company completed the sale of 4,500,000 units at a purchase price of $0.12 per unit. Each unit consisted of one common share and one common share purchase warrant exercisable at $0.18 until October 31, 2004.



On September 23, 2002, the Company completed the sale of 200,000 units at a purchase price of $0.25 per unit. Each unit consisted of one common share and one common share purchase warrant exercisable at $0.32 until November 14, 2004.



On December 19, 2002, the Company completed the sale of 833,333 common shares at a price of US$0.75 per share.



On January 27, 2003, the Company completed the sale of 476,190 common shares at a price of $1.58 per share.



On April 3, 2003, the Company completed the sale of 416,667 common shares at a price of US$1.20 per share.



On April 8, 2003, the Company completed the sale of 207,333 common shares at a price of US$1.20 per share.



On April 15, 2003, the Company completed the sale of 333,333 common shares at a price of US$1.50 per share.



In addition to the private placements listed above, during the year ended April 30, 2003 the Company issued 10,000 shares pursuant to the exercise of stock options for proceeds of $7,500; Issued 10,000 shares pursuant to the exercise of warrants for proceeds of $1,800; and issued 20,490 common shares pursuant to a debt settlement at a deemed value of $37,497.





The TSX Venture Exchange



The TSX Venture Exchange (TSX-V) is a result of the acquisition of the Canadian Venture Exchange by the Toronto Stock Exchange.



The TSX Venture Exchange was a result of the merger between the Vancouver Stock Exchange and the Alberta Stock Exchange which took place on November 29, 1999. On August 1, 2001, the Toronto Stock Exchange completed its purchase of the Canadian Venture Exchange from its member firms and renamed the Exchange the TSX Venture Exchange. The TSX-V currently operates as a complementary but independent exchange from its parent.



The initial roster of the TSX-V was made up of venture companies previously listed on the Vancouver Stock Exchange or the Alberta Stock Exchange and later incorporated junior listings from the Toronto, Montreal and Winnipeg Stock Exchanges. The TSX-V is a venture market as compared to the Toronto Stock Exchange, which is Canadas senior market, and the Montreal Exchange which is Canadas market for derivatives products.



The TSX-V currently has five service centers: Calgary, Toronto, Vancouver, Winnipeg and Montreal.  These service centers provide corporate finance, surveillance and marketing expertise.  The corporate office for the TSX-V is located in Calgary and the operations office is located in Vancouver.



The TSX-V is a self-regulating organization owned and operated by the TSX Group.  It is governed by representatives of its member firms and the public.



The TSX Group acts as a business link between TSX Venture Exchange members, listed companies and investors. TSX-V policies and procedures are designed to accommodate companies still in their formative stages and recognize those that are more established. Listings are predominately small and medium sized companies.



Regulation of the TSX Venture Exchange, its member firms and its listed companies is the responsibility of Market Regulation Services Inc. (RS) which was created as a joint initiative of The Toronto Stock Exchange Inc. and the Investment Dealers Association of Canada.



RS is recognized as a self-regulatory entity in the provinces of British Columbia, Alberta, Manitoba, Ontario and Quebec. As a Regulation Service Provider, RS provides independent regulation services to marketplaces (existing exchanges, quotation and trade reporting systems (QTRSs) and alternative trading systems (ATSs) and their participants in Canada that contract with RS Inc. for the provision of regulation services. As a national regulator for the Canadian marketplace, it is the first independent regulator of its kind for the Canadian securities market.



RS administers, oversees and enforces the Universal Market Integrity Rules (UMIR). To ensure compliance with UMIR, RS monitors real-time trading operations and market-related activities of marketplaces and participants. RS also enforces compliance with UMIR by investigating alleged rule violations and administering any settlements and hearings that may arise in respect of such violations.



RS's areas of responsibility include Market Surveillance; Operations and General Counsel (Market Policy); and Investigations and Enforcement.



The Market Surveillance division monitors all securities trading for compliance with the Universal Market Integrity Rules and marketplace specific rules. Market Surveillance also investigates irregularities and complaints relating to trading on marketplaces for which RS acts as regulation services provider to ensure a fair and orderly marketplace for all participants. This division is responsible for market supervision, which includes monitoring trading activity and timely disclosure, as well as preliminary investigations and trade desk compliance.



The market surveillance department issues TSX-V notices to inform the public of halts, suspensions, delists and other enforcement actions.  All TSX-V notices can be found on the TSX website at www.tse.com.  In the public interest, trading halts or suspensions are maintained until the surveillance department is satisfied that there is adequate disclosure of the companys affairs and a level playing field for investors. By Exchange policy, the department also reviews and approves certain types of transactions for all TSX listed companies. These types of transactions includes option grants, private placements and other share issuances, mergers and acquisitions, property-asset acquisitions and dispositions, loans, bonuses and finders fees, changes of business, name changes, stock splits, and related party transactions. If the Exchanges review of such transactions finds them to be contrary to the public interest or is in violation of policy, approval for the transaction will be denied and any action taken by the company towards the completion of the transaction must be reversed.



The Operations and General Counsel division is responsible for the development and  implementation UMIR as well as providing interpretations of, or exemptions from, UMIR with the goal of promoting market integrity. This division also coordinates all operational activities of RS including strategic planning and overall organizational matters. Finally, the General Counsel's office of this division is responsible for all legal services and matters relating to RS's Board of Directors.



The Investigation and Enforcement division is responsible for conducting investigations and prosecutions of violations of the UMIR and Policies and market integrity and market quality rules specific to the TSX Venture Exchange. Functions of this division include Investigations, Enforcement and Investigative Research.



a) Investigations

Investigations focus on activities that may be in breach of the UMIR and/or the rules of the TSX Venture Exchange. The types of violations frequently investigated include high closings, market manipulation, client priority trading violations, unapproved trading, trading in restricted securities and conduct inconsistent with the just and equitable principles of trade.



Requests for investigations come primarily from the Market Surveillance division of RS. Other sources include the provincial securities commissions, the Operations and General Counsel division, marketplaces, and in some instances, the general public. Investigators also lend assistance to investigations conducted by provincial securities commissions.



b) Enforcement

Once an investigation is complete and a decision has been made to proceed with a prosecution a statement of allegations is served upon the concerned party which references the rule or rules alleged to have been in violation. An Offer of Settlement is also presented to the concerned party, who can either accept or reject the Offer of Settlement. If accepted, the Offer of Settlement must be approved by a hearing panel of RS. The hearing panel may accept the Offer of Settlement or reject it. If the Offer of Settlement is rejected by either the concerned party or by a settlement hearing panel, a Notice of Hearing is issued and served upon the concerned party and the matter proceeds to a hearing before a hearing panel. If the hearing panel determines that an applicable requirement has been violated, it may impose a range of penalties, including a reprimand, a fine, or the restriction, suspension or revocation of access to a marketplace. After all hearings, there is an official public notification concerning the outcome of the hearing and the penalty or remedy imposed.



c) Investigative Research

The Investigative Research Division performs in-depth corporate research relating to officers, directors, and significant shareholders of organizations applying to list securities on the TSX Venture Exchange, or applying to obtain access to the marketplace's trading systems. Due diligence is a major function of the Enforcement division. The overall goal is to improve communication and to raise the standards of compliance in the securities trading industry.



Investors in Canada are protected by the Canadian Investor Protection Fund (CIPF). The CIPF is a private trust fund established to protect customers in the event of the insolvency of a member of any of the following Self-Regulatory Organizations: the TSX Venture Exchange, the Montreal Exchange, the Toronto Stock Exchange, the Toronto Futures Exchange and the Investment Dealers Association of Canada.



Memorandum and Articles of Association



The Companys Memorandum and Articles of Association are registered with the British Columbia Registrar of Companies. A copy of the documents was filed with San Telmos original 20-F Registration Statement.



Material Contracts



Currently, the Company has 4 material contracts in effect.



1.

Under an agreement dated April 7, 2005 between the Company and Rolling Thunder Exploration Inc., the Company granted Rolling Thunder Exploration Inc. the option to earn a 60% interest in the Boundary Lake property from San Telmo. The agreement is considered to be non-arms length as Brian Bass, President and CEO of San Telmo, is a director of Rolling Thunder.



Under the agreement, Rolling Thunder must purchase, on or before September 15, 2005, 2 miles of seismic data on or within 1 mile of the Boundary Lake property. If necessary, Rolling Thunder shall pay to have the data interpreted and reprocessed. On or before November 15, 2005, Rolling Thunder shall elect in writing to either drill a test well at a location of its choice at Boundary Lake or relinquish its option. If Rolling Thunder elects to drill the test well, it must begin drilling a well within 60 days, subject to surface access, drill rig availability, and regulatory approval.



Upon the drilling of the test well to the contract depth, Rolling Thunder will earn, to the base of the deepest formation penetrated



a)

In the spacing unit containing the test well, 100% San Telmos working interest, with San Telmo retaining a convertible gross overriding royalty of 5-15% on oil, and 15% on natural gas. Rolling Thunder will earn a 60% interest in the balance of the section containing the test well. San Telmo may convert its royalty at payout to a 40% working interest; and

b)

60% of San Telmos interest in N1/2 Section 21.



The agreement also estabilished an area of mutual interest encompassaing the lands within one mile of the property. The area of mutual interest will be as to the post farmout earned working interests and will be in force for a period of two years from the signing of the agreement.



2.

Under an agreement dated April 7, 2005, the Company granted Rolling Thunder Exploration Inc. the option to earn a 55% interest in the Gold Creek property from San Telmo. The agreement is considered to be non-arms length as Brian Bass, President and CEO of San Telmo, is a director of Rolling Thunder.



Under the agreement, Rolling Thunder must purchase, on or before September 15, 2005, 2 miles of seismic data on or within 1 mile of the Gold Creek property. If necessary, Rolling Thunder shall pay to have the data interpreted and reprocessed. On or before November 15, 2005, Rolling Thunder shall elect in writing to either drill a test well at a location of its choice at Gold Creek or relinquish its option. If Rolling Thunder elects to drill the test well, it must begin drilling a well within 60 days, subject to surface access, drill rig availability, and regulatory approval.



Upon the drilling of the test well to the contract depth, Rolling Thunder will provide San Telmo with all log and test information. San Telmo will have 24 hours to either



a)

elect to participate in the casing, completion, equipping and tying in of the well to maintain a 45% interest in the property; or

b)

farmout its entire interest in the property to Rolling Thunder in exchange for a gross non-convertible overriding royalty of 5-15% on oil and 15% on natural gas.



The agreement also established an area of mutual interest encompassing the lands within one mile of the property. The area of mutual interest will be as to the post farmout earned working interests and will be in force for a period of two years from the signing of the agreement.



3.

Under an agreement dated April 7, 2005, the Company granted Rolling Thunder Exploration Inc. the option to earn a 60% interest in the Mitsue property from San Telmo. The agreement is considered to be non-arms length as Brian Bass, President and CEO of San Telmo, is a director of Rolling Thunder.



Under the agreement, Rolling Thunder must purchase, on or before October 15, 2005, 2 miles of seismic data on or within 1 mile of the Mitsue property. If necessary, Rolling Thunder shall pay to have the data interpreted and reprocessed. On or before December 15, 2005, Rolling Thunder shall elect in writing to either drill a test well at a location of its choice at Mitsue or relinquish its option. If Rolling Thunder elects to drill the test well, it must begin drilling a well within 60 days, subject to surface access, drill rig availability, and regulatory approval.



Upon the drilling of the test well to the contract depth, Rolling Thunder will earn, to the base of the deepest formation penetrated



a)

In the spacing unit containing the test well, 100% San Telmos working interest, with San Telmo retaining a convertible gross overriding royalty of 5-15% on oil, and 15% on natural gas. Rolling Thunder will earn a 60% interest in the balance of the section containing the test well. San Telmo may convert its royalty at payout to a 40% working interest; and

b)

60% of San Telmos interest the balance of the earning block.



The agreement also estabilished an area of mutual interest encompassaing the lands within one mile of the property. The area of mutual interest will be as to the post farmout earned working interests and will be in force for a period of two years from the signing of the agreement.



4.

Under an agreement dated in April 2005, the Company granted Rolling Thunder Exploration Inc. the option to earn a 60% interest in San Telmos 50% interest in the Morinville property. The agreement is considered to be non-arms length as Brian Bass, President and CEO of San Telmo, is a director of Rolling Thunder.



Under the agreement, Rolling Thunder must purchase, on or before September 15, 2005, 2 miles of seismic data on or within 1 mile of the Morinville property. If necessary, Rolling Thunder shall pay to have the data interpreted and reprocessed. On or before November 15, 2005, Rolling Thunder shall elect in writing to either drill a test well at a location of its choice at Morinville or relinquish its option. If Rolling Thunder elects to drill the test well, it must begin drilling a well within 60 days, subject to surface access, drill rig availability, and regulatory approval.



Upon the drilling of the test well to the contract depth, Rolling Thunder will earn, to the base of the deepest formation penetrated



a)

In the spacing unit containing the test well, 100% of San Telmos 50% working interest, with San Telmo retaining a convertible gross overriding royalty of 5-15% on oil, and 15% on natural gas. Rolling Thunder will earn a 60% interest in the balance of San Telmos 50% working interest the section containing the test well. San Telmo may convert its royalty at payout to a 40% working interest; and

b)

60% of San Telmos 50% interest (30% total) of the balance of the earning block.



The agreement also established an area of mutual interest encompassing the lands within one mile of the property. The area of mutual interest will be as to the post farmout earned working interests and will be in force for a period of two years from the signing of the agreement.



Copies of these material contracts have been filed as exhibits to this annual report.



Exchange Controls



There are no governmental laws, decrees or regulations in Canada relating restrictions on the export or import of capital, or affecting the remittance of interest, dividends or other payments to non-resident holders of the Companys common shares.  Any remittance 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 common shares of the Company) pursuant to Article X of the reciprocal treaty between Canada and the United States.



The Investment Canada Act (the "ICA"), which became effective on 6/30/85, regulates the acquisition by non-Canadians of control of a Canadian business enterprise.  In effect, the ICA required review by Investment Canada, the agency which administers the ICA, and approval by the Canadian government in the case of an acquisition of control of a Canadian business by a non-Canadian where: (i) in the case of acquisition (for example, through a share purchase or asset purchase), the assets of the business are $5 million or more in value; or (ii) in the case of an indirect acquisition (for example, the acquisition of the foreign parent of the Canadian business) where the Canadian business has assets of $50 million or more in value or if the Canadian business represents more than 50% of the assets of the original group and the Canadian business has assets of $5 million or more in value.  Review and approval are also required for the acquisition or establishment of a new business in areas concerning "Canada's cultural heritage or national identity" such as book publishing, film production and distribution, television and radio, production and distribution of music, and the oil and natural gas industry, regardless of the size of the investment.



In the context of the Company, in essence, three methods of acquiring control of a Canadian business are regulated by the ICA: (i) the acquisition of all or substantially all of the assets used in carrying on the Canadian business; (ii) the acquisition, directly or indirectly, of voting shares of a Canadian corporation carrying on the Canadian business; (iii) the acquisition of voting of an entity which controls, directly or indirectly, another entity carrying on a Canadian business. An acquisition of a majority of the voting interests of an entity, including a corporation, is deemed to be an acquisition of control under the ICA.  An acquisition of less than one- third of the voting shares of a corporation is deemed not to be an acquisition of control.  An acquisition of less than a majority, but one-third or more, of the voting shares of a corporation is presumed to be an acquisition of control unless it can be established that on the acquisition the corporation is not, in fact, controlled by the acquirer through the ownership of voting shares.  For partnerships, trusts, joint ventures or other unincorporated entities, an acquisition of less than a majority of the voting interests is deemed not to be an acquisition of control.



In 1988, the ICA was amended pursuant to the Free Trade Agreement dated 1/2/88 between Canada and the United States to relax the restriction of the ICA.  As a result of these amendments, except where the Canadian business is in the cultural, oil and gas, uranium, financial services or transportation sectors, the threshold for direct acquisition of control by U.S. investors and other foreign investors acquiring control of a Canadian business from U.S. investors has been raised from $5 million to $150 million of gross assets, and indirect acquisitions are not reviewable.



In addition to the foregoing, the ICA requires that all other acquisitions of control of Canadian businesses by non-Canadians are subject to formal notification to the Canadian government. These provisions require a foreign investor to give notice in the required form, which notices are for information, as opposed to review, purposes.



The following summary of the material Canadian federal income tax consequences generally applicable in respect of the common stock reflects the Companys opinion.  The tax consequences to any particular holder of common stock will vary according to the status of that holder as an individual, trust, corporation or member of a partnership, the jurisdiction in which that holder is subject to taxation, the place where that holder is resident and, generally, according to that holders particular circumstances.  This summary is applicable only to holders who are resident in the United States, have never been resident in Canada, deal at arms length with the Company, hold their common stock as capital property and who will not use or hold the common stock in carrying on business in Canada.  Special rules, which are not discussed in this summary, may apply to a United States holder that is an issuer that carries on business in Canada and elsewhere.



This summary is based upon the provisions of the Income Tax Act of Canada and the regulations thereunder (collectively, the "Tax Act" or ITA)and the Canada-United States Tax Convention (the Tax Convention) as at the date of the Registration Statement and the current administrative practices of Revenue Canada, Taxation.  This summary does not take into account provincial income tax consequences.



Each holder should consult his own tax advisor with respect to the income tax consequences applicable to him in his own particular circumstances.



Taxation



CANADIAN INCOME TAX CONSEQUENCES



Disposition of Common Stock.



The summary below is restricted to the case of a holder (a Holder) of one or more common shares (Common Shares) who for the purposes of the Tax Act is a non-resident of Canada, holds his Common Shares as capital property and deals at arms length with the Company.



Dividends



A Holder will be subject to Canadian withholding tax (Part XIII Tax) equal to 25%, or such lower rates as may be available under an applicable tax treaty, of the gross amount of any dividend paid or deemed to be paid on his Common Shares. Under the Tax Convention, the rate of Part XIII Tax applicable to a dividend on Common Shares paid to a Holder who is a resident of the United States is, if the Holder is a company that beneficially owns at least 10% of the voting stock of the Company, 5% and, in any other case, 15% of the gross amount of the dividend. The Company will be required to withhold the applicable amount of Part XIII Tax from each dividend so paid and remit the withheld amount directly to the Receiver General for Canada for the account of the Holder.



Disposition of Common Shares



A Holder who disposes of Common Shares, including by deemed disposition on death, will not be subject to Canadian tax on any capital gain thereby realized unless the common Share constituted taxable Canadian property as defined by the Tax Act. Generally, a common share of a public corporation will not constitute taxable Canadian property of a Holder unless he held the common share as capital property used by him carrying on a business in Canada, or he or persons with whom he did not deal at arms length alone or together held or held options to acquire, at any time within the 60 months preceding the disposition, 25% or more of the issued shares of any class of the capital stock of the Company.



A Holder who is a resident of the United States and realizes a capital gain on disposition of Common Shares that was taxable Canadian property will nevertheless, by virtue of the Treaty, generally be exempt from Canadian tax thereon unless (a) more than 50% of the value of the Common Shares is derived from, or from an interest in, Canadian real estate, including Canadian mineral resources properties, (b) the Common Shares formed part of the business property of a permanent establishment that the Holder has or had in Canada within the 12 months preceding disposition, or (c) the Holder (i) was a resident of Canada at any time within the ten years immediately preceding the disposition, and for a total of 120 months during any period of 20 consecutive years, preceding the disposition, and (ii) owned the Common Shares when he ceased to be resident in Canada.



A Holder who is subject to Canadian tax in respect of a capital gain realized on disposition of Common Shares must include three quarters (two thirds for dispositions after February 27, 2000) of the capital gain (taxable capital gain) in computing his taxable income earned in Canada. The Holder may, subject to certain limitations, deduct three quarters (two thirds for disposition after February 27, 2000) of any capital loss (allowable capital loss) arising on disposition of taxable Canadian property from taxable capital gains realized in the year of disposition in respect to taxable Canadian property and, to the extent not so deductible, from such taxable capital gains of any of the three preceding years or any subsequent year.



United States Federal Income Tax Consequences



The following is a discussion of material United States Federal income tax consequences, under the law, generally applicable to a U.S. Holder (as defined below) of common shares of the Company. 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, possible on a retroactive basis, at any time.  In addition, the discussion does not consider the potential effects, both adverse and beneficial, or recently proposed legislation which, if enacted, could be applied, possibly on a retroactive basis, at any time. Holders and prospective holders of common shares of the Company should consult their own tax advisors about the federal, state, local, and foreign tax consequences of purchasing, owning and disposing of common shares of the Company.



U.S. Holders



As used herein, a (U.S. Holder) includes a holder of common shares of the Company who is a citizen or resident of the United States, a corporation created or organized in or under the laws of the United States or of any political subdivision thereof, an estate whose income is taxable in the United States irrespective of source or a trust subject to the primary supervision of a court within the United States and control of a United States fiduciary as described in Section 7701(a)(30) of the Code. This summary does not address the tax consequences to, and U.S. Holder does not include, 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, non-resident alien individuals, persons or entities that have a functional currency other than the U.S. dollar, shareholders who hold common shares as part of a straddle, hedging or conversion transaction, and shareholders who acquired their common shares through the exercise of employee stock options or otherwise as compensation for services. This summary is limited to U.S. Holders who own common shares as capital assets. This summary does not address the consequences to a person or entity holding an interest in a shareholder or the consequences to a person of the ownership, exercise or disposition of any options, warrants or other rights to acquire common shares.



Distribution on Common Shares of the Company



U.S. Holders receiving dividend distributions (including constructive dividends) with respect to common shares of the Company are required to include in gross income for United States Federal income tax purposes the gross amount of such distributions equal to the U.S. dollar value of such distributions on the date of receipt (based on the exchange rate on such date), 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, individuals may be deducted in computing the U.S. Holders United States Federal taxable income by those individuals 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 shares and thereafter as gain from the sale or exchange of the common shares. Dividend income will be taxed at marginal tax rates applicable to ordinary income while 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. In the case of foreign currency received as a dividend that is not converted by the recipient into U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Generally any gain or loss recognized upon a subsequent sale of other disposition of the foreign currency, including the exchange for U.S. dollars, will be ordinary income or loss.



Dividends paid on the common shares of the Company will not generally be eligible for the dividends received deduction provided to corporations receiving dividends from certain United States corporations.  A U.S. Holder which is a corporation may, under certain circumstances, be entitled to a 70% deduction of the United States source portion of dividends received from the Company (unless the Company qualifies as a foreign personal holding company or a passive foreign investment company, as defined below) if such U.S. Holder owns shares representing at least 10% of the voting power and value of the Company.  The availability of this deduction is subject to several complex limitations which are beyond the scope of this discussion.



Under current Treasury Regulations, dividends paid on the Companys common shares, if any, generally will not be subject to information reporting and generally will not be subject to U.S. backup withholding tax. However, dividends and the proceeds from a sale of the Companys common shares paid in the U.S. through a U.S. or U.S. related paying agent (including a broker) will be subject to U.S. information reporting requirements and may also be subject to the 31% U.S. backup withholding tax, unless the paying agent is furnished with a duly completed and signed Form W-9. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a refund or a credit against the U.S. Holders U.S. federal income tax liability, provided the required information is furnished to the IRS.



Foreign Tax Credit



For individuals whose entire income from sources outside the United States consists of qualified passive income, the total amount of creditable foreign taxes paid or accrued during the taxable year does not exceed $300 ($600 in the case of a joint return) and an election is made under section 904(j), the limitation on credit does not apply.



A U.S. Holder who pays (or has withheld from distributions) Canadian income tax with respect to the ownership of common shares of the Company 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 income taxes (or taxes in lieu of income tax) paid by (or withheld from) the U.S. Holder during the year.  There are significant and complex limitations which apply to the credit, among which is the general limitation that the credit cannot exceed the proportionate share of the U.S. Holders United States income tax liability that the U.S. Holders foreign source income bears to his/her or its worldwide taxable income in the determination of the application of this limitation. The various items of income and deduction must be classified into foreign and domestic sources. Complex rules govern this classification process.  In addition, this limitation is calculated separately with respect to specific classes of income such as passive income, high withholding tax interest, financial services income, shipping income, and certain other classifications of income. Dividends distributed by the Company will generally constitute passive income or, in the case of certain U.S. Holders, financial services income for these purposes.  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 shares of the Company should consult their own tax advisors regarding their individual circumstances.



Disposition of Common Shares of the Company



A U.S. Holder will recognize gain or loss upon the sale of common shares of the Company 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 shares of the Company.  Preferential tax rates apply to long-term capital gains of U.S. Holders which are individuals, estates or trusts. This gain or loss will be capital gain or loss if the common shares are capital assets in the hands of the U.S. Holder, which will be a short-term or long-term capital gain or loss depending upon the holding period of the U.S. Holder.  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 which are not corporations, any unused portion of such net capital loss may be carried over to be used in later tax years until such net capital loss is thereby exhausted. For U.S. Holders which are corporations (other than corporations subject to Subchapter S of the Code), an unused net capital loss may be carried back three years from the loss year and carried forward five years from the loss year to be offset against capital gains until such net capital loss is thereby exhausted.



Other Considerations



In the following circumstances, the above sections of the discussion may not describe the United States Federal income tax consequences resulting from the holding and disposition of common shares of the Company.



Foreign Personal Holding Company



If at any time during a taxable year more than 50% of the total combined voting power or the total value of the Companys outstanding shares is owned, actually or constructively, by five or fewer individuals who are citizens or residents of the United States and 60% (50% after the first tax year) or more of the Companys gross income for such year was derived from certain passive sources (e.g. from dividends received from its subsidiaries), the Company would be treated as a foreign personal holding company.  In that event, U.S. Holders that hold common shares of the Company would be required to include in gross income for such year their allocable portions of such passive income to the extent the Company does not actually distribute such income.



The Company does not believe that it currently has the status of a foreign personal holding company. However, there can be no assurance that the Company will not be considered a foreign personal holding company for the current or any future taxable year.



Foreign Investment Company



If 50% or more of the combined voting power or total value of the Companys outstanding shares are held, actually or constructively, by citizens or residents of the United States, United States domestic partnerships or corporations, or estates or trusts other than foreign estates or trusts (as defined by the Code Section 7701(a)(31), and the Company is found to be engaged primarily in the business of investing, reinvesting, or trading in securities, commodities, or any interest therein, it is possible that the Company might be treated as a foreign investment company as defined in Section 1246 of the Code, causing all or part of any gain realized by a U.S. Holder selling or exchanging common shares of the Company to be treated as ordinary income rather than capital gains. The Company does not believe that it currently has the status of a Foreign Investment Company as the Company believes most of the voting power of its shares is held outside the United States by citizens of countries other than the United States. Additionally, the Company does not believe that it is currently conducting its business in a manner which would cause it to fall under the criteria of a Foreign Investment Company. However, there can be no assurance that the Company will not be considered a Foreign Investment Company for the current or any future taxable year.



Passive Foreign Investment Company



As a foreign corporation with U.S. Holders, the Company would potentially be treated as a passive foreign investment company (PFIC), as defined in Section 1297 of the Code, depending upon the percentage of the Companys income which is passive, or the percentage of the Companys assets which produce or are held for the production of passive income. U.S. Holders owning common shares of a PFIC are subject to the highest rate of tax on ordinary income in effect for the applicable taxable year and to an interest charge based on the value of deferral of tax for the period during which the common shares of the PFIC are owned, in addition to the treatment of gain realized on the disposition of common shares of the PFIC as ordinary income rather than capital gain. However, if the U.S. Holder makes a timely election to treat a PFIC as a qualified electing fund (QEF) with respect to such shareholders interests therein, the above-described rules generally will not apply. Instead, the electing U.S. Holder would include annually in his gross income his pro rata share of the PFICs ordinary earnings and net capital gain regardless of whether such income or gain was actually distributed. A U.S. Holder of a QEF can, however, elect to defer the payment of United States federal income tax on such income inclusions subject to an interest charge. Special rules apply to U.S. Holders who own their interests in a PFIC through intermediate entities or persons. In addition, subject to certain limitation, U.S. Holders owning (actually or constructively) marketable stock in a PFIC will be permitted to elect to mark that stock to market annually, rather than being subject to the excess distribution regime of section 1291 described above. Amounts included in or deducted from income under this alternative (and actual gains and losses realized upon disposition, subject to certain limitations) will be treated as ordinary gains or losses. This alternative will apply to taxable years of U.S. Holders beginning after 1997 and taxable years of foreign corporations ending with or within such taxable years of U.S. Holders.



The management of the Registrant believes that the Company is not a PFIC. Additionally, the Company believes that the anticipated development of its business would not include any activities which would cause the Company to fall under the criteria of a Passive Foreign Investment Company. However, there can be no assurance that the Companys determination concerning its PFIC status will not be challenged by the IRS, or that it will be able to satisfy record-keeping requirements which will be imposed on QEFs.



Controlled Foreign Corporation



If more than 50% of the voting power of all classes of stock entitled to vote is owned, actually or constructively, by citizens or residents of the United States, United States domestic partnerships and corporations or estates or trusts other than foreign estates or trusts, each of whom own actually or constructively 10% or more of the total combined voting power of all classes of stock of the Company could be treated as a controlled foreign corporation under Subpart F of the Code.  This classification would effect many complex results, one of which is the inclusion of certain income of a CFC which is subject to current U.S. tax. The United States generally taxes United States Shareholders of a CFC currently on their pro rata shares of the Subpart F income of the CFC. Such United States Shareholders are generally treated as having received a current distribution out of the CFCs Subpart F income and are also subject to current U.S. tax on their pro rata shares of the CFCs earnings invested in U.S. property. The foreign tax credit described above may reduce the U.S. tax on these amounts. In addition, under Section 1248 of the Code, gain from the sale or exchange of shares by a U.S. Holder of common shares of the Corporation which is or was a United States Shareholder at any time during the five-year period ending with the sale or exchange is treated as ordinary income to the extent of earnings and profits of the Company (accumulated in corporate tax years beginning after 1962, but only while the shares were held and while the Company was controlled) attributable to the shares sold or exchanged. If a foreign corporation is both a PFIC and a CFC, the foreign corporation generally will not be treated as a PFIC with respect to the United States Shareholders of the CFC. This rule generally will be effective for taxable years of United States Shareholders beginning after 1997 and for taxable years of foreign corporations ending with or within such taxable years of United States Shareholders. The PFIC provisions continue to apply in the case of PFIC that is also a CFC with respect to the U.S. Holders that are less than 10% shareholders. Because of the complexity of Subpart F, a more detailed review of these rules is outside of the scope of this discussion.



The amount of any backup withholding will not constitute additional tax and will be allowed as a credit against the U.S. Holders federal income tax liability.



Filing of Information Returns.  Under a number of circumstances, United States Investor acquiring shares of the Company may be required to file an information return with the Internal Revenue Service Center where they are required to file their tax returns with a duplicate copy to the Internal Revenue Service Center, Philadelphia, PA 19255. In particular, any United States Investor who becomes the owner, directly or indirectly, of 10% or more of the shares of the Company will be required to file such a return. Other filing requirements may apply, and United States Investors should consult their own tax advisors concerning these requirements.



ITEM 11. Quantitative and Qualitative Disclosures of Market Risk



The Companys operations do not involve financial instruments or derivatives, which are market sensitive. The Company does not have significant financial market risks.



The majority of the Companys current and anticipated future operations are in Canada and do not involve significant exchange rate risks.



ITEM 12. Description of Securities Other Than Equity Securities



Not Applicable



Part II



ITEM 13. 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 90 days prior to the filing date of this report, the Company, under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer Brian Bass and Chief Financial Officer Stanley Herdman, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-14(c)under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Companys disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company (or the Companys consolidated subsidiaries) required to be included in this Form 20-F Annual Report.

The Company's disclosure controls and procedures operate such that important information flows to appropriate collection and disclosure points in a timely manner and are effective to ensure that such information is accumulated and communicated to the Company's management, and made known to the Company's Chief Executive Officer and Chief Financial Officer, including the period when this Annual Report on Form 20-F was prepared, as appropriate to allow timely decision regarding the required disclosure.

There were no significant changes made in the Companys internal controls or, to the Companys knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation.



Item 16A.  Audit Committee Financial Experts



The Company currently does not have an audit committee financial expert serving on its audit committee.  The Companys Audit Committee consists of three directors, all of whom are financially literate, have experience with public companies, and are very knowledgeable about the Companys business and financial position.  Until this fiscal year, the Companys operations were almost entirely exploratory in nature and the Board did not believe an Audit Committee Financial Expert was required. However, because the Company is now increasing its development activities and recently hired a full-time Chief Financial Officer to manage its finances, the Board will consider if a Financial Expert is required.



Item 16B.  Code of Ethics



The Company does not currently have a formal Code of Ethics.



Item 16C.  Principal Accountant Fees and Services



The following table details the fees paid by the Company to Amisano Hanson, Chartered Accountants, for professional services provided to the Company for fiscal years 2004 and 2005, ended April 30.



|                        | Fiscal Year Ended
April 30
|----------------------- | --------------------------
|                        | 2004                      
|Audit Fees:             |                           
|Audit Fees:             | $    28,462               
|Audit Related Fees (1): |                           
|Tax Fees                | 2,200                     
|Other Fees              |                           
|                        |                           
|Total Fees:             | $   30,662                



(1)  Audit Related Fees include an audit of the Companys escrow agreement.





Item 16D.  Exemptions from the Listing Standards for Audit Committees



Not Applicable





Item 16E.  Purchases of Equity Securities by the Issuer and Affiliated Purchasers



Not Applicable



Part III



ITEM 17. FINANCIAL STATEMENTS



The Company's financial statements are stated in Canadian Dollars (CDN$) and are prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP), the application of which, in the case of the Company, conforms in all material respects for the periods presented with United States GAAP except as disclosed in Note 14 to the financial statements included herein.  The value of the U.S. Dollar in relation to the Canadian Dollar was 1.16 as of September 30, 2005.



The financial statements as required under ITEM 17 are attached hereto and found immediately following the text of this Registration Statement. The report of Amisano Hanson, Chartered Accountants, is included herein immediately preceding the financial statements.



ITEM 18. FINANCIAL STATEMENTS



The Registrant has elected to provide financial statements pur­suant to ITEM 17.



ITEM 19. EXHIBITS



(A1)  The financial statements thereto as required under ITEM #17 are attached hereto and found immediately following the text of this Registration Statement.  The report of Amisano Hanson, Chartered Accountants, for the audited financial statements are included herein immediately preceding the audited financial statements.



Audited Financial Statements for the period ending April 30, 2005.



Auditors Report, dated August 4, 2005.



Consolidated Balance Sheets at April 30, 2005 and 2004.



Consolidated Statements of Earnings (Loss) for the years ended April 30, 2005, 2004, and 2003.



Consolidated Statements of Cash Flows for the years ended April 30, 2005, 2004, and 2003.



Consolidated Statements of Retained Earnings (Deficit) for the years ended April 30, 2005, 2004, and 2003.



Notes to Consolidated Financial Statements



ITEM 19.  FINANCIAL STATEMENTS AND EXHIBITS (cont.)



(B)  Index to Exhibits:



|                                                                                                                                                                              | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                                                                                                                                              | 
|1. Amended Certificate of Incorporation, Certificate of Name Change, Articles of Incorporation, Articles of Amalgamation and By-Laws (Previously Filed)                       | 
|                                                                                                                                                                              | 
|2. Instruments defining the rights of holders of the securities being registered  N/A                                                                                        | 
|3. Voting Trust Agreements  N/A                                                                                                                                              | 
|4. Material Contracts
Not Applicable                                                                                                                                          | 
|5. List of Foreign Patents  N/A                                                                                                                                              | 
|6. Calculation of earnings per share  N/A                                                                                                                                    | 
|7. Explanation of calculation of ratios  N/A                                                                                                                                 | 
|8. List of Subsidiaries
San Telmo Energy Inc., an Alberta Corporation                                                                                                         | 
|9. Statement pursuant to the instructions to Item 8.A.4, regarding the financial statements filed in registration statements for initial public offerings of securities  N/A | 
|10.Other documents

Copy of the Companys Proposed Stock Option Plan
Material Contracts
Disclosure Committee Charter                                                          | 
|SIGNATURE PAGE                                                                                                                                                                | 































SAN TELMO ENERGY LTD.

REPORT AND CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2005 and 2004

(Stated in Canadian Dollars)































A PARTNERSHIP OF INCORPORATED PROFESSIONALS

AMISANO HANSON

CHARTERED ACCOUNTANTS







REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Shareholders,

San Telmo Energy Ltd.



We have audited the consolidated balance sheets of San Telmo Energy Ltd. as at April 30, 2005 and 2004 and the consolidated statements of operations, cash flows and shareholders equity for each of the years in the three year period ended April 30, 2005. These consolidated 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 generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.



In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of San Telmo Energy Ltd. as at April 30, 2005 and 2004 and the results of its operations and its cash flows for each of the years in the three year period ended April 30, 2005 in accordance with Canadian generally accepted accounting principles.



Vancouver, Canada

AMISANO HANSON

August 4, 2005

Chartered Accountants



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



In the United States of America, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there is substantial doubt about a companys ability to continue as a going concern. The accompanying financial statements have been prepared on the basis of accounting principles applicable to a going concern, which assumes the realization of assets and discharge of liabilities in the normal course of business. As discussed in Note 1 to the accompanying financial statements, the Company has not yet achieved profitable operations, has accumulated significant losses since inception and has a working capital deficiency of $1,966,919, which raises substantial doubt about the Companys ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.



The standards of the Public Company Accounting Oversight Board (United States of America) require the addition of an explanatory paragraph (following the opinion paragraph) when there are changes in accounting principles that have a material effect on the comparability of the Companys financial statements and changes in accounting principles that have been implemented in the consolidated financial statements. As discussed in Note 3 to the accompanying financial statements, the Company changed its method of accounting for asset retirement obligations (CICA Handbook Section 3110) and flow-through shares (CICA emerging issue committee abstract no. 146). Our report to the shareholders dated August 4, 2005 is expressed in accordance with Canadian reporting standards, which do not permit a reference to such a change in accounting policy in the Auditors Report when the change in accounting policy is properly accounted for and adequately disclosed in the financial statements.



Vancouver, Canada

AMISANO HANSON

August 4, 2005

Chartered Accountants

SAN TELMO ENERGY LTD.CONSOLIDATED BALANCE SHEETS
April 30, 2005 and 2004(Stated in Canadian Dollars)

|ASSETS                                         | 2005               | (Reclassified
Note 16)
2004
|---------------------------------------------- | ------------------ | ---------------------------
|                                               |                    |                            
|Current                                        |                    |                            
|Cash                                           | $           58,474 | $           66,733         
|GST receivable                                 | -                  | 175,125                    
|Accounts receivable                            | 1,219,047          | 125,373                    
|Tax credit receivable                          | 293,623            | -                          
|Prepaid expenses  Note 11                     | 161,748            | 78,558                     
|                                               |                    |                            
|                                               | 1,732,892          | 445,789                    
|Equipment  Note 4                             | 38,769             | 27,131                     
|Oil and gas properties  Note 5 and Schedule 1 | 7,481,375          | 6,244,099                  
|                                               |                    |                            
|                                               | $      9,253,036   | $     6,717,019            
|                                               |                    |                            
|LIABILITIES                                    |                    |                            
|                                               |                    |                            
|Current                                        |                    |                            
|Bank indebtedness  Note 7                     | $     2,124,106    | $                   -      
|Accounts payable and accrued liabilities       | 1,490,293          | 2,063,589                  
|GST payable                                    | 73,639             | -                          
|Due to related parties  Note 11               | 11,773             | 6,622                      
|Loan payable  Note 8                          | -                  | 629,195                    
|                                               |                    |                            
|                                               | 3,699,811          | 2,699,406                  
|Asset retirement obligation - Note 9           | 172,662            | -                          
|                                               |                    |                            
|                                               | 3,872,473          | 2,699,406                  
|                                               |                    |                            
|SHAREHOLDERS EQUITY                           |                    |                            
|                                               |                    |                            
|Share capital  Note 10                        | 10,414,878         | 9,079,738                  
|Contributed surplus  Note 10                  | 2,536,500          | 816,500                    
|Deficit                                        | (7,570,815)        | (5,878,625)                
|                                               |                    |                            
|                                               | 5,380,563          | 4,017,613                  
|                                               |                    |                            
|                                               | $  9,253,036       | $  6,717,019               



Nature and Continuance of Operations  Note 1 Commitments  Notes 5, 7, 8, 9 and 10 Subsequent Events  Note 15



APPROVED BY THE DIRECTORS:

William E. Schmidt

Director

George StubosDirector

SEE ACCOMPANYING NOTES

SAN TELMO ENERGY LTD.CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended April 30, 2005, 2004 and 2003(Stated in Canadian Dollars)

|                                                                       | 2005            | (Reclassified
Note 16)
2004 | 2003           
|---------------------------------------------------------------------- | --------------- | --------------------------- | ---------------
|Revenue
Sales, net of royalties                                        | $    4,244,764  | $       328,196             | $      164,291 
|Cost of sales
Depletion                                                | 1,758,176       | 257,305                     | 32,430         
|Site restoration                                                       | 54,851          | -                           | -              
|Production                                                             | 927,749         | 53,996                      | -              
|Transportation                                                         | 246,689         | -                           | -              
|                                                                       | 2,987,465       | 311,301                     | 32,430         
|Gross operating income                                                 | 1,257,299       | 16,895                      | 31,861         
|Expenses
Amortization                                                  | 9,369           | 8,676                       | 8,247          
|Business promotion and development                                     | 20,457          | 334,592                     | 808,651        
|Consulting fees  Note 11                                              | 185,362         | 116,684                     | 395,171        
|Directors fees  Note 11                                              | 57,500          | -                           | -              
|Filing fees                                                            | 14,410          | 37,829                      | 29,737         
|Interest and bank charges  Note 11                                    | 109,215         | 33,177                      | 1,405          
|Interest on convertible debentures                                     | -               | -                           | 5,481          
|Investor relations                                                     | 154,773         | 339,757                     | 172,526        
|Lenders fees                                                           | -               | 60,000                      | -              
|Management fees  Note 11                                              | 141,960         | 165,960                     | 160,410        
|Mineral properties and deferred exploration costs written-off  Note 6 | -               | 1                           | 7,366          
|Office and miscellaneous                                               | 121,860         | 82,938                      | 92,155         
|Professional fees  Note 11                                            | 167,879         | 115,437                     | 91,474         
|Property investigations                                                | -               | 1,594                       | 57,243         
|Rent  Note 11                                                         | 61,252          | 53,244                      | 38,542         
|Salaries and benefits  Note 11                                        | 106,639         | -                           | -              
|Stock-based compensation                                               | 1,839,000       | 697,500                     | 119,000        
|Telephone                                                              | 8,993           | 8,838                       | 8,190          
|Transfer agent fees                                                    | 10,096          | 15,473                      | 10,325         
|Travel                                                                 | 23,584          | 41,810                      | 10,483         
|                                                                       | 3,032,349       | 2,113,510                   | 2,016,406      
|Loss before other                                                      | (1,775,050)     | (2,096,615)                 | (1,884,545)    
|Other:
Gain on disposal of mineral property  Note 6                   | -               | 9,999                       | -              
|Loss for the year before income tax provision                          | (1,775,050)     | (2,086,616)                 | (1,884,545)    
|Recovery of future income taxes  Note 3                               | 82,860          | -                           | -              
|Net loss for the year                                                  | $(1,692,190)    | $(2,086,616)                | $(1,884,545)   
|Basic and diluted loss per share                                       | $        (0.04) | $          (0.06)           | $        (0.16)
|Weighted average number of shares outstanding                          | 42,975,349      | 37,604,338                  | 11,875,548     

SEE ACCOMPANYING NOTES

SAN TELMO ENERGY LTD.CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended April 30, 2005, 2004 and 2003(Stated in Canadian Dollars)

|                                                                                    | 2005              | 2004              | 2003              
|----------------------------------------------------------------------------------- | ----------------- | ----------------- | ------------------
|Operating Activities
Net loss for the year                                          | $    (1,692,190)  | $   (2,086,616)   | $    (1,884,545)  
|Add (deduct) items not involving cash:
Amortization                                 | 9,369             | 8,676             | 8,247             
|Capital assets written-off                                                          | -                 | -                 | 9,178             
|Depletion and accretion                                                             | 1,813,027         | 257,305           | 32,430            
|Gain on disposal of mineral property                                                | -                 | (9,999)           | -                 
|Lenders fee                                                                         | -                 | 60,000            | -                 
|Mineral properties and deferred exploration
costs written off                       | -                 | 1                 | 7,366             
|Non-cash compensation charge                                                        | 1,839,000         | 697,500           | 119,000           
|Recovery of future income taxes                                                     | (82,860)          | -                 | -                 
|Changes in non-cash working capital items:
GST receivable/payable                   | 248,764           | (138,897)         | (30,547)          
|Accounts receivable                                                                 | (1,093,674)       | 42,218            | (167,591)         
|Tax credit receivable                                                               | (293,623)         | -                 | -                 
|Prepaid expenses                                                                    | (83,190)          | (67,728)          | (10,830)          
|Accounts payable and accrued liabilities                                            | (573,296)         | 1,975,015         | 110,085           
|Due to related parties                                                              | 5,151             | 600               | (2,214)           
|                                                                                    | 96,478            | 738,075           | (1,809,421)       
|Financing Activities
Bank indebtedness                                              | 2,124,106         | -                 | -                 
|Issuance of shares                                                                  | 1,299,000         | 2,857,598         | 3,711,769         
|Loan payable/repayment                                                              | (629,195)         | 629,195           | -                 
|Repayment of convertible debentures                                                 | -                 | (28,125)          | (24,375)          
|                                                                                    | 2,793,911         | 3,458,668         | 3,687,394         
|Investing Activities
Proceeds from sale of oil and gas property and
equipment (net) | -                 | -                 | 77,000            
|Deferred exploration expenditures                                                   | -                 | -                 | (1,097)           
|Oil and gas properties costs                                                        | (2,877,641)       | (5,301,753)       | (1,080,691)       
|Proceeds from sale of mineral property                                              | -                 | 10,000            | -                 
|Acquisition of equipment                                                            | (21,007)          | (1,343)           | (22,468)          
|                                                                                    | (2,898,648)       | (5,293,096)       | (1,027,256)       
|Increase (decrease) in cash for the year                                            | (8,259)           | (1,096,353)       | 850,717           
|Cash, beginning of year                                                             | 66,733            | 1,163,086         | 312,369           
|Cash, end of year                                                                   | $          58,474 | $          66,733 | $       1,163,086 
|Supplemental disclosure of cash flow information:
Cash paid for:
Interest           | $          79,292 | $           3,982 | $            5,551
|Income Taxes                                                                        | $               - | $               - | $                -

Non-cash Transaction  Note 13

SAN TELMO ENERGY LTD.CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
for the years ended April 30, 2005, 2004 and 2003(Stated in Canadian Dollars)

|                                             | Common Stock | Contributed
Surplus | Accumulated
Deficit | Total       
|-------------------------------------------- | ------------ | ------------------- | ------------------- | ------------
|                                             | Shares       | Amount             
|                                             |             
|                                             |              |                    
|Balance, April 30, 2002                      | 5,660,565    | $   2,412,873       | -                   | $(1,907,464)
|                                             |              |                     |                     |             
|Issued pursuant to private placements        | 20,196,069   | 3,927,110           | -                   | -           
|Share issuance costs                         | -            | (224,641)           | -                   | -           
|Issued pursuant to a debt settlement         | 61,470       | 37,497              | -                   | -           
|Issued pursuant to exercise of stock options | 30,000       | 7,500               | -                   | -           
|Issued pursuant to exercise of warrants      | 30,000       | 1,800               | -                   | -           
|Stock-based compensation charge              | -            | -                   | 119,000             | -           
|Net loss for the year ended April 30, 2003   | -            | -                   | -                   | (1,884,545) 
|Balance, April 30, 2003                      | 25,978,104   | 6,162,140           | 119,000             | (3,792,009) 
|Issued pursuant to a private placements      | 12,248,545   | 1,017,200           | -                   | -           
|Issued pursuant to exercise of stock options | 120,000      | 30,000              | -                   | -           
|Issued pursuant to private placement         | 1,395,304    | 1,568,148           | -                   | -           
|Issued for finders fee                      | 30,049       | -                   | -                   | -           
|Issued for lenders fee                      | 37,500       | 60,000              | -                   | -           
|Issued pursuant to exercise of stock options | 789,000      | 197,250             | -                   | -           
|Issued pursuant to exercise of warrants      | 750,000      | 45,000              | -                   | -           
|Stock-based compensation charge              | -            | -                   | 697,500             | -           
|Net loss for the year ended April 30, 2004   | -            | -                   | -                   | (2,086,616) 
|Balance, April 30, 2004                      | 41,348,502   | 9,079,738           | 816,500             | (5,878,625) 

Contd

SAN TELMO ENERGY LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

for the years ended April 30, 2005, 2004 and 2003

(Stated in Canadian Dollars)

|                                                                      | Common Stock | Contributed
Surplus | Accumulated
Deficit | Total        
|--------------------------------------------------------------------- | ------------ | ------------------- | ------------------- | -------------
|                                                                      | Shares       | Amount             
|                                                                      |              |                    
|                                                                      |             
|Balance, April 30, 2004                                               | 41,348,502   | 9,079,738           | 816,500             | (5,878,625)  
|Issued pursuant to a private placements                               | 1,620,000    | 1,134,000           | -                   | -            
|Issued pursuant to exercise of stock options                          | 300,000      | 75,000              | -                   | -            
|Issued pursuant to exercise of warrants                               | 1,500,000    | 90,000              | -                   | -            
|Transfer from contributed surplus relating to stock options exercised | -            | 119,000             | (119,000)           | -            
|Stock-based compensation charge                                       | -            | -                   | 1,839,000           | -            
|Recovery of future income tax asset  Note 3                          | -            | (82,860)            | -                   | -            
|Net loss for the year ended April 30, 2005                            | -            | -                   | -                   | (1,692,190)  
|Balance, April 30, 2005                                               | 44,768,502   | $  10,414,878       | $  2,536,500        | $ (7,570,815)



SAN TELMO ENERGY LTD.

Schedule 1 SCHEDULE OF OIL AND GAS PROPERTIES

for the year ended April 30, 2005

|                                                 |            |            |             |                    |             | Asset           |               |                |               
|------------------------------------------------ | ---------- | ---------- | ----------- | ------------------ | ----------- | --------------- | ------------- | -------------- | --------------
|                                                 |            |            |             |                    |             | Retirement      |               |                |               
|                                                 |            |            |             | Teepee             |             | Obligation      | Unproven      | Accumulated    | 2005          
|                                                 | Mahaska    | McLeod     | Gordondale  | Creek              | Drywells    | Costs           | Properties    | Depletion      | Total         
|                                                 |            |            |             |                    |             |                 |               |                |               
|Balance, beginning of the year                   | $  388,425 | $1,012,609 | $ 1,829,462 | $                - | $ 1,698,224 | $         7,581 | $  1,597,533  | $    (289,735) | $   6,244,099 
|Property Acquisition Costs
(reclassification)    | -          | (613)      | (234,146)   | 87,257             | (9,558)     | -               | 432,559       | -              | 274,499       
|Deferred Exploration Costs
Completion costs      | -          | 4,017      | -           | 31,714             | -           | -               | 9,581         | -              | 45,312        
|Drilling                                         | -          | 9,484      | 844         | 826,507            | 81,438      | -               | -             | -              | 918,273       
|Exploration expenditures                         | -          | -          | -           | 50,750             | -           | -               | 47,000        | -              | 97,750        
|Facilities                                       | -          | 58,895     | 257,408     | 1,233,081          | -           | -               | -             | -              | 1,549,384     
|Reclassification of costs(1)                     | -          | -          | 54,584      | 1,171,851          | -           | -               | (1,226,435)   | -              | -             
|                                                 | -          | 72,396     | 312,836     | 3,313,903          | 81,438      | -               | (1,169,854)   | -              | 2,610,719     
|Other:
Asset retirement obligations              | -          | -          | -           | -                  | -           | 149,922         | -             | -              | 149,922       
|Amortization of asset
retirement obligation cost | -          | -          | -           | -                  | -           | -               | -             | (39,688)       | (39,688)      
|                                                 | 388,425    | 1,083,392  | 1,908,152   | 3,401,160          | 1,770,104   | 157,503         | 860,238       | (329,423)      | 9,239,551     
|Depletion of producing
resource properties       | -          | -          | -           |                    |             | -               | -             | (1,758,176)    | (1,758,176)   
|Balance, end of the year                         | $  388,425 | $1,083,392 | $ 1,908,152 | $   3,401,160      | $ 1,770,104 | $     157,503   | $     860,238 | $  (2,087,599) | $    7,481,375

(1) During the year ended April 30, 2005, the Teepee Creek properties have proven to have reserves and accordingly have been reclassified as producing wells.

|                                            |               |                   |                     |                 | Asset             |              |              | (Reclassified 
|------------------------------------------- | ------------- | ----------------- | ------------------- | --------------- | ----------------- | ------------ | ------------ | --------------
|                                            |               |                   |                     |                 | Retirement        |              |              | Note 16)      
|                                            |               |                   |                     |                 | Obligation        | Unproven     | Accumulated  | 2004          
|                                            | Mahaska       | McLeod            | Gordondale          | Drywells        | Costs             | Properties   | Depletion    | Total         
|                                            |               |                   |                     |                 |                   |              |              |               
|Balance, beginning of the year              | $    309,047  | $               - | $                 - | $      132,992  | $               - | $    790,042 | $   (32,430) | $    1,199,651
|Property Acquisition Costs                  | -             | -                 | 234,146             | -               | -                 | 94,196       | -            | 328,342       
|Deferred Exploration Costs
Completion costs | 12,555        | 151,921           | 465,577             | -               | -                 | -            | -            | 630,053       
|Drilling                                    | -             | 382,876           | 403,488             | 1,301,369       | -                 | 938,431      | -            | 3,026,164     
|Exploration expenditures                    | 15,000        | 21,000            | 20,100              | 15,000          | -                 | 30,000       | -            | 101,100       
|Facilities                                  | 51,823        | 451,435           | 705,255             | -               | -                 | -            | -            | 1,208,513     
|Reclassification of costs(1)                | -             | 5,377             | 896                 | 248,863         | -                 | (255,136)    | -            | -             
|                                            | 79,378        | 1,012,609         | 1,595,316           | 1,565,232       | -                 | 713,295      | -            | 4,965,830     
|Other:
Asset retirement obligations         | -             | -                 | -                   | -               | 7,581             | -            | -            | 7,581         
|                                            | 388,425       | 1,012,609         | 1,829,462           | 1,698,224       | 7,581             | 1,597,533    | (32,430)     | 6,501,404     
|Depletion of producing resource
properties  | -             | -                 | -                   | -               | -                 | -            | (257,305)    | (257,305)     
|Balance, end of the year                    | $     388,425 | $   1,012,609     | $    1,829,462      | $     1,698,224 | $        7,581    | $ 1,597,533  | $ (289,735)  | $   6,244,099 

(1) During the year ended April 30, 2004, the McLeod and Gordondale properties have proven to have reserves and accordingly have been reclassified as producing wells. Management has determined that the Nisku and Blueridge properties were dry and accordingly costs associated with these properties have been reclassified to Drywells.

SAN TELMO ENERGY LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004(Stated in Canadian Dollars)





Note 1

Nature and Continuance of Operations



The Company is a public company whose common shares are traded on the TSX Venture Exchange and the OTC Bulletin Board. At April 30, 2005, the Company, directly and through joint ventures, is in the process of exploring its oil and gas properties located in Alberta, Canada. The recoverability of amounts shown for oil and gas properties are dependent upon the discovery of economically recoverable reserves, confirmation of the Company's interest in the properties, the ability of the Company to obtain necessary financing to complete the development and upon future profitable production or proceeds from the disposition thereof.



These financial statements have been prepared on a going concern basis, which assumes that the Company will continue in operation for the foreseeable future and be able to realize its assets and discharge its liabilities in the normal course of business. At April 30, 2005 the Company has not yet achieved profitable operations, has accumulated losses of $7,570,815 since inception and has a working capital deficiency of $1,966,919. Its ability to continue as a going concern is dependent upon the ability of the Company to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that the Company will be able to continue as a going concern. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities hat may be necessary should the company be unable to continue a going concern.



The Company was incorporated under the Company Act of British Columbia.



Note 2

Summary of Significant Accounting Policies



These financial statements have been prepared in accordance with generally accepted accounting principles in Canada and are stated in Canadian dollars. Differences with respect to accounting principles generally accepted in the United States of America are described in Note 17. Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use of estimates, which have been made using careful judgement. Actual results may differ from these estimates.



The financial statements have, in managements opinion, been properly prepared within the framework of the significant accounting policies summarized below:



a)

Basis of Consolidation



These consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, San Telmo Energy Inc. All significant inter-company transactions and balances have been eliminated.

San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 2





Note 2

Summary of Significant Accounting Policies  (contd)



b)

Oil and Gas Properties



The Company follows the full cost method of accounting for oil and gas operations whereby all costs of exploring for and developing oil and gas reserves are initially capitalized. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling and overhead charges directly related to acquisition and exploration activities.



Costs capitalized, together with the costs of production equipment, are depleted and amortized on the unit-of-production method based on the estimated gross proved reserves as determined by independent petroleum engineers. Petroleum products and reserves are converted to a common unit of measure, using 6 MCF of natural gas to one barrel of oil.



Costs of acquiring and evaluating unproved properties are initially excluded from depletion calculations. These unevaluated properties are assessed periodically to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion calculations.



Proceeds from a sale of petroleum and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would alter the rate of depletion by more than 20%. Royalties paid net of any tax credits received are netted with oil and gas sales.



Prior to January 1, 2004, impairment of oil and gas properties was based on the amount by which a cost centres carrying value exceeded its undiscounted future net cash flows from proved reserves using period-end, non-escalated prices and costs, less an estimate for future general and administrative expenses, financing costs and income taxes.

San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 3





Note 2

Summary of Significant Accounting Policies  (contd)



b)

Oil and Gas Properties  (contd)



Effective January 2004, Accounting Guideline 16 Oil and Gas Accounting  Full Cost requires the recognition and measurement process to assess impairment of oil and gas properties. In the recognition of an impairment, the carrying value of a cost centre is compared to the undiscounted future net cash flows of that costs centres proved reserves using estimates of future oil and gas prices and costs plus the cost of unproved properties that have been excluded from the depletion calculation. If the carrying value is greater than the value of the undiscounted future net cash flows of the proved reserves plus the cost of unproved properties excluded from the depletion calculation, then the amount of the cost centres potential impairment must be measured. A cost centres impairment loss is measured by the amount its carrying value exceeds the discounted future net cash flows of its proved and probable reserves using estimates of future oil and gas prices and costs plus the cost of unproved properties that have been excluded from the depletion calculation and which contain no probable reserves. The net cash flows of a cost centres proved and probable reserves are discounted using a risk-free interest rate. The amount of the impairment loss is recognized as a charge to the results of operations and a reduction in the net carrying amount of a cost centres oil and gas properties.



c)

Mineral Properties and Deferred Exploration Costs



Mineral properties are carried at cost until they are brought into production at which time they are depleted on a unit of production basis.



Exploration costs relating to mineral properties are deferred until the properties are brought into production, at which time the deferred costs are to be amortized on a unit of production basis, or until the properties are abandoned or sold, at which time the deferred costs are written off.



The mineral properties and deferred exploration costs are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. When there is evidence of impairment, the net carrying amount of the asset will be written down to its net recoverable amount, which is the estimated undiscounted future net cash flows, expected to result from the asset and its eventual disposition. The loss on impairment written off is not reversed even if circumstances change and the net recoverable amount subsequently increases.

San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 4





Note 2

Summary of Significant Accounting Policies  (contd)



d)

Environmental Costs



Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and which to not contribute to current or future revenue generation are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with the earlier of completion of a feasibility study or the Companys commitment to a plan of action based on the then known facts.



e)

Equipment and Amortization



Equipment is recorded at cost. The Company provides for amortization using the declining balance method at the following annual rates:



|Office furniture and equipment | 20% 
|------------------------------ | ----
|Computer hardware              | 30% 
|Computer software              | 100%



One-half of the amortization rate is taken on equipment acquired during the year.



f)

Basic and Diluted Loss Per Share



Basic loss per share is computed by dividing the loss for the year by the weighted average number of common shares outstanding during the year. Diluted loss per share reflect the potential dilution that could occur if potentially dilutive securities were exercised or converted to common stock. The dilutive effect of options and warrants and their equivalent is computed by application of the treasury stock method and the effect of convertible securities by the if converted method. Fully diluted amounts are not presented when the effects of the computations are anti-dilutive due to the losses incurred. Accordingly, there is no difference in the amounts presented for basic and diluted loss per share.



g)

Financial Instruments



The carrying value of cash, accounts receivable, bank indebtedness, accounts payable and accrued liabilities, due to related parties and loan payable approximate fair value because of the short-term maturity of these instruments. Unless otherwise noted, it is managements opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments.

San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 5





Note 2

Summary of Significant Accounting Policies  (contd)



h)

Stock-based Compensation



The fair value of all share purchase options granted subsequent to April 30, 2003 is expensed over their vesting period with a corresponding increase to contributed surplus. Upon exercise of share purchase options, the consideration paid by the option holder, together with the amount previously recognized in contributed surplus, is recorded as an increase to share capital.



The Company uses the Black-Scholes option valuation model to calculate the fair value of share purchase options at the date of grant. Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Changes in these assumptions can materially affect the fair value estimate and, therefore, the existing models do not necessarily provide a reliable single measure of the fair value of the Companys share purchase options.



i)

Income Taxes



The Company follows the asset and liability method of accounting for income taxes. Under this method, current income taxes are recognized for the estimated income taxes payable for the current period. Future income tax assets and liabilities are recognized for temporary differences between the tax and accounting basis of assets and liabilities as well as for the benefit of losses available to be carried forward to future years for tax purposes only if it is more likely than not that they can be realized. Future income tax assets and liabilities are measured using tax rates and laws expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on future income tax assets and liabilities is recognized in the year of the change.



The Company has incurred mineral property and oil and gas exploration expenditures both in Canada and overseas. These expenditures will be available to be deducted in the determination of future taxable income. Accordingly, no tax benefit has been recognized in these consolidated financial statements on account of these losses.



j)

Interest in Joint Ventures



A substantial portion of the Companys oil and gas operations are conducted jointly with others and accordingly, the financial statements reflect only the Companys proportionate interest in such activities.

San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 6





Note 2 Summary of Significant Accounting Policies  (contd)



k)

Revenue Recognition



Sales of petroleum and natural gas are recognized in the period in which the product is delivered to the customer and the price is determinable, persuasive evidence of an arrangement exists and collectibility is reasonably assured.



l)

General and Administrative Expenses



The Company charges all general and administrative expenses not directly related to exploration activities to operations as incurred.



m)

New Accounting Standards



Management does not believe that any recently issued, but not yet effective accounting standards if currently adopted could have a material effect on the accompanying financial statements.



Note 3

Changes in Accounting Policies



Asset Retirement Obligation



Effective for fiscal years commencing after January 1, 2004, asset retirement costs and liabilities associated with site restoration and abandonment of tangible long-lived assets are initially measured at a fair value which approximates the cost a third party would incur in performing the tasks necessary to retire such assets. The fair value is recognized in the financial statements at the present value of expected future cash outflows to satisfy the obligation (accretion expense) and the amortization of the asset retirement cost are recognized in the results of operations. The Company has adopted the policy

prospectively.



As a result of this change in policy the Company recorded an asset retirement obligation of $172,662 as at April 30, 2005. Prior to adopting the new standard, the Company recognized a provision for future site restoration costs over the life of the properties of $7,581 by estimating undiscounted restoration costs.

San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 7





Note 3

Changes in Accounting Policies  (contd)



Flow-through Shares



In March 2004, the Canadian Institute of Chartered Accountants issued Emerging Issue Committee Abstract No. 146, Flow-through Shares, which clarifies the recognition of previously unrecorded future income tax assets caused by renouncement of expenditures relating to flow-through shares. The Company has adopted prospectively the new recommendation for flow-through shares issued after March 19, 2004 and now records the tax effect related to the renounced deductions as a reduction of income tax expense in the statement of operations on the date that the Company renounces the deductions for investors whereas previously the tax effect was recorded as a credit to equity. As a result of this change in policy the Company recorded a recovery of future income taxes of $82,860 with a corresponding reduction to share capital for share issue expenses with respect to flow-through shares totalling $231,000 issued after March 19, 2004 and renounced to investors during the year ended April 30, 2005.



Note 4

Equipment

|                               |                          | 2005           |             
|------------------------------ | ------------------------ | -------------- | ------------
|Cost                           | Accumulated
Amortization | Net           
|Computer software              | $      1,074             | $          537 | $        537
|Computer hardware              | 33,324                   | 20,803         | 12,521      
|Office furniture and equipment | 38,724                   | 13,013         | 25,711      
|                               | $    73,122              | $      34,353  | $   38,769  
|                               |                          | 2004           |             
|Cost                           | Accumulated
Amortization | Net           
|Computer hardware              | $    28,164              | $    16,552    | $    11,612 
|Office furniture and equipment | 23,951                   | 8,432          | 15,519      
|                               | $    52,115              | $    24,984    | $    27,131 





San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 8





Note 5

Oil and Gas Properties



a) Proven Properties



Mahaska



By an agreement dated November 4, 2002, the Companys wholly owned subsidiary earned a 30% interest in a test well located in the Mahaska area of Alberta, Canada. To earn this interest the Company paid 50% of the total costs incurred in preparing the test well for production.



McLeod



By a Farm-out Agreement dated July 7, 2003, the Company drilled a well, thereby earning a 100% working interest in three leases located in Alberta, Canada. The Company is required to pay an overriding royalty to a maximum of 19.5%. As consideration, the Company paid $5,377 for the mineral rights. Pursuant to a Participation Agreement dated August 7, 2003, the Company granted a 30% working interest in these leases to a participant.



Gordondale



The Company acquired a 100% interest in a 3⁄4 section at an Alberta Crown lease sale. By a Farm-out Agreement dated August 7, 2003, the Company granted a 33% working interest in a drilling spacing unit to a participant. The participant earned a 26.4% working interest in one well. The Company initially acquired this working interest for a net amount of $78,452. The Company has acquired an additional 100% working interest in one section of a petroleum and natural gas lease for $234,146 (see also Note 5c)



Teepee Creek



In December 2002, the Company purchased a 50% working interest in two sections of a petroleum and natural gas lease at an Alberta Crown sale for a total cost of $154,500. The Company farmed into its partners interest by drilling two wells and now owns 100% of these rights, subject to a non-convertible override. In April 2004, the Company purchased a 100% working interest in one section of petroleum and natural gas rights for $41,200.

San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 9





Note 5

Oil and Gas Properties  (contd)



b)

Drywells



Timeau



By a farm-in agreement dated December 12, 2001, the Companys wholly owned subsidiary agreed to participate in drilling the Canscot et al Timeu 6-5-64-4 well in the Province of Alberta, Canada. The farmees working interest in the wells ranges from 25% to 50%. The Company acquired 50% of the farmees interest for $67,500 and agreed to pay 25% of all costs incurred in drilling the well. During the year ended April 30, 2003 this well has been determined to be dry. During the year ended April 30, 2005 the Company participated in the drilling of a well for a 25% working interest, which was determined to be dry.



Nisku



By a farm-out Agreement dated September 23, 2002, the Company acquired a 100% working interest in six leases located in Alberta, Canada. The Company is required to pay an overriding royalty of a minimum of 2.5% to a maximum of 15%. During the year ended April 30, 2004, the well has been determined to be dry.



Whitecourt (Blueridge)



By a farm-in agreement dated February 20, 2003, the Companys wholly owned subsidiary agreed to participate as to 50% of all of the farmees obligations pursuant to the farm-in agreement dated February 28, 2003 entered into by the farmee with other parties. In return, the Company has earned a 40% working interest in the petroleum and natural gas rights located in the Province of Alberta, Canada.



c)

Unproven Properties



Petroleum and Natural Gas Leases (P & NG)



Gold Creek



During the year ended April 30, 2004, the Company acquired a 100% working interest in a P & NG lease located in Alberta, Canada for $80,500.



During the year ended April 30, 2005, the Company entered into a farm-out and joint venture agreement with Rolling Thunder Exploration Ltd. This Company has the right to earn 55% working interest in the property by assuming 100% of the seismic and drilling cost before a specific date. The Company will have a gross overriding royalty of up to 15% convertible at its option to 45% working interest.

San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 10





Note 5

Oil and Gas Properties  (contd)



c) Unproven Properties  (contd)



Boundary Lake



During the year ended April 30, 2004, the Company acquired an additional lease of land located in Alberta, Canada for $91,252.



During the year ended April 30, 2005, the Company acquired an additional lease of land located in Alberta, Canada for $106,737.



During the year ended April 30, 2005, the Company entered into a farm-out and joint venture agreement with Rolling Thunder Exploration Ltd. This company has the right to earn a 60% working interest in the property by assuming 100% of the seismic and drilling and completion costs before a specific date. The Company will have a gross overriding royalty of up to 15% convertible at its option to 40% working interest after the payout.



Mitsue and Moriville



During the year ended April 30, 2005, the Company entered in to a farm-out agreement and joint venture agreement with Rolling Thunder Exploration Ltd. This company has the right to earn 60% working interest in the properties by assuming 100% of the seismic and drilling costs before a specified date. The Company will have a gross overriding royalty of up to 15% convertible at its option to a 40% working interest after payout.



Teepee Creek



During the year ended April 30, 2005, the Company acquired a 100% working interest in an additional lease of land located in Alberta, Canada for $132,337.



Gordondale



During the year ended April 30, 2004, the Company acquired a 100% working interest in an additional section of land in the Gordondale property for $234,146.



Note 6

Mineral Properties



During the year ended April 30, 2004, the Company disposed of all of its working interest in the Argentina properties for a consideration of $10,000. These claims were written down to a nominal amount of $1 in 2003.



During the year ended April 30, 2004, the Company abandoned its mineral interests located in Northern Quebec acquired for $4,400 in 2002. These claims were written down to a nominal amount of $1 in 2003.

San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 11





Note 7

Bank Indebtedness





|                                                                                                                                                                                                               | 2005           | 2004            
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ----------------
|                                                                                                                                                                                                               |                |                 
|Cheques issued in excess of funds on hands                                                                                                                                                                     | $      124,106 | $              -
|                                                                                                                                                                                                               |                |                 
|Pursuant to a letter of agreement, the Company obtained
a revolving operating demand loan of up to $5,000,000,
repayable monthly, interest only at the National Bank of
Canada prime rate plus 0.5% per annum. | 2,000,000      | -               
|                                                                                                                                                                                                               |                |                 
|                                                                                                                                                                                                               | $2,124,106     | $              -



In addition, the Company has a non-revolving acquisition/development demand loan of up to $1,500,000, repayable in monthly payments over the half-life of the reserves being financed, including interest at the National Bank of Canada prime rate plus 0.75% per annum, a treasury risk line of up to $1,000,000 and a credit card limit of $25,000.



These facilities are secured by a General Security Agreement and by a $20,000,000 debenture with a floating charge over all assets of the Company with a negative pledge and undertaking to provide fixed charges on the Companys major producing petroleum properties. Other securities include the assignment/endorsement by the Company of all risk insurance, revenues and monies under material contracts, if applicable.



All obligations of the Company are repayable upon demand by the bank.



Note 8

Loan Payable



By an agreement dated December 5, 2003, the Company obtained a 12% loan of $600,000 from a shareholder. The loan was originally due on June 5, 2004. The Company also issued 37,500 common shares as a lenders fee at $1.60 per share. During the year ended April 30, 2005, the loan was repaid.



Note 9

Asset Retirement Obligation



Effective May 1, 2004, the Company changed its policy on accounting for liabilities associated with site restoration and abandonment of its oil and gas properties. The undiscounted amount of expected cash flows required to settle the asset retirement obligations as at April 30, 2005 was estimated at $260,000 to be settled over a six year period starting in 2011. The liability for the expected cash flows, as reflected in the financial statements at April 30, 2005, has been discounted at 8%.

San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 12





Note 10

Share Capital



a)

Authorized



300,000,000 common shares without par value.



b)

Shares Held In Escrow



As at April 30, 2005, 321,427 (2004: 528,105) common shares of the Company are subject to an escrow agreement and may not be transferred, assigned or otherwise dealt with without the written consent of the regulatory authorities. These escrowed shares will be entitled to the pro-rata release on the basis of 15% of the original number (after adjustment for the share consolidation) for every $100,000 expended on exploration of the mineral properties.



No more than 50% of the original number of the 642,858 (after adjustment for share consolidation) shares may be released in any twelve-month period. Any escrowed shares not released at the expiration of ten years from August 21, 1998 will be automatically cancelled. It is anticipated that the remaining shares will be released from escrow in 2006.



c)

Share Purchase Warrants



As at April 30, 2005, the following share purchase warrants were outstanding:



|Number of Shares | Exercise Price | Expiry Date      
|---------------- | -------------- | -----------------
|                 |                |                  
|390,736          | $2.00          | December 31, 2005
|1,620,000        | $0.82          | June 11, 2006    
|                 |                |                  
|2,010,736        |                |                  



These warrants entitle the holders thereof the right to acquire one common share for each warrant held.



d)

Stock Options



Stock-based Compensation Plan



The Company has granted employees and directors stock options. These options are granted with an exercise price equal to the market price of the Companys shares on the date of the grant.



A summary of the status of the stock option plan as of April 30, 2005 and 2004 and changes during the years then ended is presented below.

San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 13





Note 10

Share Capital  (contd)



d)

Stock Options  (contd)



Stock-based Compensation Plan  (contd)



|                                           | 2005        | 2004                           
|------------------------------------------ | ----------- | -------------------------------
|                                           | Options     | Weighted
Average
Exercise
Price
|                                           |             |                                
|Outstanding at beginning of year           | 2,175,000   | $1.20                          
|Repriced                                   | (1,100,000) | $1.95                          
|                                           | 1,100,000   | $0.82                          
|Granted                                    | 1,900,000   | $0.82                          
|Exercised                                  | (300,000)   | $0.25                          
|                                           |             |                                
|Outstanding at end of year                 | 3,775,000   | $0.75                          
|                                           |             |                                
|Outstanding and exercisable at
end of year | 2,675,000   |                                



As at April 30, 2005, the following stock options were outstanding.



|Number of Shares | Exercise Price | Expiry Date     
|---------------- | -------------- | ----------------
|                 |                |                 
|675,000          | $0.25          | November 8, 2007
|100,000          | $1.95          | October 31, 2008
|1,100,000        | $0.82          | October 31, 2008
|1,900,000        | $0.82          | May 17, 2009    
|3,775,000        |                |                 



These options entitle the holder thereof the right to acquire one common share for each option held.



During the year ended April 30, 2005, 1,100,000 share purchase options were repriced to $0.82 from $1.95.



During the year ended April 30, 2005, the Company granted 1,900,000 share purchase options exercisable at $0.82 per share, which vest at 12.5% every three months.

San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 14





Note 10

Share Capital  (contd)



e)

Stock Options  (contd)



Stock-based Compensation Plan  (contd)



As disclosed in Note 2, effective for the year ended April 30, 2004, the Company has adopted the new policy to record the fair value of compensation expense on the granting of stock options. For the year ended April 30, 2004, the Company recorded a compensation charge of $697,500. These options vest at 12.5% every three months. The fair value of the stock compensation expense associated with employees and directors options, not recognized in the financial statements for the year ended April 30, 2003 is disclosed in the pro forma amounts below:



|                                           | 2003              
|------------------------------------------ | ------------------
|Net loss for the year as reported          | $    (1,884,545)  
|Stock-based compensation                   | (640,220)         
|Pro forma loss for the year                | $    (2,524,765)  
|Pro forma basic and diluted loss per share | $           (0.21)



The fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model. The assumptions used in calculating fair value are as follows:



|                                | 2005           | 2004    | 2003   
|------------------------------- | -------------- | ------- | -------
|                                |                |         |        
|Risk-free interest rate         | 3.25% to 4.00% | 2.8%    | 5%     
|Expected option life in year    | 4 to 5 years   | 5 years | 5 years
|Expected stock price volatility | 269%           | 110%    | 106%   
|Expected dividend yield         | Nil            | Nil     | Nil    



The weighted average fair value at the date of grant of the consultant and employee stock options granted were as follows:



|                                                | 2005          | 2004        | 2003         
|----------------------------------------------- | ------------- | ----------- | -------------
|                                                |               |             |              
|Weighted average fair value                     | $        0.94 | $      1.55 | $        1.19
|Total options vested and repriced               | 1,962,500     | 450,000     | 638,000      
|Total fair value of options vested and repriced | $ 1,839,000   | $ 697,500   | $   759,220  





San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 15





Note 10

Share Capital  (contd)



e)

Stock Split



During the year ended April 30, 2004 the Company completed a forward stock split of its common shares on the basis of three new shares for one old share. The number of common shares issued prior to the forward stock split have been retroactively restated.



f)

Flow-through Shares



During the year ended April 30, 2005, the Company issued a total of 330,000 flow-through common shares for cash consideration of $231,000. The expenditures related to the use of the flow-through share proceeds are recorded in oil and gas properties, but are not available as a tax deduction to the Company as the tax benefit of these expenditures have been renounced to the investors.



Note 11

Related Party Transactions



The Company incurred the following charges by directors of the Company, former directors of the Company or companies with common directors:



|                      | 2005          | 2004             | 2003          
|--------------------- | ------------- | ---------------- | --------------
|                      |               |                  |               
|Consulting fees       | $      20,000 | $              - | $       91,250
|Directors fees       | 57,500        | -                | -             
|Interest              | 4,688         | -                | -             
|Management fees       | 141,960       | 165,960          | 160,410       
|Professional fees     | 25,439        | 36,949           | 45,303        
|Rent                  | 27,600        | 53,244           | 27,700        
|Salaries and benefits | 100,000       | -                | -             
|                      | $     377,187 | $    256,153     | $     324,663 



These charges were measured by the exchange amount, which is the amount agreed upon by the transacting parties.



At April 30, 2005, prepaid expenses include $Nil (2004: $14,130) in respect to management fees prepaid to a company controlled by a director of the Company.



The amounts due to related parties are due to directors of the Company and are non-interest bearing, unsecured and repayable on demand.



During the year ended April 30, 2005 certain directors of the Company were issued 40,000 (2004: Nil) common shares for total proceeds of $28,000 (2004: $Nil).

San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 16





Note 12

Credit Risk



The Company sells oil and natural gas products and grants credit to its customers in the normal course of business. Where possible, credit is extended based on an evaluation of the customers financial conditions and historical payment record.



Note 13

Non-cash Transaction



Investing and financing activities that do not have a direct impact on current cash flows are excluded from the cash flow statements. The following transaction was excluded from the statements of cash flows:



During the year ended April 30, 2004, the Company issued 37,500 common shares in respect to a lenders fee equivalent to $60,000.



Note 14

Income Taxes



Total income tax recovery varies from the amounts that would be computed by applying the statutory income tax rate to loss before income taxes for the following reasons:



|                                                                                                   | 2005             | 2004               
|-------------------------------------------------------------------------------------------------- | ---------------- | -------------------
|Average statutory income tax rate                                                                  | 33.75%           | 35.93%             
|Income tax recovery on loss before income taxes                                                    | $     (600,331)  | $     (749,695)    
|Increase (decrease) in income taxes resulting from:
Amortization of equipment and intangible asset | 101,066          | 96,100             
|Other                                                                                              | 5,475            | 2,793              
|Provincial royalties and other levies                                                              | 186,859          | 26,405             
|Resource allowance                                                                                 | (280,110)        | (2,325)            
|Stock based compensation                                                                           | 659,613          | 250,179            
|Application of prior years losses                                                                  | (243,928)        | -                  
|Change in the valuation allowance for future
income tax assets                                     | 88,496           | 376,543            
|Income tax expense (recovery)                                                                      | $       (82,860) | $                 -



Significant components of the Companys future tax assets and liabilities, after applying enacted corporation income tax rates, are as follows:

San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 17



Note 14

Income Taxes  (contd)



|                                                 | 2005                | 2004               
|------------------------------------------------ | ------------------- | -------------------
|Future income tax assets:                        |                     |                    
|Non-capital losses carried forward               | $     1,275,771     | $     1,378,272    
|Resource deductions                              | 92,129              | 109,159            
|Capital cost allowance                           | 12,275              | 2,906              
|Valuation allowance for future income tax assets | (1,380,175)         | (1,490,337)        
|                                                 |                     |                    
|Net future income tax assets                     | $                 - | $                 -



Management considers it more-likely-than-not that the amounts will not be utilized and accordingly a full valuation allowance has been applied.



The Company has accumulated non-capital losses totalling $3,556,651 that can be utilized to offset taxable income of future years. These losses expire as follows:



|2006 | $      124,812
|---- | --------------
|2007 | 79,957        
|2008 | 103,034       
|2009 | 222,678       
|2010 | 1,489,726     
|2011 | 1,046,937     
|2012 | 489,507       
|     |               
|     | $   3,556,651 



The Company has accumulated Canadian and foreign exploration and development expenses and Canadian oil and gas expenses totalling $7,717,051 available to offset taxable income of future years at various rates per year.



Note 15

Subsequent Events



Subsequent to April 30, 2005, the Company acquired a 50% working interest in a petroleum and natural gas lease from the Alberta Department of Energy Crown sale for a total consideration of $154,489.



Note 16

Comparative Figures



Certain comparative figures for the year April 30, 2004, have been reclassified to conform to the presentation adopted in the current year.

San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 18





Note 17

Differences Between Generally Accepted Accounting Principles in Canada and the United States of America



The financial statements have been prepared in accordance with accounting principles generally accepted in Canada, which differ in certain respects with those principles and practices that the Company would have followed had its financial statements been prepared in accordance with accounting principles and practices generally accepted in the United States of America.



The Companys accounting principles generally accepted in Canada (Canadian GAAP) differ from accounting principles generally accepted in the United States of America (US GAAP) as follows:



a)

Mineral Properties and Deferred Exploration



In accordance with US GAAP, costs related to acquisition and exploration activities are generally expensed, whereas under Canadian GAAP such costs may be deferred until the properties are brought into production, at which time the deferred costs are to be amortized on a unit of production basis over proven and probable reserves, or until the properties are abandoned or sold, at which time the deferred costs are written off. As a result, acquisition and exploration costs have been expensed under US GAAP in the year such costs were incurred.



b)

Flow-Through Shares



In accordance with US GAAP, proceeds from the sale of flow-through shares are allocated amongst the fair value of the stock issued and the price the investor pays. The difference between the fair value and the price paid is recognized as a liability for accounting purposes. The liability is relieved and the corresponding future tax liability is recorded when the Company renounces its exploration expenditures to the flow-through share investors. The Company issued flow-through shares at fair market value in the years ended April 30, 2005 and 2004. During the year ended April 30, 2005 and 2004, all amounts renounced have been expended and the liability account relating to the flow-through expenses was $Nil.



Under Canadian GAAP, the company recorded a recovery of future income taxes with a corresponding reduction to share capital of $82,860 with respect to flow-through shares totalling $231,000 issued after March 19, 2004 and renounced to investors during the year ended April 30, 2005. Under US GAAP, a recovery of future income taxes with a corresponding reduction to share capital is not recorded in the year flow-through shares are renounced.



c)

New Accounting Standards



Management does not believe that any recently issued, but not yet effective accounting standards if currently adopted could have a material effect on the accompanying financial statements.

San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 19





Note 17

Differences Between Generally Accepted Accounting Principles in Canada and the United States of America  (contd)



d)

The impact of the foregoing on the financial statements is as follows:



|Balance Sheets                                                      | 2005             | 2004           
|------------------------------------------------------------------- | ---------------- | ---------------
|                                                                    |                  |                
|Total assets per Canadian and US GAAP                               | $      9,253,036 | $     6,717,019
|                                                                    |                  |                
|Total liabilities per Canadian and US GAAP                          | $      3,872,473 | $     2,699,406
|                                                                    |                  |                
|Shareholders Equity                                                 |                  |                
|                                                                    |                  |                
|Deficit, per Canadian GAAP                                          | $   (7,570,815)  | $   (5,878,625)
|Future income tax recovery related to flow-through
shares renounced | (82,860)         | -              
|                                                                    |                  |                
|Deficit, per US GAAP                                                | (7,653,675)      | (5,878,625)    
|                                                                    |                  |                
|Share capital per Canadian GAAP                                     | 10,414,878       | 9,079,738      
|Future income tax recovery related to flow-through
shares renounced | 82,860           | -              
|                                                                    |                  |                
|Share capital per US GAAP                                           | 10,497,738       | 9,079,738      
|                                                                    |                  |                
|Contributed surplus                                                 | 2,536,500        | 816,500        
|                                                                    |                  |                
|Total shareholders equity per US GAAP                              | $      5,380,563 | $     4,017,613













San Telmo Energy Ltd.

Notes to the Consolidated Financial Statements

April 30, 2005 and 2004

(Stated in Canadian Dollars)  Page 20





Note 17

Differences Between Generally Accepted Accounting Principles in Canada and the United States of America  (contd)



d) The impact of the foregoing on the financial statements is as follows:  (contd)



|Statements of Loss                                                                                | 2005              | 2004              | 2003              
|------------------------------------------------------------------------------------------------- | ----------------- | ----------------- | ------------------
|                                                                                                  |                   |                   |                   
|Net loss per Canadian GAAP                                                                        | $  (1,692,190)    | $  (2,086,616)    | $   (1,884,545)   
|Future income tax recovery related
to flow-through shares renounced                               | (82,860)          | -                 | -                 
|Adjustment for mineral properties
and deferred exploration incurred in
previous years written off | -                 | 1                 | 7,367             
|Mineral properties and deferred
exploration costs incurred during
the year                        | -                 | -                 | (1,097)           
|                                                                                                  |                   |                   |                   
|Net loss per US GAAP                                                                              | $  (1,775,050)    | $  (2,086,615)    | $   (1,878,275)   
|                                                                                                  |                   |                   |                   
|Basic and diluted loss per share per
US GAAP                                                      | $          (0.04) | $          (0.06) | $           (0.16)
|                                                                                                  |                   |                   |                   
|Weighted average number of shares
outstanding per US GAAP                                         | 42,975,349        | 37,604,338        | 11,875,548        
|                                                                                                  |                   |                   |                   
|                                                                                                  |                   |                   |                   
|                                                                                                  | 2005              | 2004              | 2003              
|Statements of Cash Flows                                                                          |                   |                   |                   
|                                                                                                  |                   |                   |                   
|Cash flows from (used in) operating
activities per Canadian GAAP                                  | $        96,478   | $       738,075   | $   (1,809,421)   
|Exploration expenses incurred                                                                     | -                 | -                 | (1,097)           
|                                                                                                  |                   |                   |                   
|Cash flows from (used in) operating
activities per US GAAP                                        | 96,478            | 738,075           | (1,810,518)       
|                                                                                                  |                   |                   |                   
|Cash flows from financing activities
per Canadian and US GAAP                                     | 2,793,911         | 3,458,668         | 3,687,394         
|                                                                                                  |                   |                   |                   
|Cash flows from (used in) investing
activities per Canadian GAAP                                  | (2,898,648)       | (5,293,096)       | (1,027,256)       
|Exploration expenditure incurred                                                                  | -                 | -                 | 1,097             
|                                                                                                  |                   |                   |                   
|Cash flows from (used in) investing
activities per US GAAP                                        | (2,898,648)       | (5,293,096)       | (1,026,159)       
|                                                                                                  |                   |                   |                   
|Increase (decrease) in cash per US
GAAP                                                           | $       (8,259)   | $  (1,096,353)    | $       850,717   































Signature Page



Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.





San Telmo Energy Ltd.

Registrant





|Dated:  October 31, 2005 | Signed:  /s/  Brian Bass          
|------------------------ | ----------------------------------
|                         | Brian Bass,
President and Director





























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