1  UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB/A (Mark One) xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year endedDecember 31, 2005 oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from [   ] to [    ] Commission file number0-25579 PETROGEN CORP. (Name of small business issuer in its charter) Nevada
        
        97-0571853(State or other jurisdiction of incorporation or organization)
        
        (I.R.S. Employer Identification No.)  322-2000 South Dairy AshfordHouston, Texas
        
        77077(Address of principal executive offices)
        
        (Zip Code) Issuers telephone number(281) 497-3700 Securities registered pursuant to Section 12(b) of the Act: Title of each classNil
        
        Name of each exchange on which registeredNil Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001(Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx
        No [
        ] Check here if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.x      2   Check whether the issuer is a blank check company as defined under the Exchange Act. Yes [
        ]
        Nox State issuers revenues for its most recent fiscal year.  $201,628 State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of January 31, 2006: $15,125,542. Issuers Involved in Bankruptcy Proceedings During the Preceding Five Years N/A Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 and 15(d) of the Securities Exchange Act of 1934 after the distribution of securities under a plan confirmed by a court. Yes [   ]  No [    ] Applicable Only to Corporate Registrants State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 67,676,807 common shares issued and outstanding as of April 13, 2006. Documents Incorporated by Reference If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10-KSB into which the document is incorporated: (i) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 (the Securities Act). The listed documents should be clearly described for identification purposes. None Transitional Small Business Disclosure Format (Check one):
        Yes [
        ];
        Nox.  AMENDMENTS TO FORM 10-KSBA  In fiscal year 2004, the Company reclassified $105,716 in operator fees to general and administration expenses, the reclassification  did not affect assets, liabilities or stockholders equity. See Note 2  Summary of Significant Accounting Policies under Oil and Gas Properties.  We have restated the Statement of Stockholders Equity to properly reflect the reverse recapitalization of the past share activity of the entity gaining control to reflect the equivalent number of shares received in the acquisition. Costs associated with the reverse merger totaling $60,000 and the fair value of the share purchase warrants of $357,800 were previously charged directly to stockholders deficit but have now been expensed as non-recurring costs of the share exchange. See Note 3  Acquisition of Petrogen Inc.      3   Table of Contents  PART  1Item 1.
        Description of Business
        4Business Development
        4Current Business Operations
        5Oil and Gas Properties
        5Employees
        14Risk Factors
        14ITEM 2.
        Description of Properties
        20ITEM 3.
        Legal proceedings
        20ITEM 4.
        Submission of Matters to a Vote of Securities Holders
        21PART IIITEM 5.
        Market for Common Equity and Related Stockholders Matters
        21Market Information
        21Holders
        21Dividends
        21Securities Authorized for Issuance under Equity Compensation Plans
        22Recent Sales of Unregistered Securities and Changes in Control of the Company
        24ITEM 6.
        Managements Discussion and Analysis or Plan of Operation
        26Results of Operation
        26Liquidity and Capital Resources
        27Plan of Operation
        28Material Commitments
        30Off-Balance Sheet Arrangements
        31ITEM 7.
        Financial Statements
        31Index to Financial Statements
        32Auditors Report
        33Consolidated Balance Sheets
        34Consolidated Statements of Operations
        35Consolidated Statements of Cash Flows
        36Consolidated Statements of Stockholders Equity  [Deficit]
        37Notes to the Consolidated Financial Statements
        41ITEM 8.
        Changes in and Disagreements with Accountants on Accounting and Financial Statements
        56ITEM 8A.
        Controls and Procedures
        56ITEM 8B.
        Other Information
        56PART IIIITEM 9.
        Directors, Executive Officers, Promoters and Control Persons; Compliance with 16(a) of the Exchange Act
        56Identification of Directors and Executive Officers
        56Involvement in Certain Legal Proceedings
        57Audit Committee
        58Audit Committee Financial Expert
        58Compliance with Section 16(a) of the Exchange Act
        58ITEM 10.
        Executive Compensation
        58Compensation of Officers and Directors
        58Summary Compensation Table
        60Stock Options/SAR Grants Table
        60Aggregated Options/SAR Exercises
        60ITEM 11.
        Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
        61ITEM 12.
        Certain Relationships and Related Transactions
        62Indemnification of Directors and Officers
        62ITEM 13.
        Exhibits.
        62ITEM 14.
        Principal Accountant Fees and Services
        63Audit Fees
        63Financial Information Systems Design and Implementation Fees
        63All Other Fees
        63SIGNATURES
        
        63       4    FORWARD LOOKING STATEMENTS  This Annual Report contains forward-looking statements, as that term is used in federal securities laws, about our financial condition, results of operations and business. These statements include, among others:  (i)
        statements concerning the benefits that we expect will results from our business activities and certain transactions that we have completed, such as increased revenues, decreased expenses and avoided expenses and expenditures; and  (ii)
        statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts.  These statements may be made expressly in this document or may be incorporated by reference to documents that we will file with the SEC. You can find many of these statements by looking for words such as believes, expects, anticipates, estimates or similar expressions used in this prospectus. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled Risk Factors, which may cause our or our industrys actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. We caution you not to put undue reliance on these statements, which speak only as of the date of this Annual Report. Further, the
information contained in this Annual Report or incorporated herein by reference is a statement of our present intention and is based on present facts and assumptions, and may change at any time and without notice, based on changes in such facts or assumptions.  While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results. The safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995 applies to this Annual Report.  Moreover, the Securities and Exchange Commission (the "SEC") permits oil and gas companies, in their filings with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. As of the date of this Annual Report, we have not reported nor filed any reserve estimates with any Federal agencies. In this Annual Report, the term total potential reserves is used, which is intended to include an aggregate of proved reserves, probable reserves and possible reserves. SEC guidelines strictly prohibit publicly traded companies from including probable and possible reserves in their filings with the SEC.  Where possible, absent omissions, when the phrase potential reserves is referenced, it is followed by an asterisk (*) to remind the investor
of this cautionary note.  Available Information  Petrogen Corp. files annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy documents referred to in this Annual Report on Form 10-KSB that have been filed with the Commission at the Commissions Public Reference Room, 450 Fifth Street, N.W., Washington, D.C.  You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  You can also obtain copies of our SEC filings by going to the SEC website at http://www.sec.gov  PART  1  ITEM 1. DESCRIPTION OF BUSINESS  BUSINESS DEVELOPMENT  Petrogen Corp. is a corporation organized under the laws of the State of Nevada. We currently trade on the OTC Bulletin Board under the symbol "PTGC" and are quoted on the Frankfurt Stock Exchange in Germany under the symbol "PTD".  Petrogen Corp. was incorporated under the laws of the State of Nevada on December 3, 1997 under the name "Hadrosaurus Resources, Inc.". On January 20, 1998, we filed an amendment to the articles of incorporation changing our name to "Hadro Resources, Inc." On February 12, 2003, subsequent to the acquisition of Petrogen, Inc. ("Petrogen"), we filed an amendment to its articles of incorporation changing our name to "Petrogen Corp."      5   On October 11, 2002, effective February 12, 2003, Hadro Resources, Inc. (now known as Petrogen Corp.), Petrogen, Inc. (Petrogen) and the shareholders of Petrogen (the Petrogen Shareholders) entered into a share exchange agreement (the Share Exchange Agreement). Pursuant to the terms of the Share Exchange Agreement, we acquired from the Petrogen Shareholders one hundred percent (100%) of the issued and outstanding shares of common stock of Petrogen and issued 7,000,000 shares of our restricted common stock to the Petrogen Shareholders in proportion to their respective holdings in Petrogen.  In accordance with the terms of the Share Exchange Agreement: (i) Petrogen became our wholly-owned subsidiary; (ii) we changed our name to Petrogen Corp. and our trading symbol to PTGC and (iii) our sole business operations are as an independent oil and gas development and production company.  This acquisition has been accounted for with Petrogen Corp. being treated as the accounting parent and Petrogen being treated as the accounting subsidiary. Accordingly, the consolidated financial statements include the accounts of Petrogen Corp. and its wholly-owned subsidiary, Petrogen, since the date of the acquisition.  Our executive officers are located at 322-2000 South Dairy Ashford, Houston, Texas 77077 and our telephone number is 281.497.3700.  CURRENT BUSINESS OPERATIONS  As of the date of this Annual Report, we are an independent oil and natural gas development and production company specializing in the development of domestic energy including, but not limited to, the acquisition, development and exploration of oil and natural gas properties throughout the State of Texas and the Texas Gulf Coast region with operations based in Houston, Texas. We are together with our wholly owned subsidiary, Petrogen, Inc. (Petrogen), a junior domestic upstream natural gas development company focused on acquiring, developing and producing known previously producing natural gas reserves in well known high impact and mature hydrocarbon rich areas. Our core business strategy is to acquire interests in fields that have potential natural gas reserves and development and expansion opportunities as well as to acquire properties that have previously produced natural gas from formerly
and currently producing proved developed reserves.  Our principal geographic areas of focus lie in the Gulf of Mexico and the Texas Permian Basin regions, with core assets presently located in the Emily Hawes Field on the Texas Gulf Coast, and the Tiller Ranch Field in the Texas Gulf Coast. Non-core assets include Enos Creek Field in central Wyoming and Baxterville Field in southern Gulf Coast of Mississippi. We have acquired the rights and are currently developing our interests in our two core properties spanning over approximately 2,554 net acres with what management believes to be hydrocarbon development opportunities that represent potential oil and natural gas reserves in several that could be developed with targeted development efforts. Management anticipates that our ongoing efforts, subject to adequate funding being available, will be primarily focused upon the development and expansion our Texas properties, through the drilling of new wells into
what management anticipates will thereafter be proven producing hydrocarbon reserves. Currently, we are assessing divestiture opportunities related to our Mississippi and Wyoming properties. Additionally, we have previously held options and rights of first refusal to develop some 15,000 gross acres of prospects in the Texas Permian Basin region and the Adams Ranch and Harrell Ranch (the Permian Basin Fields). After assessing certain risks and economic variables related to the Permian Basin Fields and the general area geologically as a potential investment for ongoing hydrocarbon development, as well as taking into consideration managements focused agenda to develop the Texas Gulf Coast properties exclusively going forward, management elected to allow the options and rights of first refusal to develop the Permian Basin Properties to lapse. Management has no further plans at this time to attempt to re-engage in potential opportunities to develop potential prospects in the Texas
Permian Basin. We plan to continue building and increasing a strategic base of proven hydrocarbon reserves and production opportunities within the Texas Gulf Coast region that represent outstanding growth opportunities for us and our shareholders over the immediate, near and long term.  Oil and Gas Properties  As of the date of this Annual Report, we have not reported nor filed any reserve estimates with any Federal agencies. Plans to commence production from certain properties were initiated within the period of this Annual Report. We maintain approximately an aggregate of 2,554 net developed and undeveloped acreage pursuant to leases and/or concessions as discussed below. The following is a description of our oil and gas operations.  Emily Hawes Field Project  Productive Wells and Acreage. We hold a 64.125% working interest and a 77.5% net revenue interest (resulting in 49.697% net of all proceeds from hydrocarbon sales) in approximately 1,571 gross (1,156.65 net) undeveloped acreage of oil and gas leases located in Matagorda Island, Calhoun County, Texas (the "Emily Hawes Field"). Previously we held a 95% working interest and a 77.5% net revenue interest in the Emily Hawes Field. We entered into farm-in agreements with Nortex Corporation (Nortex) and Darcy Energy LLC, formerly known as Bazmo Exploration LLC (Darcy), respectively, pursuant to which we assigned a portion of our     6  interests and retained a 35.0% working interest and a 77.5% net revenue interest (resulting in 26.25% net of all proceeds from hydrocarbon sales). Then, on September 20, 2004, we entered into an agreement with Leila Clark Wynn Mineral Trust, which resulted in our retaining a 37.5% working interest and a 77.5% net revenue interest (resulting in 29.06% net of all proceeds from hydrocarbon sales) for payment of $3,536. On approximately April 13, 2005, we acquired an additional 37.5% working interest in the Emily Hawes Field from Nortex for a one-time aggregate payment of $300,000, thus doubling our working interest to 75% and a net revenue interest of 77.5% (resulting in 58.125% net of all proceeds from hydrocarbon sales). We then sold Darcy a 9.375% working interest, pursuant to the terms and provisions of the Area of Mutual Interest agreement entered into between Darcy and Petrogen in 2004 related to their
joint operations on Emily Hawes Field, for a one time aggregate payment of $111,005.  On May 25, 2005, we entered into a farm-out agreement with an individual investor (the WIU Holder), pursuant to which we sold to the WIU Holder a working interest unit (the WIU) in exchange for an aggregate payment of $150,000. The WIU is comprised of a 1.5% working interest in Emily Hawes Field, and 75,000 two-year share purchase warrants (collectively, the WIU Warrant) with each WIU Warrant permitting the WIU Holder to purchase a share of our restricted common stock up to June 1, 2006 at an exercise price of $.25 and thereafter at an exercise price of $.30 per share until expiration of the WIU Warrant on June 1, 2007. The WIU also has equity conversion rights and terms as follows:  (i)
        commencing June 1, 2006 the WIU Holder shall have the right and option (the Option) to tender the WIU for shares of our restricted common stock valued at market less 10% discount to the ten day trading average preceding notice by the WIU Holder but at no less that $1.00 per share.  The WIU shall be valued in accordance with Securities and Exchange Commission Present Value discounted by 10% per annum (PV-10) valuation methodologies utilizing professional third party hydrocarbon engineers.  The number of common shares issuable shall be the WIU value divided by the discounted share price; and  (ii)
        commencing June 1, 2007, we shall have the right and option (the Put) to cause the WIU Holder to assign the WIU interests at market less 10% of the ten day trading average preceding notice at any time that our shares of common stock have traded on the OTCBB at $2.00 or more with an average of 50,000 shares per day averaged over the preceding 20 consecutive trading days.  The WIU interest will transfer on our books the date of notice and delivery of the shares and the WIU Holder shall execute all such transfer documents and securities documents as we shall reasonably require.  After the sales to the WIU Holder and Darcy, we now hold a 64.125% working interest and a 77.5% net revenue interest (resulting in 49.697% net of all proceeds from hydrocarbon sales) in the Emily Hawes Field.  In consideration for the original 95% working interest and the 77.5% net revenue interest we initially acquired in the Emily Hawes Field, we previously issued a floating charge debenture in the amount of $75,000 and certain notes payable totaling $47,145 to certain lessors. As at December 31, 2003, the notes aggregating $47,145 were paid in full. The oil and gas leases relating to the Emily Hawes Field were to terminate by October 31, 2004 unless operations commenced upon the property prior thereto which, in such event, the leases will continue indefinitely. As of the date of this Annual Report, we now control an aggregate 64.125% working interest in Emily Hawes Field providing us with net potential reserves of approximately 8.2 billion cubic feet (Bcf) of natural gas.  We previously announced that a drilling rig commenced sidetrack drilling operations on the Emily Hawes #3-A Sidetrack (EH-3A) well on September 28, 2004. The EH-3A is the first of a potential four well drilling program on Hawes Field in an effort to stimulate the development of natural gas production from the area. We anticipated encountering, based on pre-drill expectations, as many as six recognized pay sands on the Emily Hawes Field between depths of 6,250 feet and 6,750 feet, with projected net pay of approximately 50 feet. Subsequently, we performed post-drill analysis and announced log results that the drilling had encountered up to eight potential pay sands after the EH-3A well had been drilled to a total measured depth of 6,725 feet. Log analysis reflected 75 feet of gross sand and greater than 60 feet of possible natural gas pay.  We further announced completion of the analysis and development operations of the EH-3A and the successful four-point gas test on the lower Miocene sand. The Miocene sand tested at 978 mcf per day of natural gas on a 14/64 choke with flowing tubing pressure of 1395 psi. The final shut-in pressure was recorded at 1950 psi, and calculated absolute open flow was recorded at 1,998 mcf per day of natural gas.  The Emily Hawes Field is located on a simple anticlinal closure on a down-to-the-coast normal fault within the oil and gas producing Miocene-Frio Trend. The Miocene-Frio Trend consists of hundreds of individual oil and gas fields that produce from multiple sands of Miocene and/or Frio age located in a fairway that parallels the present day Texas Gulf Coast. At the Miocene level, approximately 800 feet of structural closure is encompassed within the leased area. At Emily Hawes Field, gas production has previously been established in multiple Miocene sands between 6,190 feet and 6,450 feet. Additional Miocene sands remain to be definitively tested, but log and sidewall core analyses strongly suggest that these sands may also be productive.      7   The Emily Hawes Field had previously been developed by the drilling of three gas wells. Although exhibiting excellent reservoir and production characteristics, a gravel pack completion was not employed and, therefore, sand production forced the premature abandonment of these wells. To realize we believe to be remaining existing reserves, we plan, subject to financing or joint venture operating agreements with industry peers, plan to drill offset wells, utilizing proper completion techniques to control sand production. We intend to utilize data derived from the new wells to subsequently drill step-out locations to efficiently and economically drain the reservoir. We believe that three to six wells will be needed to completely develop the Miocene reservoir. Future drilling will also include a well to test the oil and gas potential of multiple sands in the Frio. We anticipate that a test well in the Frio could
potentially prove significant recoverable reserves. We believe that there is a potential resource of over 21.5 bcf of probable and possible natural gas reserves in the deeper Frio formation.  Present Activities Emily Hawes #3-1. On May 7, 2005, crews were mobilized to the Emily Hawes Field Project and immediately began the extended production test. We completed an extended test of the Emily Hawes #3-A well as part of the wells completion and pipeline connection program. The extended test resulted in a stabilized natural gas production rate of 750 mcfgd through a 12/64 choke. During the months of May and June 2005, we completed the well by utilizing a gravel pact and connecting the well to our gas gathering pipeline on Matagorda Island.  On July 22, 2005, we commenced sales of natural gas from the Emily Hawes #3-A. During third quarter 2005, natural gas production from the Emily Hawes #3-A fluctuated from 250,000 cubic feet of gas per day (mcfgd) to 1,500 mcfgd through a 12/64 choke, during which time we received daily sales prices for our natural gas production ranging from $10.00 per mcfg up to as high as $15.05 per mcfg, while recovering completion fluids and encountering high pipeline pressures. We believe that completion of the Emily Hawes #3-A well bore and pipeline hook-up marked the inflection point of our business model from an investment-stage company to an operational-stage company, and has provided the platform to prove up a portion of the Emily Hawes Fields estimated recoverable 12.3 bcf of gross potential formerly producing reserves.  On September 14, 2005, we entered into an agreement with Hanover Compression Company of Houston, Texas (Hanover) to implement a two-stage natural gas compression system. We further sought input from three independent compression service companies to analyze our data from the Emily Hawes #3-A well. Hanover was also contracted to ascertain to what degree natural gas flow rates could be increased from the Emily Hawes #3-A well through the additional of compression. Results of well bore pressure and data analyses indicated that production flows from the Emily Hawes #3-A can be increased to approximately 800 mcfgd with one stage of compression thus potentially doubling average daily production.  Subsequently, on October 7, 2005, crews were mobilized to Emily Hawes Field Project to install the two-stage compression system to help increase and optimize daily natural gas flow rates from Emily Hawes #3-A and as part of our ongoing developments on our natural gas gathering and transportation management facilities on Matagorda Island. Due to high line pressures of the Northern Natural Gas/Matagorda Offshore Pipeline System sales pipeline (the NNG/MOPS), optimum daily natural gas production rates from the Emily Hawes #3-A have been suppressed. The addition of the first stage of compression has been implemented to mitigate any further suppression from the NNC/MOPS line pressures to ensure optimum daily natural gas flow rates can be sustained from the Emily Hawes #3-A. As of the date of this Annual Report, natural gas production rates from the Emily Hawes #3-A utilizing initial compression
speeds are averaging between 380 mcfgd to 500 mcfgd. We believe based upon indications from operations personnel that as the Emily Hawes #3-A well continues to clean up, compression speeds will be increased within the first stage of compression to further improve gas sales.  Present Activities  Emily Hawes #1-A.On September 15, 2005, we entered into a drilling agreement with Moncla Well Service of Lafayette, Louisiana (Moncla), to commence the drilling of the Emily Hawes #1-A well. Previously during the month of June 2005, our operational team readied the Emily Hawes #1-A location, the second sidetrack drilling location. We believe that the Emily Hawes #1-A well is similar to the natural gas producing Emily Hawes #3-A well. The Emily Hawes #1-A step-out location has been prepared to be kicked off at a depth of approximately 2,700 feet by cutting the casing and setting a 200 foot cement kick-off plug. We believe that this will allow us to re-enter the hole and utilize 2,600 feet of the existing well to directionally drill the new side-track bottom hole location. Due to circumstances associated with Hurricane Rita, drilling of the
Emily Hawes #1A well was suspended in October, 2005. Management anticipates that activities related to the drilling of the Emily Hawes #1A well will re-commence within calendar year 2006.  Tiller Ranch  On June 9, 2005, we completed the acquisition of a 100% working interest and a 70% net revenue interest in approximately 822 undeveloped acres of oil and gas leases located in Tom Graham Field, Jim Wells County, Texas (the Tom Graham Field). We entered into an assignment of lease with Capital Exploration, Inc. (Capital Exploration) dated June 3, 2005 (the Tiller Ranch Lease). In accordance with the terms and provisions of the Tiller Ranch Lease: (i) we have paid to Capital Exploration an initial sum towards the aggregate amount due and owing; (ii) in the event we do not perform according to the terms of the Tiller Ranch Lease, we     8  will forfeit any and all payments made to Capital Exploration and will be required to reassign the Tiller Ranch Lease to Capital Exploration; and (iii) the spudding of the first well to be followed by continuous operations will begin no later than the fourth quarter of 2005 unless extended and agreed upon between us and Capital Exploration.  As of the date of this Annual Report, we anticipate a further extensive testing and completion program to be conducted on the Tiller Ranch Lease. We further anticipate the drilling of five additional locations on the Tiller Ranch Lease capable of testing the multiple Frio and Vicksburg age reservoir sands located within the Tiller Ranch Lease, and anticipate that potentially up to 18 BCFG reserves are recoverable based upon extensive subsurface control provided by approximately 25 wells located on or adjacent to the Tiller Ranch Lease.  The Tiller Ranch Lease consists of potential natural gas exploration opportunities within an approximate 10,000 acres that comprise the Tom Graham Field. The Tom Graham Field has historically produced approximately 6,800,000 barrels of oil from six sands ranging in depths from 3,600 feet to 5,600 feet, and wells in the area have average production histories of approximately 8 to 10 years with cumulative production ranging from approximately 2.6 to 3.5 BCFG per well. We believe that extensive natural gas infrastructure exists within the area providing for immediate transportation and sales of any potential upcoming natural gas production.  During fiscal year 2005, we entered into certain agreements with investors pursuant to which we sold an aggregate 24% working interest (16.80% net revenue interest) in exchange for aggregate proceeds of $640,000. The net proceeds were used to offset the costs of drilling and developing the Tiller Ranch during the last quarter of 2005. Three of the investors have an option to convert their respective working interests into shares of our common stock at prices ranging from $0.25 per share to $0.45 per share commencing January 1, 2006 for a period of six months. The conversion price was less than the market price of the Companys stock at the date these agreements were entered into, thus giving rise to an intrinsic value conversion feature. The Company recognized the intrinsic value of the beneficial conversion feature of $245,600 as financing fees.  TR #1  On approximately October 13, 2005, our field crew staked the location for TR#1 and commenced location preparations as well as installation of the various support infrastructures necessary for the first phase of operations in the drilling program. On October 27, 2005, a drilling rig was mobilized by Nopolitas Drilling LP, and TR#1 was spud shortly thereafter. After initial preparations were undertaken, including location design, road construction and installation of the necessary infrastructure and services to undertake drilling operations, TR#1 was spud on October 27, 2005. Upon reaching a total depth of 6,000 feet, we implemented a logging program, which was conducted by Schlumberger Ltd. (which provides internationally technology, project management and information solutions in the oil and gas industry). During the logging process, we ran a suite of open-hole logs for formation evaluation and testing and
conducted sidewall core analysis. Upon full evaluation and identification of the multiple zones of interest, casing was set of 5,995 feet and Schlumberger Ltd. cemented the TR#1 in preparation for perforating and testing the zones of interest. As a result of the logging program, our technical and operations team identified multiple zones of interest, whereby pressure data and sidewall cores were collected over those same intervals for further third party evaluation by four industry leading petrophysical firms. On approximately October 31, 2005, we completed drilling the TR#1 to a depth of 6,000 feet.  On December 2, 2005, our operations team completed perforating the TR#1 and commenced extended testing of the Stillwell Sands, the deepest of the ten zones identified as prospective natural gas bearing from log analysis. Tests resulted in an absolute open flow natural gas from TR#1 of 5,909 MCFGD. Bottom hole pressure was measured at 2,144 psi. Upon completion of the extended tests, our operations team choked back the TR#1 to a 12/64 choke, at which time the well stabilized with a production rate of 1,267 MCFGD, and 10 barrels of 60 degree API condensate per day with a flowing tubing pressure of 1,634 psi.  Natural gas production and sales commenced early January 2006 from the TR#1, and preliminary daily natural gas flow from the TR#1 is currently being produced at rates averaging 650+ MCFD and approximately 5 BCD utilizing an initial small 5/64 choke size. As of the date of this Annual Report, we are conducting comprehensive analyses towards optimizing future production rates thereby maximizing total project value to our shareholders. We believe that at full maturity, TR#1 may generate between $2,500,000 and $3,000,000 annually in free cash flow to us.  TR#2  After achieving success on the Tiller Ranch with TR#1, preparations were immediately made to implement additional development through a drilling program that management believes could possibly result in as many as 6 natural gas wells. We believe that our drilling plan aims to exploit 18 BCFG of potential natural gas reserves believed to remain on the Tiller Ranch. Therefore, on approximately February 4, 2006, we commenced the spudding and drilling operations of Tiller Ranch natural gas well #2 (TR#2). A Patterson-UTI rig #127 was moved onto the location of TR#2 and rigged up to spud TR#2, which marked our second phase of operations on the Tiller Ranch. We conducted our open-hole logging and casing programs for formation evaluation and analysis. After     9  receipt of results of our programs, our technicians and operations team identified multiple zones of interest. Pressure data and sidewall core analyses combined with detailed log evaluation by several third party petrophysical firms indicated that the TR#2 encountered the same target horizons as those at TR#1. Further preliminary indications indicated that reservoir pressures in the Lower Stillwell Sand at the TR#2 are greater than those at the TR#1, the producing horizon from which the TR#1 is generating daily natural gas and condensate revenues. The TR#2 is anticipated to produce economically salable rates of condensate as the Companys operations team further details the relationship of the natural gas and condensate within the stacked, multi-hydrocarbon potential zones on Tiller Ranch Field.  As of the date of this Annual Report, we believe establishing immediate production and sales from the Tiller Ranch assures our business strategy for the area is on track for fiscal year 2006 and beyond. We believe that Tiller Ranch is quickly becoming a key growth driver for our immediate business development objectives and we anticipate that as many as five additional infill and step out well locations of similar quality can be drilled and completed as natural gas producers at Tiller Ranch in the future. If successful, we believe that these additional new wells may significantly impact our current performance metrics. As part of the measures being undertaken by us to optimize overall long term natural gas production from the Tiller Ranch, attention is being taken to implement best practices production optimization methodologies on the project. We believe this will ensure that a careful balance of natural
has flow rates are incorporated into the production profile of the TR#1 initially, as well as all subsequent infill and step out well locations, including TR#2, to ensure that the maximization of reserves from the Tiller Ranch can potentially be attained.  Matagorda Island Pipeline  On March 31, 2005, we entered into a purchase agreement (the Purchase Agreement) with Timothy Roche (Roche) pursuant to which we purchased the natural gas transmission pipeline located on Matagorda Island. In accordance with the Purchase Agreement: (i) we issued to Roche 175,000 shares of our restricted common stock at $0.50 per share for an aggregate value of $87,500; (ii) we further agreed to pay additional consideration to Roche a royalty of $0.16 per mcfg transmitted through the pipeline up to $50,000 and, thereafter, $0.12 per mcfg transmitted through the pipeline, both amounts which will be payable upon an accrued total of natural gas transmitted through the pipeline of no more than 4 bcf. As a result of consummation of the Purchase Agreement, we control the only gas gathering right-of-way on Matagorda Island, as this is the only existing pipeline on Matagorda Island. This
ownership results in our ability to transport our own natural gas from the Emily Hawes Field as well as to transport natural gas from other operators on Matagorda Island. We believe that the Matagorda Island natural gas pipeline has the capacity to transport up to 20,000,000 gross cubic feet of natural gas per day. Previously, we conducted integrity tests on the Matagorda Island pipeline and repaired minor damages to the pipeline to ensure that transmission capacity would be in place prior to anticipated natural gas production from Emily Hawes Field. As of the date of this Annual Report, the pipeline is operating efficiently in the transportation of natural gas produced from Petrogens Emily Hawes Field property.  Baxterville Field  Productive Wells and Acreage. Pursuant to a farm-in agreement between Petrogen and US Gas Systems Corp. (the "Baxterville Agreement"), we hold a 75% working interest and a 56.25% net revenue interest on any and all potential oil developments and a 50% working interest and a 37.5% net revenue interest on any and all potential natural gas production in approximately 680 gross (513 net) undeveloped acreage of oil and gas leases located in LaMar County and Marion County, Mississippi (the "Baxterville Field"). Pursuant to the terms and provisions of the Baxterville Agreement, Petrogen agreed to recomplete four existing well-bores and further develop additional infill drilling opportunities and proven undeveloped oil and gas reserves located on the Baxterville Field.  S. J. Hooper #1.  On October 25, 2002, we also entered into a letter of intent with Crown Royalties of Louisiana, Inc., pursuant to which we acquired a 100% working interest and a 77% net revenue interest in the S.J. Hooper #1 well-bore, which lies adjacent to the Baxterville Field (the "Hooper Lease"). We believe that the Hooper Lease is a valuable addition to our ongoing Baxterville Field development strategy. The Hooper Lease well-bore falls below our criteria for acquisition, however, geophysical log analysis of the well-bore indicates that there is a high probability of significant productive gas zones. Coupled with Baxterville Field, the Hooper Lease meets Mississippi's minimum acreage spacing requirements for a gas well bore completion and is, therefore, a key component in our development of potential gas reserves in its Baxterville Field interests. We anticipate that potentially recoverable oil reserves can be
exploited through the recompletion and secondary work-over operations and will, thereafter, attempt to perforate the potential gas bearing zones to attempt a natural gas completion. We are also considering the potential to "twin" the well bore (hydrocarbons produced from two zones at the same time) once clarification pursuant to spacing requirements is received from the Mississippi State Oil and Gas Board and adequate funding is available.  Present Activities. As of the date of this Annual Report, there are four existing shut-in well-bores located on the Baxterville Field. We developed operations at Baxterville Field throughout the summer months of 2003. To date, we have recompleted one well bore     10  (the Moody #6). We anticipated commencement of production from the Moody #6 well bore immediately after hooking up all relevant surface equipment, however, bad reservoir performance and geologic structure issues resulted in an uneconomic well.  As of the date of this Annual Report, the Moody #6 and the SJ Hooper #1 well bore are in a shut-in status as they are not producing any economic quantities of hydrocarbons. Management has elected to allow the oil and gas leases associated to the Baxterville Field to lapse as we have determined that further development in Baxterville Field is not economically viable for the Company and does not fit within Petrogens mandate of developing Texas Gulf Coast hydrocarbon opportunities. However, Petrogen remains owner and in control of all the associated wellbores located within the legal limits of Baxterville Field and has made plans in cooperation with the oil and gas authority of the State of Mississippi to plug and abandon all Petrogen wells within the next twenty four months.  Enos Creek Field/Brown Government Lease  Productive Wells and Acreage. We hold a 100% working interest and a 77.5% net revenue interest in all existing and future wells located on approximately 440 gross (330 net) undeveloped acreage in the Enos Creek field in Hot Springs County, Wyoming (known as the Brown Government Lease). Pursuant to the terms and provisions of the Brown Government Lease: (i) we will pay to Coronado Oil Company 50% of its production income net of royalties to a maximum of $75,000; and (ii) Coronado Oil Company has the right to back-in to a 50% working interest at the time when we complete our development operations and recoup all of our expenses related to those developments, and upon Coronado Oil Company exercising that back-in right, they will forfeit their existing 5% overriding royalty interest which will effectively thereafter increase our net revenue interest from 77.5% to 82.5%.
The oil and gas leases relating to the Brown Government Lease will continue in existence subject to our performing the required operations to attempt to bring the property back into the status of production as set forth under the guidelines of the Wyoming Bureau of Land Management.  We are also currently under the terms of an agreement with the vendor of the Brown Government Lease, Coronado Oil Company, that delineates an additional 440 acres within an area of mutual interest (the AMI). The AMI also comprises part of the Brown Government Lease, in which we shall hold, upon completion of acquisition, a 100% working interest of an 80% net revenue interest. Coronado Oil Company has the right to back-in to a 25% working interest at the time when we complete our development operations and recoup all of our expenses related to those developments upon the AMI, and upon Coronado Oil Company exercising that back-in right, they will forfeit their existing 5% overriding royalty interest which will effectively thereafter increase our net revenue interest from 77.5% to 82.5% in all existing and future new wells located within the AMI of the Brown Government Lease.  The Brown Government Lease is located on the western flank of the Bighorn Basin and exhibits 1,000 feet of closure and encompasses approximately 800 acres. This asymmetric basin has produced in excess of 2 million barrels of oil and more than 1 trillion cubic feet of natural gas. Compressional forces related to the building of the Rocky Mountains created numerous structural folds (anticlines), which subsequently filled with oil and/or gas. Within a 15-mile radius of the Brown Government Lease, twenty such anticlines are located which are oil and gas productive.  The Brown Government Lease consists of twelve wells previously drilled and completed, of which six have been oil productive, three gas productive, one dually completed as both oil and gas productive, and two as dry holes. We reformulated an operations agenda with the Wyoming Bureau of Land Management, which was initiated during the month of September 2003. However, as of the date of this Annual Report, plans are underway to commence operations with the Bureaus assistance for third quarter 2006.  Present Activities. On May 8th, 2003, we entered into a preliminary gas sales contract (the Gas Sales Contract) with Sierra Gas Corporation (SGC). Pursuant to the terms and provisions of the Gas Sales Contract: (i) SGC shall, upon Petrogens successful production of natural gas hydrocarbons, gather gas from the Enos Creek property as productive capacity is brought on stream and made available for purchase; and (ii) we will be paid 90% of Colorado  Interstate Gas at First of Month Index Price. As of the date of this Annual Report, no gas sales have been made due to the relationship with the Enos Creek operations vis a vis the Brown Government Lease. We anticipate that subject to successful well recompletions being conducted, our first gas sales in this regard may commence by approximately fourth quarter 2006.  Currently, we are assessing opportunities related to the potential divestiture of our interests in Enos Creek Field.  Adams Ranch and Harrell Ranch Properties, Crockett County, Texas  The Company holds certain rights to develop an average 100% working interest and 77.5% net revenue interest located on approximately 20,180 acres of developed and undeveloped acreage on the Adams Ranch and Harrell Ranch prospects in Crockett County, Texas, which consists of 6,480 net acres of shallow development rights and 13,700 net acres of deep development rights. After assessing certain risks and economic variables related to the Permian Basin Fields and the general area geologically as a potential investment for ongoing hydrocarbon development, as well as taking into consideration managements focused agenda to develop the Texas Gulf Coast properties exclusively going forward, management elected to allow the options and rights of first refusal     11  to develop the Permian Basin Properties to lapse. As a result, At December 31, 2005, the Company has abandoned this property and expensed a total of $109,804 of previously capitalized expenditures relating to these properties.  Drilling Activity  The following table sets forth the results of our drilling activity as of December 31, 2005:  Gross Wells
        Net WellsTotal (3)
        Producing (2)
        Dry (NIL)
        Total (2.118)
        Producing (1.412)
        Dry (NIL)Shut-in (1)
        
        
        Shut-in (.706) Production Information With the exception of the disclosure regarding the Tiller Ranch, during the prior three fiscal years, we had no oil and gas production. Producing Wells and Acreage Gross and Net Productive Gas Wells, Developed Acreage and Overriding Royalty Interests Productive wells and developed acres. The tables below set forth our leasehold interest in productive and shut-in wells, and in developed acres, at December 31, 2005: Prospect
        Gross(1)
        Net (2)Emily Hawes Field
        3
        2.325Tiller Ranch Field
        2
        1.412Baxterville Field
        5
        4.32Enos Creek Field
        3
        2.475 (1) A gross well is a well in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned. (2) A net well is deemed to exist when the sum of fractional ownership working interest in gross wells equals one. The number of net wells is the sum of the fractional working interests owned in gross wells expressed as whole numbers and fractions thereof. Developed Acreage Table (1) Prospect
        Gross (2)
        Net (3)Emily Hawes Field
        1,571
        1,156Tiller Ranch Field
        822
        575 (1) Consists of acres spaced or assignable to productive wells. (2) A gross acre is an acre in which a working interest is owned. The number of gross acres is the total number of acres in which a working interest is owned. (3) A net acre is deemed to exist when the sum of fractional ownership working interests in gross acres equals one. The number of net acres is the sum of the fractional working interests owned in gross acres expressed as whole numbers and fractions thereof.      12   Undeveloped Acreage Leasehold Interests The table below sets forth our leasehold interest in undeveloped acreage at December 31, 2005:Prospect
        Gross
        NetEnos Creek Field
        440
        330Baxterville Field
        660
        495 Delivery Commitments We have no delivery commitments. We contract with Northern Natural Gas (Gulf Coast) and Sierra Gas (Rocky Mountains) for pipeline to sell oil or gas produced Competition  We operate in a highly competitive industry, competing with major oil and gas companies, independent producers and institutional and individual investors, which are actively seeking oil and gas properties throughout the world together with the equipment, labor and materials required to operate properties. Most of our competitors have financial resources, staffs and facilities substantially greater than ours. The principal area of competition is encountered in the financial ability to acquire good acreage positions and drill wells to explore for oil and gas, then, if warranted, drill production wells and install production equipment. Competition for the acquisition of oil and gas wells is intense with many oil and gas properties and or leases or concessions available in a competitive bidding process in which we may lack technological information or expertise available to other bidders. Therefore, we may not
be successful in acquiring and developing profitable properties in the face of this competition. No assurance can be given that a sufficient number of suitable oil and gas wells will be available for acquisition and development.  GOVERNMENT REGULATION  General  The production and sale of oil and gas are subject to various federal, state and local governmental regulations, which may be changed from time to time in response to economic or political conditions and can have a significant impact upon overall operations. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties, taxation, abandonment and restoration and environmental protection. These laws and regulations are under constant review for amendment or expansion. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. Changes in these regulations could require us to expend significant resources to comply with
new laws or regulations or changes to current requirements and could have a material adverse effect on us.  Oil and Gas Regulation  The governmental laws and regulations which could have a material impact on the oil and gas exploration and production industry are as follows:  Drilling and Production  Our operations are subject to various types of regulation at federal, state, local and Native American tribal levels. These types of regulation include requiring permits for the drilling of wells, drilling bonds and reports concerning operations. Most states, and some counties, municipalities and Native American tribes, in which we operate also regulate one or more of the following: (i) the location of wells; (ii) the method of drilling and casing wells; (iii) the rates of production or allowables (iv) the surface use and restoration of properties upon which wells are drilled and other third parties; (v) the plugging and abandoning of wells; and (vi) notice to surface owners and other third parties.  State laws regulate the size and shape of drilling and spacing units or proration units governing the pooling of oil and natural gas properties. Some states allow forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose requirements regarding the ratability of production. These     13  laws and regulations may limit the amount of natural gas and oil we can produce from our wells or limit the number of wells or the locations at which we can drill. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction.  Natural Gas Sales Transportation  Historically, federal legislation and regulatory controls have affected the price of the natural gas we produce and the manner in which we market our production. The Federal Energy Regulatory Commission (FERC) has jurisdiction over the transportation and sale for resale of natural gas in interstate commerce by natural gas companies under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978.  FERC also regulates interstate natural gas transportation rates and service conditions, which affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas. Commencing in 1985, FERC promulgated a series of orders, regulations and rule makings that significantly fostered competition in the business of transporting and marketing gas. Today, interstate pipeline companies are required to provide nondiscriminatory transportation services to producers, marketers and other shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. Under FERCs current regulatory regime, transmission services must be provided on an open-access, non-discriminatory basis at cost-based rates or at market-based rates if the transportation market at issue is sufficiently competitive.  Mineral Act  The Mineral Leasing Act of 1920 ("Mineral Act") prohibits direct or indirect ownership of any interest in federal onshore oil and gas leases by a foreign citizen of a country that denies "similar or like privileges" to citizens of the United States. Such restrictions on citizens of a "non-reciprocal" country include ownership or holding or controlling stock in a corporation that holds a federal onshore oil and gas lease. If this restriction is violated, the corporation's lease can be canceled in a proceeding instituted by the United States Attorney General. Although the regulations of the Bureau of Land Management (which administers the Mineral Act) provide for agency designations of non-reciprocal countries, there are presently no such designations in effect.  Environmental Regulation  Our activities will be subject to existing federal, state and local laws and regulations governing environmental quality and pollution control.  Our operations will be subject to stringent environmental regulation by state and federal authorities including the Environmental Protection Agency ("EPA"). Such regulation can increase the cost of such activities. In most instances, the regulatory requirements relate to water and air pollution control measures.  Waste Disposal  The Resource Conservation and Recovery Act (RCRA), and comparable state statutes, affect oil and gas exploration and production activities by imposing regulations on the generation, transportation, treatment, storage, disposal and cleanup of hazardous wastes and on the disposal of non-hazardous wastes. Under the auspices of the EPA, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Drilling fluids, produced waters, and most of the other wastes associated with the exploration, development, and production of crude oil, natural gas, or geothermal energy constitute solid wastes, which are regulated under the less stringent non-hazardous waste provisions, but there is no guarantee that the EPA or the individual states will not adopt more stringent requirements for the handling of
non-hazardous wastes or categorize some non-hazardous wastes as hazardous for future regulation.  Comprehensive Environmental Response, Compensation and Liability Act  The federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") imposes joint and several liability for costs of investigation and remediation and for natural resource damages, without regard to fault or the legality of the original conduct, on certain classes of persons with respect to the release into the environment of substances designated under CERCLA as hazardous substances ("Hazardous Substances"). These classes of persons or potentially responsible parties include the current and certain past owners and operators of a facility or property where there is or has been a release or threat of release of a Hazardous Substance and persons who disposed of or arranged for the disposal of the Hazardous Substances found at such a facility. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in response to threats to the public health or the environment
and to seek to recover the costs of such action. Although CERCLA generally exempts petroleum from the definition of Hazardous Substances in the course operations, we may in the future generate wastes that fall within CERCLA's definition of Hazardous Substances. We may also in the future become an owner of facilities on which Hazardous Substances have been released by previous owners or operators. We may in the future be responsible under CERCLA for all or part of the costs to clean up facilities or property at which such substances have been released and for natural resource damages.      14   Air Emissions  Our operations are subject to local, state and federal regulations for the control of emissions of air pollution. Major sources of air pollutants are subject to more stringent, federally imposed permitting requirements.  Administrative enforcement actions for failure to comply strictly with air pollution regulations or permits are generally resolved by payment of monetary fines and correction of any identified deficiencies. Alternatively, regulatory agencies could require us to forego construction, modification or operation of certain air emission sources.  Clean Water Act  The Clean Water Act ("CWA") imposes restrictions and strict controls regarding the discharge of wastes, including produced waters and other oil and natural gas wastes, into waters of the United States, a term broadly defined.  Permits must be obtained to discharge pollutants into federal waters. The CWA provides for civil, criminal and administrative penalties for unauthorized discharges of oil, hazardous substances and other pollutants. It imposes substantial potential liability for the costs of removal or remediation associated with discharges of oil or hazardous substances. State laws governing discharges to water also provide varying civil, criminal and administrative penalties and impose liabilities in the case of a discharge of petroleum or it derivatives, or other hazardous substances, into state waters. In addition, the EPA has promulgated regulations that may require us to obtain permits to
discharge storm water runoff.  In the event of an unauthorized discharge of wastes, we may be liable for penalties and costs.  We believe that we are in substantial compliance with current applicable environmental laws and regulations.  RESEARCH AND DEVELOPMENT ACTIVITIES  No research and development expenditures have been incurred, either on our account or sponsored by customers, during the past three years.  EMPLOYEES  As of the date of this Annual Report, we do not employ any persons on a full-time or on a part-time basis. Mr. Sacha Spindler, our Chief Executive Officer, and Mr. Sam Sen, our President, are primarily responsible for all of our day-to-day operations. Other services are provided by outsourcing and management contracts. As the need arises and funds become available, however, management may seek employees as necessary in our best interests. The following lists describes certain services performed for us by consultants. See "Item 10. Executive Compensation and Item 12. Certain Relationships and Related Transactions. RISK FACTORS An investment in our common stock involves a number of very significant risks. You should carefully consider the following risks and uncertainties in addition to other information in evaluating us and our business before purchasing shares of our common stock. Our business, operating results and financial condition could be seriously harmed due to any of the following risks. The risks described below are all of the material risks that we are currently aware of that we are facing. Additional risks not presently known to us may also impair our business operations. You could lose all or part of your investment due to any of these risks. Risks Related to Our Business Our business is difficult to evaluate because we have a limited operating history. In considering whether to invest in our common stock, you should consider that there is only limited historical financial and operating information available on which to base your evaluation of our performance.  Our inception was November 15, 2001 and, as a result, we have a limited operating history. We have a history of operating losses and there can be no assurances we will be profitable in the future. We have a history of operating losses, expect to continue to incur losses, and may never be profitable, and we must be considered to be in the development stage. Further, we have been dependent on sales of our equity securities and debt financing to meet our cash requirements. We have incurred losses from operations totaling approximately $3,065,271 for fiscal year ended December 31, 2005. As of December 31, 2005, we had an accumulated deficit of $9,359,742 and a working capital deficit of $1,595,169. Further, we do not expect positive cash flow from operations in the near term. There is no assurance that actual cash requirements will not exceed our estimates. In particular, additional capital may be required in the event that: (i) the costs to acquire additional leases are more than we currently
anticipate; (ii) drilling and completion costs for additional wells increase beyond our expectations; or (iii) we encounter greater costs associated with general and administrative expenses or offering costs. Our development of and participation in an increasingly larger number of oil and gas prospects have required and will continue to require substantial capital expenditures. The uncertainty and factors described throughout this section may impede our ability to     15  economically find, develop, exploit, and acquire natural gas and oil reserves. As a result, we may not be able to achieve or sustain profitability or positive cash flows from operating activities in the future. We have received a going concern opinion from our independent auditors. We have received a going concern opinion from our independent auditors report accompanying our December 31, 2005 and 2004 consolidated financial statements. The independent auditors report accompanying our December 31, 2005 and 2004 consolidated financial statements contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.  The consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates that we will realize our assets and satisfy our liabilities and commitments in the ordinary course of business. Our ability to continue as a going concern is dependent on raising additional capital to fund our operations and ultimately on generating future profitable operations.
There can be no assurance that we will be able to raise sufficient additional capital or eventually have positive cash flow from operations to address all of our cash flow needs. If we are not able to find alternative sources of cash or generate positive cash flow from operations, our business and shareholders will be materially and adversely affected. We will require additional funding in the future.We will require additional funding in the future. Based upon our historical losses from operations, we will require additional funding in the future. If we cannot obtain capital through financings or otherwise, our ability to execute our development plans and achieve production levels will be greatly limited. Our current development plans require us to make capital expenditures for the exploration and development of our oil and natural gas properties. Historically, we have funded our operations through the issuance of equity and short-term debt financing arrangements. We may not be able to obtain additional financing on favorable terms, if at all. Our future cash flows and the availability of financing will be subject to a number of variables, including potential production and the market prices of oil and natural gas. Further,
debt financing could lead to a diversion of cash flow to satisfy debt-servicing obligations and create restrictions on business operations. If we are unable to raise additional funds, it would have a material adverse effect upon our operations. Our acquisitions may not be successful. Our acquisitions may not be successful. As part of our growth strategy, we intend to acquire additional oil and gas production properties. Such acquisitions may pose substantial risks to our business, financial condition, and results of operations. In pursuing acquisitions, we will compete with other companies, many of which have greater financial and other resources to acquire attractive properties. Even if we are successful in acquiring additional properties, some of the properties may not produce revenues at anticipated levels or failure to conduct drilling on prospects within specified time periods may cause the forfeiture of the lease in that prospect. There can be no assurance that we will be able to successfully integrate acquired properties, which could result in substantial costs and delays or other operational, technical, or
financial problems. Further, acquisitions could disrupt ongoing business operations. If any of these events occur, it would have a material adverse effect upon our operations and results from operations. Our exploratory and development drilling and production operations may not be successful.Our exploratory and development drilling and production operations may not be successful. We intend to drill additional wells and continue production operations on our current wells. There can be no assurance that our future drilling activities will be successful, and we cannot be sure that our overall drilling success rate or our production operations within a particular area will not decline. We may not recover all or any portion of our capital investment in the wells or the underlying leaseholds. Unsuccessful drilling activities would have a material adverse effect upon our results of operations and financial condition. The cost of drilling, completing, and operating wells is often uncertain, and a number of factors can delay or prevent drilling operations including: (i) unexpected
drilling conditions; (ii) pressure or irregularities in formation; (iii) equipment failures or accidents; (iv) adverse weather conditions; and (iv) shortages or delays in availability of drilling rigs and delivery of equipment. Further, coal beds from which gas is produced may frequently contain water, which may hamper any production of gas in commercial quantities. The amount of gas that can be commercially produced depends upon the coal quality, the original gas content of the coal seam, the thickness of the seam, the reservoir pressure, the rate at which gas is released from the coal, and the existence of any natural fractures through which the gas can flow to the well bore. However, coal beds frequently contain water that must be removed in order for the gas to detach from the coal and flow to the well bore. The average life of a coal bed well is only five to six years. Ability to remove and dispose of sufficient quantities of water from the coal seam will determine whether or not production of gas can occur in commercial quantities. There is no guarantee that the potential drilling locations that we have or acquire in the future will ever produce oil or natural gas, which could have a material adverse effect upon our results of operations. A decline in the price of our Common Stock could affect our ability to raise further working capital and adversely impact our operations. A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our operations.A decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise additional capital for our operations. Because our operations to date have been principally financed through the sale of equity securities, a decline in the price of our common stock could have an adverse effect upon our liquidity and our continued operations. A reduction in our ability to raise equity capital in the future would have a material adverse effect upon our     16  business plan and operations, including our ability to continue our current operations. If our stock price declines, we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations. We are a new entrant into the oil and gas industry. We are a new entrant into the oil and gas industry without profitable operating history.Since November 15, 2001 (inception), our activities have been limited to organizational efforts, obtaining working capital and acquiring and developing a very limited number of properties.  As a result, there is limited information regarding production or revenue generation. As a result, our future revenues may be limited. The Tiller Ranch and the Emily Hawes Field are the oil and gas properties where most of our drilling capital resources have been employed. These prospects are still in the development stage, and estimates made at this time as to proved or probable oil and natural gas reserves cannot be guaranteed that sufficient reserves will be maintained or new reserves discovered for production. The absence of a sustained production history provides risk regarding independent reserve estimates. Property lease positions in other locations that have been acquired by us are unproven, having little to no production, which prevents us from assigning any proved or probable reserves to these other properties. No assurance of the accuracy of the estimates of oil and gas reserves.There is no assurance of the accuracy of the estimates of oil and gas reserves. Reserve estimates are based upon various assumptions, including assumptions relating to oil and gas prices, drilling and operating expenses, production levels, capital expenditures, taxes and availability of funds. No one can measure underground accumulations of oil and natural gas in an exact way.  As a result, estimated quantities of proved reserves, projections of future production rates, and the timing of development expenditures may be incorrect. Any significant variance from these assumptions to actual figures could greatly affect our estimates of reserves, the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, the classifications of reserves based on risk of
recovery, and estimates of the future net cash flows. Further, the present value of future net cash flows from any proved reserves is not necessarily the same as the current market value of any estimated oil and natural gas reserves. Actual future net cash flows from oil and natural gas properties also will be affected by factors such as: (i) actual prices we receive for oil and natural gas; (ii) the amount and timing of actual production; (iii) supply of and demand for oil and natural gas; and (iv) changes in governmental regulations or taxation. The timing of both production and incurrence of expenses in connection with the development and production of oil and natural gas properties will affect the timing of actual future net cash flows from proved reserves, and thus their actual present value. In addition, any discount factor used when calculating discounted future net cash flows may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general. Actual future production, oil and gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and gas reserves will most likely vary from those estimates and any significant variance could have a material adverse effect on our future results from operations. Unless we replace our oil and gas reserves, our reserves and production will decline. Unless we replace our oil and natural gas reserves, our reserves and production will decline, which would adversely affect our business, financial condition and results of operations.Producing oil and natural gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. Thus, our future oil and natural gas reserves and production and, therefore, our cash flow and income are highly dependent on our success in efficiently developing and exploiting our current reserves and economically finding or acquiring additional recoverable reserves. We may not be able to develop, find or acquire additional reserves to replace our current and future production at acceptable costs. Prospects that we decide to drill may not yield natural gas or oil in commercially viable quantities.Prospects that we decide to drill may not yield natural gas or oil in commercially viable quantities.We describe some of our current prospects in this prospectus. Our prospects are in various stages of evaluation, ranging from prospects that are ready to drill to prospects that will require substantial additional seismic data processing and interpretation. However, the use of seismic data and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling and testing whether natural gas or oil will be present or, if present, whether natural gas or oil will be present in sufficient quantities to recover drilling or completion costs or to be economically viable. If we
drill wells that we identify as dry holes in our current and future prospects, our drilling success rate may decline and materially harm our business. In sum, the cost of drilling, completing and operating any wells is often uncertain and new wells may not be productive. We are substantially dependent upon only one or two properties. We are substantially dependent upon only one or two properties located in Texas, which causes our risk to be concentrated.As a result, we may be disproportionately exposed to the impact of delays or interruptions of production from these wells caused by significant governmental regulation, transportation capacity constraints, curtailment of production or interruption of transportation of natural gas produced from the wells.      17   Properties that we acquire may not produce as projected. Properties that we buy may not produce as projected and we may be unable to determine reserve potential, identify liabilities associated with the properties or obtain protection from sellers against them.One of our growth strategies is to capitalize on opportunistic acquisitions of oil and natural gas reserves. However, our reviews of acquired properties are inherently incomplete because it generally is not feasible to review in depth every individual property involved in each acquisition. A detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and potential. Further, environmental problems, such as ground water
contamination, are not necessarily observable even when an inspection is undertaken. Acquiring properties with liabilities would have a material adverse effect upon our results of operations. The potential profitability of oil and gas ventures depends upon factors beyond our control.The potential profitability of oil and gas ventures depends upon factors beyond our control.The potential profitability of oil and gas properties is dependent upon many factors beyond our control. For instance, world prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments. Additionally, due to worldwide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. These and other changes and events may materially affect our
financial performance. Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic in the event water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. The marketability of oil and gas, which may be acquired or discovered will be affected by numerous factors beyond our control. These factors include, but are not limited to, the proximity and capacity of oil and gas pipelines and processing equipment, market fluctuations of prices, taxes, royalties, land tenure, allowable production and environmental protection. These factors cannot be accurately predicted and the combination of these factors may result in us not receiving an adequate return on our invested capital. We are dependent upon transportation and storage services provided by a third party.We are and will continue to be dependent upon transportation and storage services provided by third parties.We will be dependent on the transportation and storage services offered by various interstate and intrastate pipeline companies for the delivery and sale of our oil and gas supplies. Both the performance of transportation and storage services by interstate pipelines and the rates charged for such services are subject to the jurisdiction of the Federal Energy Regulatory Commission or state regulatory agencies. An inability to obtain transportation and/or storage services at competitive rates could hinder our processing and marketing operations and/or affect our sales margins. Our results of operation are dependent upon market prices.Our results of operations are dependent upon market prices for oil and natural gas, which fluctuate widely and are beyond our control.Our revenue, profitability, and cash flow depend upon the prices and demand for oil and natural gas. The markets for these commodities are very volatile and even relatively modest drops in prices can significantly affect our financial results and impede our growth. Prices received also will affect the amount of future cash flow available for capital expenditures and may affect our ability to raise additional capital. Lower prices may also affect the amount of natural gas and oil that can be economically produced from reserves either discovered or acquired. Factors that can cause price fluctuations include: (i) the level of consumer product demand; (ii) weather conditions; (iii) domestic and foreign governmental regulations; (iv) the price and availability of alternative fuels; (v) technical advances affecting energy consumption; (vi) proximity and capacity of oil and gas pipelines and other transportation facilities; (vii) political conditions in natural gas and oil producing regions; (viii) the domestic and foreign supply of natural gas and oil; (ix) the ability of members of Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; (x) the price of foreign imports; and (xi) overall domestic and global economic conditions. The availability of a ready market for our oil and gas depends upon numerous factors beyond our control.The availability of a ready market for our oil and gas depends upon numerous factors beyond our control, including the extent of domestic production and importation of oil and gas, the relative status of the domestic and international economies, the proximity of our properties to gas gathering systems, the capacity of those systems, the marketing of other competitive fuels, fluctuations in seasonal demand and governmental regulation of production, refining, transportation and pricing of oil, natural gas and other fuels. The oil and gas industry involves many operating risks that can cause substantial losses.The oil and gas industry in which we operate involves many operating risks that can cause substantial losses.Our drilling activities are subject to many risks, including the risk that we will not discover commercially productive reservoirs. Drilling for oil and natural gas can be unprofitable, not only from dry holes, but from productive wells that do not produce sufficient revenues to return a profit. In addition, our drilling and producing operations may be curtailed, delayed or canceled as a result of other factors, including: (i) fires; (ii) explosions; (iii) blow-outs and surface cratering; (iv) uncontrollable flows of underground natural gas, oil, or formation water; (v) natural disasters; (vi) facility and equipment failures; (vii) title
problems; (viii) shortages or delivery delays of equipment and services; (ix) abnormal pressure formations; and (x) environmental hazards such as natural gas leaks, oil spills, pipeline ruptures and discharges of toxic gases.      18   If any of these events occur, we could incur substantial losses as a result of (i) injury or loss of life; (ii) severe damage to and destruction of property, natural resources or equipment; (iii) pollution and other environmental damage; (iv) clean-up responsibilities; (v) regulatory investigation and penalties; (vi) suspension of our operations; or (vii) repairs necessary to resume operations. If we were to experience any of these problems, it could affect well bores, gathering systems and processing facilities, any one of which could adversely affect our ability to conduct operations. We may be affected by any of these events more than larger companies, since we have limited working capital. We currently do not maintain liability insurance on bodily injury, which would include coverage for pollution, environmental damage and chemical spills. For other risks, we may further elect not to obtain insurance if
we believe the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. If a significant accident or other event occurs and is not covered by insurance, it could adversely affect operations. Moreover, even if we obtained insurance in the future, we cannot provide assurance that we would be able to maintain adequate insurance at rates considered reasonable. The oil and gas industry is highly competitive.The oil and gas industry is highly competitive and there is no assurance that we will be successful in acquiring the leases.The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. These companies may be able to pay more for productive oil and natural gas properties and exploratory prospects or define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, these companies may have a greater ability to continue exploration activities during
periods of low oil and natural gas market prices. Our larger competitors may be able to absorb the burden of present and future federal, state, local and other laws and regulations more easily than we can, which would adversely affect our competitive position. Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. In addition, because we have fewer financial and human resources than many companies in our industry, we may be at a disadvantage in bidding for exploratory prospects and producing oil and natural gas properties. There can be no assurance we will be able to obtain drilling equipment. There can be no assurance we will be able to obtain drilling equipment to meet our drilling requirements.There is currently a high demand for drilling equipment in the State of Texas. We may experience delays in obtaining drilling rigs due to the high drilling demand in the areas where we have been concentrating our oil and gas targeted production and leasing programs. There can be no assurance that we will be able to obtain the requisite drilling equipment to meet our planned drilling initiatives according to our timetable. In the event that we are unable to obtain drilling equipment to conduct our exploration operations, it could have a material adverse effect upon our business and our results of operations. The marketability of natural resources will be affected by numerous factors. The marketability of natural resources will be affected by numerous factors beyond our control which may result in us not receiving an adequate return on invested capital to be profitable or viable.The marketability of natural resources which may be acquired or discovered by us will be affected by numerous factors beyond our control. These factors include market fluctuations in oil and gas pricing and demand, the proximity and capacity of natural resource markets and processing equipment, governmental regulations, land tenure, land use, regulation concerning the importing and exporting of oil and gas and environmental protection regulations. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in
us not receiving an adequate return on invested capital to be profitable or viable. Oil and gas operations are subject to comprehensive regulation. Oil and gas operations are subject to comprehensive regulation which may cause substantial delays or require capital outlays in excess of those anticipated causing an adverse effect us. Oil and gas operations are subject to federal, state, and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment. Oil and gas operations are also subject to federal, state, and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Various permits from government bodies are required for drilling operations to be conducted; no assurance can be given that such permits will be received. Environmental standards imposed by
federal, provincial, or local authorities may be changed and any such changes may have material adverse effects on our activities. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages which we may elect not to insure against due to prohibitive premium costs and other reasons. To date we have not been required to spend material amounts on compliance with environmental regulations. However, we may be required to do so in future and this may affect our ability to expand or maintain our operations. Exploration and production activities are subject to environmental regulations. Exploration and production activities are subject to certain environmental regulations which may prevent or delay the commencement or continuance of our operations.In general, our exploration and production activities are subject to certain federal, state and local laws and regulations relating to environmental quality and pollution control. Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation. Compliance with these laws and regulations has not had a material effect on our operations or financial condition to date. Specifically, we are subject to legislation regarding emissions into the environment, water     19  discharges and storage and disposition of hazardous wastes. In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of state authorities. However, such laws and regulations are frequently changed and we are unable to predict the ultimate cost of compliance. Generally, environmental requirements do not appear to affect us any differently or to any greater or lesser extent than other companies in the industry. We believe that our operations comply in all material respects with all applicable environmental regulations. However, we are not insured against all possible environmental risks. Any change to government regulation/administrative practices may have a negative impact on our ability to operate and our profitability. Any change to government regulation/administrative practices may have a negative impact on our ability to operate and our profitability.The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the United States or any other jurisdiction, may be changed, applied or interpreted in a manner which will fundamentally alter our ability to carry on business.  The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitably. We may be unable to retain key employees or consultants. We may be unable to retain key employees or consultants or recruit additional qualified personnel.Our extremely limited personnel means that we would be required to spend significant sums of money to locate and train new employees in the event any of our employees resign or terminate their employment with us for any reason. Due to our limited operating history and financial resources, we are entirely dependent on the continued service of Mr. Sacha Spindler, our Chief Executive Officer, and Mr. Sam Sen, our President. Further, we do not have key man life insurance on either of these individuals. We may not have the financial resources to hire a replacement if one or both of our officers were to die. The loss of service of either of these employees could therefore significantly
and adversely affect our operations. Certain of our officers and directors may be subject to conflicts of interest. Our officers and directors may be subject to conflicts of interest.Certain of our officers and directors serve only part time and are subject to conflicts of interest. Certain of these officers and directors each devote part of his working time to other business endeavors. These business endeavors as well as other business opportunities should be presented to the company. Such conflicts include deciding how much time to devote to our affairs, as well as what business opportunities should be presented to the company. Because of these relationships, our officers and directors may be subject to conflicts of interest. Risks Related to our Common Stock Sales of a substantial number of share or our Common Stock into the public market may result in significant downward pressure on the price of our Common Stock.Sales of a substantial number of shares of our common stock into the public market by certain stockholders may result in significant downward pressure on the price of our Common Stock and could affect your ability to realize the current trading price of our Common Stock. Sales of a substantial number of shares of our Common Stock in the public market by certain stockholders could cause a reduction in the market price of our Common Stock.  As of the date of this Annual Report, we have 67,676,807 shares of Common Stock issued and outstanding. As of the date of this Annual Report, there are 38,016,919 outstanding shares of our common stock that are restricted securities as that term is defined in Rule 144 under the Securities
Act of 1933, as amended (the Securities Act). Although the Securities Act and Rule 144 place certain prohibitions on the sale of restricted securities, restricted securities may be sold into the public market under certain conditions. Further, as of December 31, 2005, there are an aggregate of 5,130,277 Stock Options and 3,807,000 Warrants outstanding. Any significant downward pressure on the price of our Common Stock as certain stockholders sell their shares of our Common Stock could encourage short sales by the selling stockholders or others. Any such short sales could place further downward pressure on the price of our Common Stock. The trading price of our Common Stock on the OTC Bulletin Board has been and may continue to fluctuate significantly.The trading price of our Common Sock on the OTC Bulletin Board has been and may continue to fluctuate significantly and stockholders may have difficulty reselling their shares. During fiscal years ended December 31, 2005 and December 31, 2004, our Common Sock has traded as low as $0.17 and as high as $0.99. In addition to volatility associated with Bulletin Board securities in general, the value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock: (i) changes in the world wide price for oil or natural gas; (ii) disappointing results from our discovery or development efforts; (iii) failure to meet our revenue or profit goals or operating budget; (iv) decline in demand for our common stock; (v)
downward revisions in securities analysts' estimates or changes in general market conditions; (vi) technological innovations by competitors or in competing technologies; (vii) lack of funding generated for operations; (viii) investor perception of our industry or our prospects; and (ix) general economic trends.      20   In addition, stock markets have experienced extreme price and volume fluctuations and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our Common Stock. As a result, investors may be unable to sell their shares at a fair price and you may lose all or part of your investment. Additional issuances of equity securities may result in dilution to our existing shareholders. Additional issuances of equity securities may result in dilution to our existing stockholders. Our Articles of Incorporation authorize the issuance of 100,000,000 shares of Common Stock.  The Board of Directors has the authority to issue additional shares of our capital stock to provide additional financing in the future and the issuance of any such shares may result in a reduction of the book value or market price of the outstanding shares of our Common Stock. If we do issue any such additional shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other stockholders. As a result of such dilution, if you acquire shares of our common stock, your proportionate ownership interest and voting power could be decreased. Further, any such issuances could result in a change of control. As of March 6, 2006, our Board of Directors authorized and approved the adoption of Performance Stock Incentive Plan (the Performance Stock Incentive Plan), pursuant to which an aggregate of 30,000,000 shares of our restricted Common Stock were issued to certain officers, directors and consultants. The 30,000,000 shares of restricted Common Stock are subject to an escrow and can be acquired by the respective individual upon achievement by us of certain milestones. See Item 5. Market for Common Equity and Related Stockholders Matters and Item 10. Executive Compensation. Our Common Stock is classified as a penny stock under SEC rules which limits the market for our Common Stock. Our Common Stock is classified as a "penny stock" under SEC rules which limits the market for our Common Stock. Because our stock is not traded on a stock exchange or on the NASDAQ National Market or the NASDAQ Small Cap Market, and because the market price of the Common Stock is less than $5 per share, the Common Stock is classified as a "penny stock." Our stock has not traded above $5 per share. SEC Rule 15g-9 under the Exchange Act imposes additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as an "established customer" or an "accredited investor." This includes the requirement that a broker-dealer must make a determination that investments in penny stocks are
suitable for the customer and must make special disclosures to the customers concerning the risk of penny stocks. Many broker-dealers decline to participate in penny stock transactions because of the extra requirements imposed on penny stock transactions. Application of the penny stock rules to our common stock reduces the market liquidity of our shares, which in turn affects the ability of holders of our Common Stock to resell the shares they purchase, and they may not be able to resell at prices at or above the prices they paid. Nevada law and our Articles of Incorporation may protect our directors from certain types of lawsuits. Nevada law and our Articles of Incorporation may protect our directors from certain types of lawsuits.Nevada law provides that our officers and directors will not be liable to us or our stockholders for monetary damages for all but certain types of conduct as officers and directors. Our Bylaws permit us broad indemnification powers to all persons against all damages incurred in connection with our business to the fullest extent provided or allowed by law. The exculpation provisions may have the effect of preventing stockholders from recovering damages against our officers and directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require us to use our limited assets to defend
our officers and directors against claims, including claims arising out of their negligence, poor judgment, or other circumstances. ITEM 2. DESCRIPTION OF PROPERTIES Except as described above regarding the oil and gas properties, we do not own any other real estate or property. We lease office space and our offices are located at 322-2000 South Dairy Ashford, Houston, Texas 77077.  ITEM 3. LEGAL PROCEEDINGS We are not aware of any legal proceeding contemplated by any governmental authority or any other party involving us or our properties. Other than as discussed below, as of the date of this Annual Report, no director, officer or affiliate is: (i) a party adverse to us in any legal proceeding; of (ii) has an adverse interest to us in any legal proceedings. We are not aware of any other legal proceedings pending or that have been threatened against us or our properties.  PETROGUARD COMPANY INC. LITIGATION On or about September 15, 2004, a lawsuit was filed by Petroguard Company, Inc. (Petroguard) against Petrogen, Inc. On or about October 12, 2004, Petrogen, Inc. removes this case to the United States District Court for the Southern District of Texas, Victoria Division, Civil Action No. V-04-94, Petroguard Company, Inc., vs. Petrogen, Inc. and Leo William Kerrigan. The claims made by Petroguard in its complaint against Petrogen, Inc. and Mr. Kerrigan allege conversion, unjust enrichment, fraud and negligent representation, and a request for declaratory judgment and injunctive relief regarding a cease and desist order for utilization and distribution of a three-dimensional seismic survey. The complaint further alleges that Petroguard incurred certain expenses developing the geologic and geophysical interpretations of a three-dimensional seismic survey of approximately 135 square miles constituting     21  Esperitu-Santo Bay and most of Matagorda Island, and that Petrogen wrongfully obtained the seismic survey. Petrogen has responded in its answer to the complaint denying receipt of the seismic data as alleged and counterclaiming that Petrogen is in possession of some related data that is not three-dimensional, which it properly acquired from a company named Fortune. As of the date of this Annual Report, we intend to aggressively defend all such claims and to pursue all such legal actions and remedies against Petroguard.  SETTLEMENT OF DAVIS GULF COAST LITIGATION On or about April 6, 2005, Petrogen, Inc. filed a lawsuit against Davis Gulf Coast (Davis) in the 55th Judicial District Court of Harris County, Texas, Civil Action No. 2004-65553. The claims made by Petrogen in its complaint against David generally allege breach of contract. Previously, Petrogen and Davis had entered into an agreement pursuant to which Davis agreed to provide support and services for the drilling program on Matagorda Island. The complaint alleges that David breached its agreement by failing to perform services in a timely and proper manner. Davis has filed an answer and counterclaim to the complaint alleging that Petrogen failed to compensate it in the amount of $177,234.53. On August 12, 2005, Petrogen and Davis entered into a settlement agreement. The parties have at all times denied all allegations asserted by each party, however, the parties desire that all
matters in dispute between them be terminated and resolved without further legal proceedings.  X-CLEARING CORP. LITIGATION On approximately October 20, 2004, we commenced an action against X-Clearing Corp. our previous transfer agent (X-Clearing), in the District Court for the City and County of Denver, State of Colorado, Case No. 04-CV-8749, for return of our stock record documents. X-Clearing Corp. has filed an answer and counterclaim asserting that we are liable to X-Clearing for certain legal expenses incurred by X-Clearing in prosecuting an action against the Depository Trust Company, which legal expenses are undeterminable at this time. As of the date of this Annual Report, we intend to aggressively pursue all such claims and to pursue all such legal actions and remedies against X-Clearing.  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During fiscal year ended December 31, 2005, no matters were submitted to our stockholders for approval.  PART II  ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS  MARKET INFORMATION Our Common Stock is traded on the OTC Bulletin Board under the symbol "PTGC" and on the Frankfurt and Berlin Stock Exchanges in Germany under the symbol PTD. The market for our Common Stock is limited, volatile and sporadic.  The following table sets forth the high and low sales prices relating to our Common Stock for the last two fiscal years. These quotations reflect inter-dealer prices without retail mark-up, mark-down, or commissions, and may not reflect actual transactions.  Quarter Ended
        High Bid
        Low Bid12/31/05
        $0.81
        $0.4909/30/05
        $0.60
        $0.3406/30/05
        $0.44
        $0.3203/31/05
        $0.52
        $0.2712/31/04
        $0.58
        $0.4909/30/04
        $0.55
        $0.4106/30/04
        $0.52
        $0.3303/31/04
        $0.39
        $0.22  HOLDERS  As of the date of this Annual Report, we have approximately 139 shareholders of record.  DIVIDENDS  No dividends have ever been declared by our Board of Directors on our Common Stock. Our previous losses do not currently indicate the ability to pay any cash dividends, and we do not have any intention of paying cash dividends on our Common Stock in the foreseeable future.      22   SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS We have one equity compensation plan, the Petrogen Corp. Stock Option Plan.  The table set forth below presents the securities authorized for issuance with respect to the Stock Option Plan under which equity securities are authorized for issuance as of December 31, 2005: Equity Compensation Plan Information Number of Securities To Be  Issued Upon Exercise of Outstanding Options, Warrants and Rights(a)
        Weighted Average Exercise  Price of Outstanding Options, Warrants and Rights(b)
        Number of Securities  Remaining Available for Future Issuance Under Equity Compensation Plans(Excluding (a))(c)Equity compensation plans approved by security holdersStock Options
        5,130,277
        $0.44
        2,215,000Equity compensation plans not approved by security holdersWarrants(1)
        3,642,000165,000
        $0.50$0.25
        -0--0-Total
        8,937,277
        
        2,215,000 (1)
        Of the 3,807,000 warrants, 75,000 two-year warrants are exercisable at $0.35 per share until June 1, 2006 and thereafter at $0.30 per share until June 1, 2007. The remaining 3,732,000 warrants and 7,464,000 piggyback warrants were set to expire on September 30, 2005. However, in accordance with the terms and provisions of new agreements with the investors, the 7,464,000 piggyback warrants were cancelled and the 3,732,000 warrants have been extended to March 31, 2006 with the exercise price re-priced from $0.50 to $0.45 per share. Petrogen Corp. 2004 Stock Option Plan  On July 23, 2004, our Board of Directors unanimously approved and adopted a 2004 stock option plan (the "Stock Option Plan"), which provides for the granting of up to 6,000,000 shares of common stock. The purpose of the Stock Option Plan is to advance our interests and the interests of our shareholders by affording our key personnel opportunity for investment and the incentive advantages inherent in stock ownership. Pursuant to the provisions of the Stock Option Plan, stock options (the "Stock Options") will be granted only to our key personnel, generally defined as a person designated by our Board of Directors upon whose judgment, initiative and efforts we may rely including any of our directors, officers, employees or consultants.  The Stock Option Plan is to be administered by our Board of Directors, which shall determine (i) the persons to be granted Stock Options under the Stock Option Plan; (ii) the number of shares subject to each option, the exercise price of each Stock Option; and (iii) whether the Stock Option shall be exercisable at any time during the option period of ten (10) years or whether the Stock Option shall be exercisable in installments or by vesting only. The Stock Option Plan provides authorization to our Board of Directors to grant Stock Options to purchase a total number of shares of our Common Stock of the Company, not to presently exceed 6,000,000 shares of Common Stock as at the date of adoption by our Board of Directors of the Stock Option Plan. At the time a Stock Option is granted under the Stock Option Plan, our Board of Directors shall fix and determine the exercise price at which shares of our Common
Stock may be acquired; provided, however, that any such exercise price shall not be less than that permitted under the rules and policies of any stock exchange or over-the-counter market which is applicable to us.  In the event an optionee who is one of our directors or officers ceases to serve in that position, any Stock Option held by such optionee generally may be exercisable within up to ninety (90) calendar days after the effective date that his position ceases, and after such 90-day period any unexercised Stock Option shall expire. In the event an optionee who is one of our employees or consultants ceases to be employed by us, any Stock Option held by such optionee generally may be exercisable within up to sixty (60) calendar days (or up to thirty (30) calendar days where the optionee provided only investor relations services to the Company) after the effective date that his employment ceases, and after such 60- or 30-day period any unexercised Stock Option shall expire.      23   No Stock Options granted under the Stock Option Plan will be transferable by the optionee, and each Stock Option will be exercisable during the lifetime of the optionee subject to the option period of ten (10) years or limitations described above. Any Stock Option held by an optionee at the time of his death may be exercised by his estate within one (1) year of his death or such longer period as the Board of Directors may determine.  Unless restricted by the option agreement, the exercise price shall by paid by any of the following methods or any combination of the following methods: (i) in cash; (ii) non-forfeitable, unrestricted or restricted shares of Common Stock, which are already owned by the Optionee and have a market referenced value at the time of exercise that is equal to the Option price; (iii) any other legal consideration that the Board of Directors may deem appropriate, including without limitation any for of consideration authorized on such basis as our Board of Directors may determine in accordance with the Stock Option Plan; and (iv) any combination of the foregoing. Out Board of Directors in its sole discretion may permit a so-called cashless exercise (net exercise of the Stock Options.  The Stock Option Plan further provides that, subject to the provisions of the Stock Option Plan and prior shareholder approval, our Board of Directors may grant to any of our key personnel who is an employee eligible to receive options one or more incentive stock options to purchase the number of shares of Common Stock allotted by the Board of Directors (the "Incentive Stock Options"). The option price per share of Common Stock deliverable upon the exercise of an Incentive Stock Option shall be no less than fair market value of a share of Common Stock on the date of grant of the Incentive Stock Option. In accordance with the terms of the Stock Option Plan, "fair market value" of the Incentive Stock Option as of any date shall not be less than the closing price for the shares of Common Stock on the last trading day preceding the date of grant. The option term of each Incentive Stock Option shall be
determined by the Board of Directors, which shall not commence sooner than from the date of grant and shall terminate no later than ten (10) years from the date of grant of the Incentive Stock Option, subject to possible early termination as described above.  We caused to be filed with the Securities and Exchange Commission on July 23, 2004 a registration statement on "Form S-8 - For Registration Under the Securities Act of 1933 of Securities to Be Offered to Employees Pursuant to Employee Benefit Plans". The S-8 registration statement became effective registering Stock Options under the Stock Option Plan in the amount of 5,000,000 shares at $0.38 per share.  Petrogen Corp. 2003 Stock Option Plan  On November 1, 2003, our Board of Directors unanimously approved an amendment to the 2003 stock option plan (the "2003 Stock Option Plan"), providing for the authorization to grant up to 10,000,000 Stock Options. As of the date of this Annual Report, an aggregate of 10,000,000 Stock Options have been granted under the 2003 Stock Option Plan.  During fiscal year ended December 31, 2004, we granted a total of 8,985,000 Stock Options to our directors, officers, employees and consultants at exercise prices ranging from $0.25 to $1.00 per common share under the 2003 Stock Option Plan (5,000,000) and the Stock Option Plan (3,985,000).  During fiscal year ended December 31, 2005, we granted a total of 300,000 Stock Options to one of our directors and officers at exercise prices ranging from $0.50 to $0.75 per common share and 560,000 Stock Options to a consultant at exercise prices ranging from $0.25 to $0.50 per common share under the Stock Option Plan.  As of the date of this Annual Report, under the Stock Option Plan and the 2003 Stock Option Plan, an aggregate of 5,719,060 Stock Options remain issued and outstanding.  PERFORMANCE STOCK INCENTIVE PLAN  On March 6, 2006, our Board of Directors, pursuant to unanimous consent, approved the adoption of a performance stock incentive plan  2006 (the Performance Stock Incentive Plan) with an effective date of March 1, 2006 (the Effective Date), pursuant to which shares of our restricted common stock will be allocated and issued into escrow in the record name of certain officers, directors and/or employees/consultants as incentives at an original issue price of $0.001 par value per share (the Escrowed Performance Shares). The Board of Directors deemed adoption and approval of the Performance Stock Incentive Plan to be in our best interests and those interests of our shareholders based upon an analysis of several factors including, but not limited to the following: (i) to retain and attract the best available personnel as our directors, management, advisers and consultants
of the Company (the Participants) to enhance the continued successful performance to date of our operational business plan by management; (ii) to create inducements and incentives for the Participants based on achievement of certain performance criteria to encourage maximization of our further operational success and growth, thus creating substantial value for our shareholders; (iii) to provide our management with a measure of control to ensure continuity and successful future performance of our operational business plan goals; and (iv) to simultaneously create combined operational efficiency of incentives for our management and enhancement of our capital by associated realization costs. Based upon the terms and provisions of the Performance Stock Incentive Plan:      24   (i)
        an aggregate of 3,500,000 Escrowed Performance Shares can be purchased pro-rata from escrow by a participant (the Participant) at a price of $0.50 per share commencing one year from the Effective Date for up to five years;  (ii)
        an aggregate of 4,500,000 Escrowed Performance Shares can be purchased pro-rata from escrow by a Participant at a price of $1.00 per share on or before the first three years after the Effective Date, if our assets increase by 50%, the market share price of our common stock achieves a minimum of $1.25, and our financial statements reflect a minimum $3,000,000 profit before taxes, depletion, amortization and stock based compensation charges;  (iii)
        an aggregate of 6,000,000 Escrowed Performance Shares can be purchased pro-rata from escrow by a Participant at a price of $1.25 per share on or before the first five years after the Effective Date, if our assets increase by 100%, the market share price of our common stock achieves a minimum of $2.00, and our financial statements show a minimum $6,000,000 profit before taxes, depletion, amortization and stock based compensation charges;  (iv)
        an aggregate of 7,500,000 Escrowed Performance Shares can be purchased pro-rata from escrow by a Participant at a price of $1.50 per share on or before the first seven years after the Effective Date, if our assets increase by 200%, the market share price of our common stock achieves a minimum of $3.00, and our financial statements show a minimum of $9,000,000 profit before taxes, depletion, amortization and stock based compensation charges; and  (v)
        an aggregate of 8,500,000 Escrowed Performance Shares can be purchased pro-rata from escrow by a Participant at a price of $2.00 per share on or before the termination date, if our assets increase by 400%, the market share price of our common stock achieves a minimum of $4.00, and our financial statements show a minimum of $15,000,000 profit before taxes, depletion, amortization and stock based compensation charges.  The Escrowed Performance Shares shall participate as to all the rights of a shareholder, including voting rights, except that until earned and paid from escrow, the Escrowed Performance Shares shall not participate in dividends, assets or other distributions. The Escrowed Performance Shares can be purchased by the Participant: (i) cash; (ii) shares of common stock which are already owned by the participant and have an aggregate market referenced value as determined by the board; (iii) any other legal consideration that the board may deem appropriate; and (iv) a cashless exercise based upon a certain formula. Any Escrowed Performance Shares not earned during the specified time frame set forth above may be carried forward. At termination of the Performance Stock Incentive Plan, all Escrowed Performance Shares not earned will be cancelled and returned to treasury.  RECENT SALES OF UNREGISTERED SECURITIES  As of the date of this Annual Report and during fiscal year ended December 31, 2005, to provide capital, we issued shares of our Common Stock pursuant to private placement offerings, settlement of debt or pursuant to contractual agreements as set forth below.  Performance Stock Incentive Plan  On March 6, 2006, we issued an aggregate of 30,000,000 shares of our restricted Common Stock to seven Participants, of which 30,000,000 shares are being held in escrow for future delivery. The shares of Common Stock were issued pursuant to the transactional exemption under the Securities Act of 1933, as amended (the Securities Act) in accordance with Section 4(2).  Emily Hawes Debt Conversion  During fiscal year ended December 31, 2005, we approved the issuance of an aggregate of 235,030 shares of our restricted Common Stock to McAda Drilling Fluids, Inc. (McAda) in connection with a debt settlement. Pursuant to certain services provided by McAda on the Emily Hawes Field, we incurred an aggregate debt of $82,260.34 to McAda. In accordance with a debt agreement with McAda, McAda agreed to convert the aggregate debt of $82,260.34 into 235,030 shares of our Common Stock at the approximate rate of $0.35 per share.  Matagorda Pipeline  In accordance with the terms and provisions of the Purchase Agreement, our Board of Directors on March 31, 2005 authorized the issuance to Roche of an aggregate of 175,000 shares of our restricted common stock at $0.50 per share for an aggregate value of $87,500. The shares of common stock were issued pursuant to the transactional exemption under the Securities Act in accordance with     25  Section 4(2). Roche acknowledged that the securities to be issued have not been registered under the Securities Act, that he understood the economic risk of an investment in the securities, and that he had the opportunity to ask questions of and receive answers from our management concerning any and all matters related to acquisition of the securities.  Private Placement Offering  During fiscal year ended December 31, 2005, we engaged in a private placement offering under Regulation S of the Securities Act, which has been terminated. Pursuant to the terms of the private placement, we sold 180,000 shares of our common stock to two investors at the price of $0.25 per share for aggregate proceeds of $45,000, which had been received as of December 31, 2004. The per share price of the offering was arbitrarily determined by our board of directors based upon analysis of certain factors including, but not limited to, stage of development, industry status, investment climate, perceived investment risks, assets and our net estimated worth. We issued 120,000 shares of common stock to one U.S. accredited investor and 60,000 shares to one non U.S. sophisticated investor. The investors executed a subscription agreement and acknowledged that the securities to be issued have not been registered
under the Securities Act, that it understood the economic risk of an investment in the securities, and that it had the opportunity to ask questions of and receive answers from our management concerning any and all matters related to acquisition of the securities. No underwriter was involved in the transaction.  Consulting Services Agreement  During fiscal year ended December 31, 2005, our Board of Directors approved the issuance to eleven of our consultants of an aggregate of 320,000 shares of our restricted Common Stock and 224,366 of our Common Stock valued at $242,912 in accordance with the terms and provisions of the respective consulting agreements. The shares of restricted Common Stock were issued pursuant to the transactional exemption under the Securities Act in accordance with Section 4(2). Four of the consultants acknowledged that the securities to be issued have not been registered under the Securities Act, that they understood the economic risk of an investment in the securities, and that they had the opportunity to ask questions of and receive answers from our management concerning any and all matters related to acquisition of the securities. The shares of Common Stock were issued pursuant to the transactional exemption under the
Securities Act in accordance with Section 4(2).  Bonuses  During fiscal year ended December 31, 2005, our Board of Directors approved the issuance to four individuals, two of whom are current officers and/or directors, of an aggregate of 1,583,000 shares of our Common Stock valued at $661,500. The shares of Common Stock were issued pursuant to the transactional exemption under the Securities Act in accordance with Section 4(2).  Finders Fee  During fiscal year ended December 31, 2005, our Board of Directors approved the issuance to Michael Tan of an aggregate of 671,400 shares of our restricted Common Stock in accordance with the terms and provisions of a finders fee agreement which required issuance of the number of shares equivalent to 10% of all units sold (6,284,000 units) in a private placement offering during fiscal year ended December 31, 2004. The shares of Common Stock were issued pursuant to the transactional exemption under the Securities Act in accordance with Regulation S. Mr. Tan acknowledged that the securities to be issued have not been registered under the Securities Act, that he understood the economic risk of an investment in the securities, and that he had the opportunity to ask questions of and receive answers from our management concerning any and all matters related to acquisition of the securities.  Note Receivable  During fiscal year ended December 31, 2005, our Board of Directors approved the issuance to Peter Jensen of an aggregate of 1,250,000 shares of our Common Stock at a price of $0.30 per share for aggregate consideration of $375,000. The consideration for acquisition of the shares of Common Stock is evidenced by a non-interest bearing promissory note dated April 4, 2005 between us as lender and Mr. Jensen as borrower (the Note Receivable). Pursuant to the terms and provisions of the Note Receivable: (i) Mr. Jensen is to pay the principal amount of $375,000 to us by September 30, 2005 (received) by either cash or delivery of shares of our Common Stock at the greater of the then market value of $0.30 per share at the time of tendering the principal amount due; and (ii) in the event the principal amount is not repaid in accordance with such terms, interest shall accrued at five percent (5%) per annum.  Stock Options Exercised  During fiscal year ended December 31, 2005, we issued an aggregate of 2,306,123 shares of our common stock pursuant to the exercise of 2,306,123 Stock Options at exercise prices ranging from $0.50 to $0.75 per share, for aggregate proceeds of $868,949, of which $303,949 was utilized to off-set debt owing to one of our directors and five consultants.      26   ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION  The following discussion should be read in conjunction with our consolidated audited financial statements and the related notes that appear elsewhere in this registration statement. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this Annual Report, particularly in the section entitled Risk Factors. Our consolidated audited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.  SUMMARY OF FINANCIAL DATA  The summarized consolidated financial data set forth in the table below is derived from and should be read in conjunction with our audited consolidated financial statements for the period from inception to the fiscal year ended December 31, 2005, including the notes to the financial statements which are included elsewhere in this Annual Report.  For Fiscal Year EndedDecember 31, 2005(audited)Revenue
        $    201,628Net Loss
        (3,065,271)Working Capital Deficit
        $ (1,595,169)Total Assets
        3,875,154Total Number of Shares of Common Stock
        32,873,500Stockholders Equity
        1,105,250  RESULTS OF OPERATION  Fiscal Year Ended December 31, 2005 Compared to Fiscal Year Ended December 31, 2004  Our net losses during fiscal year ended December 31, 2005 were approximately ($3,065,271) compared to ($4,003,722) during fiscal year ended December 31, 2004 (a decrease of $938,451). During fiscal year ended December 31, 2006, we recorded revenue in the aggregate amount of $201,628 consisting of $199,013 in gas sales revenue and $2,615 in interest income compared to revenue in the aggregate amount of $1,596 consisting of interest income recorded during fiscal year ended December 31, 2004 (an increase of $200,032 or 125.33%). The increase in revenue was primarily a result of the sale of natural gas produced from the wells brought into production. We incurred operating expenses of $11,258 (2004: $-0-) for depletion and $45,450 (2004: $-0-) in lease operating expenses.  During fiscal year ended December 31, 2005, we incurred operating expenses of approximately $3,210,191 compared to operating expenses of $4,005,318 incurred during fiscal year ended December 31, 2004 (a decrease of $795,127 or 19.85%). The operating expenses incurred during fiscal year ended December 31, 2005 consisted of: (i) $1,448,652 (2004: $546,286) in general and administrative expenses; (ii) $801,750 (2004: $609,000) in management and consulting fees  related party; (iii) $303,921 (2004: $521,674) in professional fees; (iv) $16,673 (2004: $4,979) in depreciation; (v) $259,900 (2004: $2,046,650) in management and consulting fees  stock based compensation; (vi) $23,891 (2004: $52,428) in interest expense; (vii) $-0- (2004: $224,301) in loss on settlement of debt; (viii) $245,600 in financing fees (2004: $-0-); and (ix) $109,804 in impairment of oil and gas properties (2004: $-0-).  General and administrative expenses increased during fiscal year ended December 31, 2005 compared to the same period in 2004 due to increased operational costs resulting from the increased number of operational wells. General and administrative expenses generally include corporate overhead, financial and administrative contracted services, marketing and consulting costs. The management and consulting fees  stock based compensation relating to the fair valuation of stock bonus received and stock options granted decreased during fiscal year ended December 31, 2005 compared to the same period due to a decrease in the number of Stock Options granted to our officers and directors. Depreciation expense increased during fiscal year ended December 31, 2005 compared to the same period primarily the result of the increase in  depreciation resulting from the purchase of equipment. Professional fees also
decreased during fiscal year ended December 31, 2005 compared to the same period due to the reduction of litigation and acquisitions. A loss on settlement of debt was incurred during fiscal year ended December 31, 2004, which was not incurred during fiscal year ended December 31, 2005.      27   During fiscal year ended December 31, 2005, we recorded a loss from operations of ($3,067,886) (2004: ($4,005,318) ) and interest income of $2,615 (2004: $1,596) resulting in a net loss of ($3,065,271) (2004: ($4,003,722)   ).  The overall decrease in operating expenses during fiscal year ended December 31, 2005 compared to fiscal year ended December 31, 2004 was primarily due to the decrease in management fees  stock based compensation relating to the fair valuation of stock bonus received and Stock Options granted.  Mr. Spindler, our Chief Executive Officer and a director, derives remuneration from us as compensation for management and consulting services rendered. During fiscal year ended December 31, 2005, approximately $207,000 was incurred by us to Mr. Spindler for management and consulting services rendered, and an additional $245,000 was incurred by us to Mr. Spindler as bonus management fees. At December 31, 2005, Mr. Spindler owed an aggregate of $4,529 relating to  an advance on expenses. See Item 10, Executive Compensation.  Mr. Kerrigan, our prior Co-President and director, derived remuneration from us as compensation for management and consulting services rendered. During fiscal year ended December 31, 2005, approximately $67,500 was incurred by us to Mr. Kerrigan for management and consulting services rendered, and an additional $122,500 was incurred by us to Mr. Kerrigan as bonus management fees. As of the date of this Annual Report, Mr. Kerrigan will also receive severance fees of $121,500. At December 31, 2005, we owed Mr. Kerrigan an aggregate of $142,724 relating to accrued management fees and bonuses. Effective October 7th, 2005, Mr. Kerrigan tendered his resignation as Co-President and as a director. See Item 10, Executive Compensation.  Mr. Sen, our President, derives remuneration from us as compensation for management services rendered. During fiscal year ended December 31, 2005, approximately $120,000 was incurred by us to Mr. Sen for management fees, and an additional $93,000 was incurred by us to Mr. Sen as bonus management fees. At December 31, 2005, we owed Mr. Sen an aggregate of $65,000 for accrued management fees.  See Item 10, Executive Compensation.  Mr. Fiddler, our chief Financial Officer, derives remuneration from us as compensation for management services rendered. During fiscal year ended December 31, 2005, approximately $36,000 was incurred by us to Mr. Fiddler for management fees, and an additional $16,250 was incurred by us to Mr. Fiddler as bonus management fees. At December 31, 2005, we owed Mr. Fiddler an aggregate of $-0 for accrued management fees.  See Item 10, Executive Compensation.  Mr. Russell, one of our directors, derives remuneration from us as compensation for management services rendered. During fiscal year ended December 31, 2005, approximately $72,000 was incurred by us to Mr. Russell for management fees. During fiscal year ended December 31, 2005, Mr. Russell exercised an aggregate of 172,667 Stock Options at various exercise prices and accepted a debt settlement of 35,000 shares of our Common Stock for aggregate proceeds of $126,500, which amount was utilized by us to offset the aggregate amount of management fees due and owing Mr. Russell. Thus, at December 31, 2005, we owed Mr. Russell an aggregate of $4,000 for accrued management fees.  See Item 10, Executive Compensation.  Our net loss during fiscal year ended December 31, 2005 was ($3,065,271) or ($0.10) per share compared to a net loss of ($4,003,722) or ($0.22) per share for fiscal year ended December 31, 2004. The weighted average number of shares outstanding was 30,171,562 at December 31, 2005 compared to 18,008,981 at December 31, 2004.  LIQUIDITY AND CAPITAL RESOURCES  As at December 31, 2005  As at fiscal year ended December 31, 2005, our current assets were $1,174,735 and our current liabilities were $2,769,904, resulting in working capital deficit of $1,595,172. As at fiscal year ended December 31, 2005, current assets were comprised of: (i) $817,720 in cash; (ii) $45,000 in restricted cash; (iii) $241,740 in accounts receivable; (iv) $14,114 in notes receivables; and (v) $56,161 in pre-paids and deposits.  As at fiscal year ended December 31, 2005, our total assets were $3,875,154 comprised of: (i) $1,174,735 in current assets; (ii) $2,650,940 in capitalized oil and gas expenditures relating to our unproved oil and gas properties; and (iii) $49,479 in furniture and equipment (net of depreciation). As of December 31, 2004, our total assets were $2,624,196 comprised of: (i) $1,117,856 in current assets; (ii) $1,475,409 in capitalized oil and gas expenditures relating to our unproved oil and gas properties; and (iii) $30,931 in furniture and equipment (net of depreciation). The increase in total assets during fiscal year ended December 31, 2005 from fiscal year ended December 31, 2004 was primarily due to the increase in capitalized oil and gas expenditures on our properties.  As at fiscal year ended December 31, 2005, our current liabilities were $2,769,904. Current liabilities were comprised of: (i) $1,172,583 in accounts payable and accrued liabilities; (ii) $1,209,430 in subscription proceeds received; (iii) $270,143 due to related parties; and (iv) $43,438 in advances payable. As at fiscal year ended December 31, 2005, our total liabilities were $2,769,904, all     28  consisting of current liabilities. As of December 31, 2004, our total liabilities were $1,024,976 consisting of current liabilities were: (i) $820,189 in accounts payable and accrued liabilities; (ii) $45,000 in subscription proceeds received; (iii) $155,233 due to related parties; and (iv) $4,554 in current portion of debentures payable. The increase in total liabilities during fiscal year ended December 31, 2005 compared to fiscal year ended December 31, 2004 was due primarily to the increase in accounts payable and accrued liabilities from $820,189 to $1,172,583 and the increase in recording of subscription proceeds as a liability from $45,000 to $1,252,095.  Stockholders' equity decreased from $1,599,220 for December 31, 2004 to $1,105,250 for fiscal year ended December 31, 2005.  For fiscal year ended December 31, 2005, net cash from operating activities was ($565,011) compared to net cash used in operating activities of ($904,991) for fiscal year ended December 31, 2004. Net cash from operating activities during fiscal year ended December 31, 2005 was comprised of a net loss of ($3,065,271) (2004: ($4,003,722)) and adjusted primarily by: (i)  expenses paid by issuance of shares of $1,148,830 (2004: $497,707); (ii) accounts payable of $758,438 (2004: $470,011); and (iii) stock based compensation of $259,900 (2004: $2,046,650).  Our cash flow used in investing activities for fiscal year ended December 31, 2005 was ($1,484,314) compared to net cash used in investing activities of ($763,584) for fiscal year ended December 31, 2004. The net cash used in investing activities during fiscal year ended December 31, 2005 was primarily from oil and gas properties in the amount of $1,449,093 (2004: $733,486). The change in net cash used in investing activities during fiscal year ended December 31, 2005 was primarily the result of an increase in the investment and acquisition of oil and gas properties.  Cash flows from financing activities for fiscal year ended December 31, 2005 was $2,039,719 compared to cash flow from financing activities of $2,487,524 for fiscal year ended December 31, 2004. The net cash flow from financing activities during fiscal year ended December 31, 2005 was primarily comprised of: (i) $1,399,430 (2004: $2,060,500) in proceeds on sale of common stock; (ii) $375,000 (2004: $550,000) in loan receivable; and (iii) $246,689 in advances from related parties (2004: ($96,091). The decrease in net cash from financing activities during fiscal year ended December 31, 2005 was primarily the result of a decrease in the amount of proceeds received from sale of common stock.  PLAN OF OPERATION  As of the date of this Annual Report, we have generated little revenue from operations. During the prior fiscal years, we focused primarily on the exploration of potential oil and gas projects and generated no revenues. During those prior fiscal years, we relied upon internally generated funds and advances, funds from the sale of shares of stock and loans from its shareholders and private investors to finance our operations and growth. Our management anticipates a possible increase in operating expenses and capital expenditures relating to oil and gas operating properties and acquisitions.  We believe, however, that fiscal year 2005 proved to be a very successful year for us. Our management positioned us to develop our interests specifically within the Texas Gulf Coast region as out primary area of operational focus going forward through development of the Emily Hawes Project and the Tiller Ranch Project. We believe that implementation of a well defined operations strategy over the past twelve months has led to proving up natural gas and condensate reserves on both of these key properties through the development of successful new well completions, resulting a substantial increase in reserves, hydrocarbon sales and revenues and further definition of the geologic aspect of the fields that bode exceptionally well for our strong continued growth in natural gas and condensate production and revenues into the future.  As of the date of this Annual Report, both the EH#3A well and the TR#1 well have been completed as successful natural gas producers and are currently providing us with revenues that average approximately $180,000 per month. Additionally, Tiller Ranch Project has shown outstanding earnings potential not only as a natural gas production field, but as a high quality condensate production field. The TR#1 well produces 60 degree API condensate along with its natural gas production and the recently completed TR#2 well is anticipated to produce rates of condensate greater than those of the TR#1 as our operations team further details the relationship of the natural gas and condensate within the stacked, multi-hydrocarbon potential zones. Our management is confident that as many as five more new well drills could be completed as natural gas and/or condensate producers in the Tiller Ranch Project exploit potential
reserves of 18 BCF plus natural gas with additional reserves of condensate.  We believe that our Texas Gulf Coast operations program saw the successful completion of the first stages of new development efforts at our Emily Hawes Project during fiscal year 2005 that resulted in re-establishing natural gas production from the Basal Miocene sands. We believe that we mitigated and managed complex development challenges related to marine supported operational logistics, establishing us as one of the very few junior natural gas producers in the Texas Gulf Coast that has developed the expertise to operate in this region.  We are confident that at least three additional step-out wells can be completed at the Emily Hawes Project. We believe that a successful program would result in proving up reserves of approximately 12 BCF plus of natural gas in the Basal Miocene alone.     29  Significant additional reserve potential exists in the deeper Frio Formation, which we will attempt to exploit over the course of the next two years in a move to significantly expand the ultimate production, revenues and reserve potential of the Emily Hawes Project.  As part of our Texas Gulf Coast mandate, our management has positioned us to have complete control of the distribution of our hydrocarbon products. To that end, we have acquired and constructed the entire natural gas gathering and transportation facilities and pipelines within the areas adjacent to and upon both f our currently producing Gulf Coast properties, effectively managing the distribution of our commodities right up to the sales interconnect points. We believe that this streamlined, integrated business model has resulted in additional realized value through our ability to generate additional revenues through transportation tariffs to third party operators in those areas.  Throughout our fiscal strategy evolution and growth mandate, we have been very cognizant and proactive on developing our continuous financial strength over the course of our operational history. We believe that through a well planned and executed development agenda, we have developed from the seed stage development through start-up to the current development activities of our early stage growth strategy. In keeping with this focused and disciplined fiscal approach, we have not incurred any form of senior or subordinated debt. It has long been the goal of our management to minimize debt so that it would not be a consideration in our early stage growth model. We were originally positioned with known high-quality hydrocarbon assets in high impact regions such as the Texas Gulf Coast and set forth to develop those assets with capital that was raised through equity infusions only. The result is that we as
operator of those assets and our shareholders maintain 100% control of our assets rather than having pledged those assets in exchange for a substantially higher risk development platform comprised of debt. Our revenue stream is not encumbered by any form of financing or servicing of debt.  As a logical step regarding our next phase of growth, our management is currently assessing numerous opportunities in a number of key areas both corporately and operationally. Particularly, we have initiated the evaluation of several international producing properties for the purpose of acquisition, on which we plan to begin negotiations and work toward consummation of acquisition agreements with fiscal year 2006. Potential acquisitions from the opportunity set currently under review would result in our immediate entry into the global energy arena and provide instant positive impact on our earnings and profits and financial performance indicators. These potential new assets, along with the ongoing development and success of our Texas Gulf Coast assets proven up during fiscal year 2005, would cumulatively provide an even greater platform for achieving all corporate and operational targets along these key criteria.  As part of our overall growth objectives for fiscal year 2006, our management has been assessing alternative listing platforms for the public trading of our common shares. To this end, we have identified a number of international stock exchanges that we have been evaluating and in discussion with regarding preparation to move the trading of our common shares from the NASD Over-the-Counter Bulletin Board to a more senior and internationally recognized stock exchange. Further, we intend to extend the trading of our common shares through inter-listing on several international stock exchanges in regions of the world that promote and value the fundamental attributes and further development of producing oil and gas enterprises such as us. We believe that this will also provide liquidity platforms for new incoming international investors and shareholders that would potentially be the result of the successful
funding and consummation of international business agreements for new asset acquisitions and joint development projects. We will also provide additional trading platforms and extended hours of trading for our current shareholders.  As part of our strategy to expand our listings, our management and our opportunities globally, we have established a ten-year Performance Stock Incentive Program. The Performance Stock Incentive Program permits up to 30,000,000 shares of our common stock to be earned in stages over ten years where earning occurs on multiplying our assets and production and stockholder value, which would result in the recipients paying in approximately $42,000,000 in capital contribution to move our development forward. The purpose of the Performance Stock Incentive Program is to encourage management to achieve maximal growth and value while putting increased stockholder value ahead of any substantial management benefit. See  Item 5. Market For Common Equity and Related Stockholder Matters  Recent Issuances of Unregistered Securities.  During fiscal year ended December 31, 2004, we completed a private placement offering whereby we issued 7,284,000 Units for gross proceeds of $1,821,000. Each Unit consisted of one share of common stock, one-half of one share purchase warrant (the Share Purchase Warrant) and one piggyback warrant (the Piggyback Warrant). Each whole Share Purchase Warrant entitled the holder thereof (collectively, the Investor) to purchase one additional share of our restricted common stock until September 30, 2005 at a purchase price of $0.50 per whole Share Purchase Warrant. Each Piggyback Warrant entitled the Investor to purchase one additional share of common stock until January 31, 2006 at a purchase price of $1.00 per Piggyback Warrant, and only if the Warrants were first exercised in full.  During fiscal year ended December 31, 2005, we entered into agreements with certain of the Investors to opt to surrender for cancellation the Piggyback Warrants and to re-price the $.50 half warrants to $.45 per whole exercised warrants held of record by the respective Investor (collectively, the Agreements), in order to prevent dilution and to help attract investors for future possible financings. As of the date of this Annual Report, all Investors have entered into an Agreement.      30   We may finance further expenditures with future issuances of our common stock. We believe that any private placements of equity capital and debt financing, or the sale of working interests in our properties, if successful, may be adequate to fund our operations over the next year. We may encounter business endeavors that require significant cash commitments or unanticipated problems or expenses that could result in a requirement for additional cash before that time. If we raise additional funds through the issuance of equity or convertible debt securities other than to current shareholders, the percentage ownership of our current shareholders would be reduced, and such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we
may not be able to take advantage of prospective new oil and gas acquisitions or opportunities, which could significantly and materially restrict our business operations.  As of the date of this Annual Report, we believe that an estimated $2,000,000 to $5,000,000 is required over the next two years for payment of expenses associated with our ongoing oil and gas exploration, development and production operations. We believe that we can satisfy our cash requirements for approximately the next twelve months based on proceeds received from its private placement offering and its ability to successfully generate revenues from oil and gas production and to obtain advances or equity private placements from certain investors and other parties, as necessary.  As of the date of this Annual Report, there is substantial doubt regarding our ability to continue as a going concern as we have not generated sufficient cash flow to fund our business operations and material commitments. We must raise additional capital. We have not generated sufficient cash flow in the past to fund its operations and activities. Historically, we have relied upon internally generated funds, funds from the sale of shares of stock and loans from our shareholders and private investors to finance our operations and growth.  Our future success and viability are entirely dependent upon our ability to generate revenues from our business operations and raise additional capital through further private offerings of our stock or loans from private investors. Management is optimistic that we will be successful in our capital raising efforts. There can be no assurance, however, that we will be able to generate sufficient revenues or raise additional capital. Our failure to successfully generate sufficient revenues and/or raise additional capital will have a material and adverse affect upon us and our shareholders.  MATERIAL COMMITMENTS  In connection with the oil and gas exploration, development and production expenses and other overhead costs incurred, we and/or our subsidiary incurred liability or borrowed funds pursuant to various contractual arrangements representing the following material commitments.  Amounts Due to/From Related Parties  Mr. Spindler, our Chief Executive Officer and a director, derives remuneration from us as compensation for management and consulting services rendered. At December 31, 2005, Mr. Spindler owed an aggregate of $4,529 relating to an expense advance.  Mr. Kerrigan, our prior Co-President and director, derived remuneration from us as compensation for management and consulting services rendered. At December 31, 2005, we owed Mr. Kerrigan an aggregate of $142,724 in unpaid and accrued consulting fees, bonuses, and severance fees. Mr. Kerrigan tendered his resignation as our Co-President and director effective October 4, 2005.  Mr. Sen, our President, derives remuneration from us as compensation for management and consulting services rendered. At December 31, 2005, we owed Mr. Sen at aggregate of $65,000 in unpaid and accrued consulting fees and bonuses.  Mr. Russell, one of our directors, derives remuneration from us as compensation for management and consulting services rendered. At December 31, 2005, we owed Mr. Russell an aggregate of $4,000 in unpaid and accrued fees.  Private Placement Offering Loan  We have a material commitment resulting from the terms and conditions of certain private placement subscription agreements received during fiscal year ended December 31, 2005. In accordance with the terms and provisions of these subscription agreements, proceeds from the financings will constitute an interest free loan until the securities are issued and delivered to the respective investors. As of the date of this Annual Report, the Company has four offering of units outstanding.  The first offering is for 283,334 units at $0.30 per unit, each unit consisting of one common share and 1/2 share purchase warrant; each full warrant exercisable into one common share of the Company at an exercise price of $0.60 for a period of one year. The second offering is for 1,900,000 units at $0.25 per unit, each unit consisting of one common share only. The third offering is for 200,000 units at $0.25 per unit, each unit
consisting of one common share and 1/2 share purchase warrant, each full warrant exercisable into one common share of the Company     31  at an exercise price of $0.50 for a period of one year. The fourth offering is for 416,080 units at $0.50 per unit, each unit consisting of one common share and one share purchase warrant; each warrant is exercisable into one common share at an exercise price of $1.00 for one year. The Company received $250,000 towards a future private placement, the terms of which have not yet been finalized. The Company also received $141,390 for the exercise of 314,200 outstanding warrants at $0.45. Subsequent to year end the Company issued 2,799,413 shares under these private placements.  OFF-BALANCE SHEET ARRANGEMENTS  As of the date of this Annual Report, we do not have any off-balance sheet arrangements that have or are reasonably like to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term off-balance sheet arrangement generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.  PURCHASE OF SIGNIFICANT EQUIPMENT We do not intend to purchase any significant equipment during the next twelve months.  ITEM 7. FINANCIAL STATEMENTS  The information required under Item 310(a) of Regulation S-B is included in this report as set forth in the "Index to Financial Statement".      32            PETROGEN CORP. (An Exploration Stage Company)  CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2005             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  CONSOLIDATED BALANCE SHEETS  CONSOLIDATED STATEMENTS OF OPERATIONS  CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY  CONSOLIDATED STATEMENTS OF CASH FLOWS  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      33     REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Stockholders and Board of Directors of Petrogen Corp. (An Exploration Stage Company)  We have audited the accompanying consolidated balance sheets of Petrogen Corp. (An Exploration Stage Company) as of December 31, 2005 and 2004 and the related consolidated statements of operations, stockholders equity and cash flows for the years then ended and the period from November 15, 2001 (inception) to December 31, 2005. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.  In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company, as of December 31, 2005 and 2004, and the results of its operations and its cash flows and the changes in stockholders equity for the years then ended and the period from November 15, 2001 (inception) to December 31, 2005, in conformity with generally accepted accounting principles used in the United States of America.  The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the financial statements, to date the Company has not generated any significant revenues from operations, has incurred substantial losses to date and requires additional funds to meet its obligations and fund the costs of its operations.  These factors raise substantial doubt about the Companys ability to continue as a going concern.  Managements plans in this regard are described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.  /s/ Dale Matheson Carr-Hilton LaBonte CHARTERED ACCOUNTANTS  Vancouver, Canada April 5, 2006        34    PETROGEN CORP. (An Exploration Stage Company)  CONSOLIDATED BALANCE SHEETS   December 31,2005
        December 31, 2004(as restated*)ASSETSCURRENT ASSETSCash
        $        817,720
        $        827,326Restricted cash
        45,000
        45,000Accounts receivable
        241,740
        170,863Notes receivable (Note 3)
        14,114
        34,096Prepaids and deposits
        56,161
        40,5711,174,735
        1,117,856FURNITURE AND EQUIPMENT, net of depreciation of $23,357 (2004 - $6,685)
        49,479
        30,931OIL AND GAS PROPERTIES, UNPROVED, net of depletion of $11,258 (2004  NIL) (Note 4)
        2,650,940
        1,475,409$   3,875,154
        $   2,624,196LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable and accrued liabilities
        $   1,172,583
        $       820,189Note payable
        74,310
        -Current portion of debentures payable
        -
        4,554Advances payable
        43,438
        -Private placement subscription proceeds received (Note 5)
        1,209,430
        45,000Due to related parties (Note 6)
        270,143
        155,2332,769,904
        1,024,976CONTINGENCIES (Note 9)STOCKHOLDERS EQUITY (Note 7)Common stock, $0.001 par value, 100,000,000 shares authorized32,873,500 (2004  27,221,581) shares issued and outstanding
        32,874
        27,222Additional paid-in capital
        10,167,668
        7,684,369Obligation to issue shares
        59,250
        -Common stock purchase warrants
        205,200
        182,100Deficit accumulated during the exploration stage
        (9,359,742)
        (6,294,471)1,105,250
        1,599,220$   3,875,154
        $    2,624,196  * See Note 12  The accompanying notes are an integral part of these consolidated financial statements      35   PETROGEN CORP. (An Exploration Stage Company)  CONSOLIDATED STATEMENTS OF OPERATIONS   Year Ended December 31, 2005
        Year Ended December 31, 2004(as restated*)
        November 15, 2001 (Inception) toDecember 31, 2005(as restated*)REVENUEGas sales
        $     199,013
        $               -
        $     199,013OPERATING EXPENSESDepletion
        11,258
        -
        11,258Lease operating expenses
        45,450
        -
        45,45056,708
        -
        56,708OPERATING PROFIT
        142,305
        -
        142,305EXPENSESDepreciation
        16,673
        4,979
        23,357Financing fees
        245,600
        -
        245,600General and administrative
        1,448,652
        546,286
        2,440,166Impairment of oil and gas properties
        109,804
        -
        109,804Interest expense
        23,891
        52,428
        166,715Loss on settlement of debt
        -
        224,301
        239,448Management and consulting fees  related party (Note 6)
        801,750
        609,000
        1,704,895Management and consulting fees  stock based compensation (Note 8)
        259,900
        2,046,650
        3,028,995Non-recurring costs of share exchange
        -
        -
        417,800Professional fees
        303,921
        521,674
        1,129,4783,210,191
        4,005,318
        9,506,258LOSS FROM OPERATIONS
        (3,067,886)
        (4,005,318)
        (9,363,953)OTHER INCOME (EXPENSES)Interest income
        2,615
        1,596
        4,2112,615
        1,596
        4,211NET LOSS
        $ (3,065,271)
        $ (4,003,722)
        $ (9,359,742)   BASIC AND DILUTED NET LOSS PER SHARE
        $   (0.10)
        $   (0.22)WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
        30,171,562
        18,008,981  * See Note 12  The accompanying notes are an integral part of these consolidated financial statements      36   PETROGEN CORP. (An Exploration Stage Company)  CONSOLIDATED STATEMENTS OF CASH FLOWS  Year ended December 31, 2005
        Year ended December 31, 2004
        November 15, 2001 (inception) to December 31, 2005(as restated*)(Note 1)CASH FLOWS FROM OPERATING ACTIVITIESNet loss
        $  (3,065,271)
        $  (4,003,722)
        $  (9,359,742)Adjustments to reconcile net loss to net cash used in operating activities:- depletion
        16,673
        -
        23,357- depreciation
        11,258
        4,979
        11,258- accounts receivable
        169,123
        (170,863)
        (1,740)- accrued interest receivable
        (1,614)
        1,596
        (18)- prepaids and deposits
        (15,590)
        (40,571)
        (56,161)- accrued interest expense
        -
        32,421
        81,717- accounts payable
        758,438
        470,011
        1,429,781- advances payable
        43,438
        -
        43,438- obligation to issue shares
        -
        32,500
        -- loss on settlement of debt
        -
        224,301
        239,448- accrued management fees
        -
        -
        84,500- non-recurring costs of share exchange
        -
        -
        417,800- impairment of oil and gas properties
        109,804
        -
        109,804- stock-based compensation
        259,900
        2,046,650
        3,028,995- expenses paid by the issuance of shares
        1,148,830
        497,707
        1,649,037NET CASH USED IN OPERATING ACTIVITIES
        (565,011)
        (904,991)
        (2,298,526)CASH FLOWS FROM (USED IN) INVESTING ACTIVITIESPurchase of furniture and equipment
        (35,221)
        (30,098)
        (72,836)Oil and gas properties
        (1,449,093)
        (733,486)
        (2,612,100)Pre reverse acquisition advances from Petrogen Corp.
        -
        -
        100,000Cash acquired on reverse acquisition of Petrogen Inc.
        -
        -
        868NET CASH USED IN INVESTING ACTIVITIES
        (1,484,314)
        (763,584)
        (2,584,068)CASH FLOWS FROM FINANCING ACTIVITIESProceeds on sale of common stock including subscriptions received
        1,399,430
        2,060,500
        4,123,040Warrants
        18,600
        -
        18,600Restricted cash
        -
        (45,000)
        (45,000)Notes payable
        -
        (10,061)
        (36,920)Loans payable
        -
        (75,000)
        -Debenture payable
        -
        (89,006)
        (138,302)Loans receivable
        375,000
        550,000
        925,000Cash advances from former related parties
        -
        -
        318,990Advances from related parties
        246,689
        96,091
        534,906NET CASH FLOWS FROM FINANCING ACTIVITIES
        2,039,719
        2,487,524
        5,700,314(DECREASE) INCREASE IN CASH
        (9,606)
        818,949
        817,720CASH, BEGINNING OF YEAR
        827,326
        8,377
        -CASH, END OF YEAR
        $       817,720
        $       827,326
        $       817,720 Non-cash transactions:  Refer to Notes 3 and 7.  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid
        $    -
        $    -
        $    -Income taxes paid
        $    -
        $    -
        $    - * See Note 12 The accompanying notes are an integral part of these consolidated financial statements     37   PETROGEN CORP. (An Exploration Stage Company)  CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY  FOR THE PERIOD FROM NOVEMBER 15, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2005  Common Stock(as restated*)
        Additional
        
        Share Purchase Warrants(as restated*)
        Deficit Accumulated during the Exploration Stage(as restated*)
        Total Stockholders Equity (Deficit)(as restated*)Number of Shares
        Amount
        Paid-inCapital(as restated*)
        Obligation to issue shares(as restated*)Stock issued for cash, November 15, 2001 (Date of Inception)
        6,521,555
        $   6,522
        $   (6,412)
        $               -
        $              -
        $               -
        $         110Stock issued for cash, May 3, 2002
        5,929
        6
        (6)
        -
        -
        -
        -Stock Issued for oil and gas property, May 20, 2002
        44,465
        44
        (43)
        -
        -
        -
        1Stock Issued for services, June 3, 2002
        142,288
        142
        11,858
        
        
        
        12,000Stock issued for cash, July 8, 2002
        59,287
        59
        24,941
        -
        -
        -
        25,000Subscriptions received for 32,000 units, August 9, 2002
        -
        -
        -
        8,000
        -
        -
        8,000Stock Issued for services, August 13, 2002
        29,643
        30
        2,470
        -
        -
        -
        2,500Stock issued for subscriptions received in prior period, October 7, 2002
        18,972
        19
        7,981
        (8,000)
        -
        -
        -Stock issued for cash, November 26, 2002
        177,861
        178
        29,822
        -
        -
        -
        30,000Net loss for the period November 15, 2001 to December 31, 2002
        -
        -
        -
        -
        -
        (193,562)
        (193,562)Petrogen, Balance, December 31, 2002
        7,000,000
        7,000
        70,611
        -
        -
        (193,562)
        (115,951)Stock issued for acquisition costs, February 12, 2003
        300,000
        300
        (300)
        -
        -
        -
        -Reverse acquisition of Petrogen Corp., February 12, 2003
        2,078,291
        2,078
        (352,145)
        -
        357,800
        -
        7,733Stock issued for exercise of options, March 21, 2003
        1,000,000
        1,000
        499,000
        -
        -
        -
        500,000Obligation to issue 10,000 shares
        -
        -
        -
        5,000
        -
        -
        5,000Stock-based compensation, options granted on September 10, 2003
        -
        -
        362,230
        -
        -
        -
        362,230Stock issued for exercise of options, September 29, 2003
        235,000
        235
        63,515
        -
        -
        -
        63,750Obligation to issue shares reclassification
        
        
        
        (5,000)
        
        
        (5,000)Stock-based compensation, options granted on November 1, 2003
        -
        -
        360,215
        -
        -
        -
        360,215Warrants expired
        -
        -
        101,500
        -
        (101,500)
        -
        -Net loss
        -
        -
        -
        -
        -
        (2,097,187)
        (2,097,187)Balance, December 31, 2003(as restated*)
        10,613,291
        $   10,613
        $   1,104,626
        $          -
        $   256,300
        $ (2,290,749)
        $    (919,210)  * See Note 12   The accompanying notes are an integral part of these consolidated financial statements     38   PETROGEN CORP. (An Exploration Stage Company)  CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY  FOR THE PERIOD FROM NOVEMBER 15, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2005  Common Stock
(as restated*)
        Additional
        
        Share Purchase Warrants(as restated*)
        Deficit Accumulated during Exploration Stage(as restated*)
        Total Stockholders Equity (Deficit)(as restated*)Number of Shares
        Amount
        Paid-inCapital(as restated*)
        Obligation to issue shares(as restated*)Balance, December 31, 2003(as restated*)
        10,613,291
        $   10,613
        $   1,104,626
        $               -
        $   256,300
        $  (2,290,749)
        $    (919,210)Stock issued for exercise of options, January 14, 2004
        200,000
        200
        39,800
        -
        -
        -
        40,000Stock issued for exercise of options, January 20, 2004
        375,000
        375
        75,625
        -
        -
        -
        76,000Stock cancelled, January 30, 2004
        (50,000)
        (50)
        50
        -
        -
        -
        -Stock issued for exercise of options, February 11, 2004
        1,645,000
        1,645
        385,855
        -
        -
        -
        387,500Stock based compensation, options granted on March 4, 2004
        -
        -
        947,550
        -
        -
        -
        947,550Stock issued for exercise of options, April 30, 2004
        1,185,000
        1,185
        424,065
        -
        -
        -
        425,250Stock issued for exercise of options, May 18, 2004
        250,000
        250
        62,250
        -
        -
        -
        62,500Stock issued for exercise of options, May 21, 2004
        1,309,600
        1,310
        326,091
        -
        -
        -
        327,401Stock issued for exercise of options, June 1, 2004
        20,000
        20
        4,980
        -
        -
        -
        5,000Stock issued for exercise of options, June 16, 2004
        295,000
        295
        73,455
        -
        -
        -
        73,750Stock based compensation, options granted on March 4, 2004
        -
        -
        176,950
        -
        -
        -
        176,950Stock issued for exercise of options, August 12, 2004
        1,000,000
        1,000
        299,000
        -
        -
        -
        300,000Stock issued for settlement of debenture, August 18, 2004
        2,934,690
        2,935
        936,166
        -
        -
        -
        939,101Stock issued for cash, September 21, 2004
        7,384,000
        7,384
        1,631,516
        
        182,100
        -
        1,821,000Stock based compensation, options granted on July 22, 2004
        -
        -
        852,050
        -
        -
        -
        852,050Stock issued for exercise of options, October 12, 2004
        30,000
        30
        8,970
        -
        -
        -
        9,000Stock issued for exercise of options, November 1, 2004
        20,000
        20
        5,980
        -
        -
        -
        6,000Stock issued for exercise of options, November 8, 2004
        10,000
        10
        2,990
        -
        -
        -
        3,000Stock based compensation, options granted on October 1, 2004
        -
        -
        70,100
        -
        -
        -
        70,100Warrants expired
        -
        -
        256,300
        -
        (256,300)
        -
        -Net loss
        -
        -
        -
        -
        -
        (4,003,722)
        (4,003,722)Balance, December 31, 2004(as restated*)
        27,221,581
        $    27,222
        $  7,684,369
        $               -
        $   182,100
        $  (6,294,471)
        $  1,599,220  * See Note 12    The accompanying notes are an integral part of these consolidated financial statements      39    PETROGEN CORP. (An Exploration Stage Company)  CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY  FOR THE PERIOD FROM NOVEMBER 15, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2005  Common Stock
(as restated*)
        Additional
        
        Share Purchase Warrants(as restated*)
        Deficit Accumulated during Exploration Stage(as restated*)
        Total Stockholders Equity (Deficit)(as restated*)Number of Shares
        Amount
        Paid-inCapital(as restated*)
        Obligation to issue shares(as restated*)Balance, December 31, 2004(as restated*)
        27,221,581
        $   27,222
        $   7,684,369
        $               -
        $   182,100
        $  (6,294,471)
        $   1,599,220Stock issued for exercise of options, April 4, 2005
        1,250,000
        1,250
        373,750
        -
        -
        -
        375,000Stock issued for services, April 5, 2005
        30,000
        30
        14,670
        -
        -
        -
        14,700Stock issued for exercise of options, May 1, 2005
        247,340
        247
        145,923
        -
        -
        -
        146,170Stock issued for services, May 1, 2005
        421,000
        421
        152,729
        -
        -
        -
        153,150Stock issued for acquisition of pipeline, May 1, 2005
        175,000
        175
        87,325
        -
        -
        -
        87,500Stock issued for finders fees, May 1, 2005
        628,400
        628
        (628)
        -
        -
        -
        -Stock issued for private placement, May 1, 2005
        120,000
        120
        26,880
        -
        3,000
        -
        30,000Stock based compensation, options granted on May 2, 2005
        -
        -
        48,700
        -
        -
        -
        48,700Stock issued for services, May 16, 2005
        5,450
        5
        1,995
        -
        -
        -
        2,000Stock issued for exercise of options, June 1, 2005
        200,000
        200
        99,800
        -
        -
        -
        100,000Stock issued for private placement, June 1, 2005
        60,000
        60
        13,440
        -
        1,500
        -
        15,000Stock issued for conversion of debt, June 2, 2005
        235,030
        235
        82,025
        -
        -
        -
        82,260Stock issued for services, June 2, 2005
        10,500
        11
        3,664
        -
        -
        -
        3,675Stock based compensation, options granted on July 1, 2005
        -
        -
        211,200
        -
        -
        -
        211,200Stock issued for services, September 1, 2005
        1,368,000
        1,368
        586,872
        -
        -
        -
        588,240Stock issued for services, September 7, 2005
        5,000
        5
        2,495
        -
        -
        -
        2,500Stock issued for services, September 12, 2005
        116,000
        116
        42,804
        -
        -
        -
        42,920Stock issued for services, September 29, 2005
        3,000
        3
        2,127
        -
        -
        -
        2,130Stock issued for exercise of options, September 29, 2005
        20,000
        20
        4,980
        -
        -
        -
        5,000Stock issued for exercise of options, October 6, 2005
        60,000
        60
        29,940
        -
        -
        -
        30,000Stock issued for conversion of debt, October 6, 2005
        50,000
        50
        36,450
        -
        -
        -
        36,500Stock issued for conversion of debt, October 12, 2005
        35,000
        35
        13,965
        -
        -
        -
        14,000Balance  forward
        32,261,301
        $    32,261
        $  9,665,475
        $               -
        $   186,600
        $  (6,294,471)
        $  3,589,865  * See Note 12  The accompanying notes are an integral part of these consolidated financial statements      40    PETROGEN CORP. (An Exploration Stage Company)  CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY  FOR THE PERIOD FROM NOVEMBER 15, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2005  Common Stock
(as restated*)
        Additional
        
        Share Purchase Warrants(as restated*)
        Deficit Accumulated during Exploration Stage(as restated*)
        Total Stockholders Equity (Deficit)(as restated*)Number of Shares
        Amount
        Paid-inCapital(as restated*)
        Obligation to issue shares(as restated*)Balance  forward
        32,261,301
        $    32,261
        $  9,665,475
        $               -
        $   186,600
        $  (6,294,471)
        $  3,589,865Stock issued for exercise of options, October 18, 2005
        82,667
        83
        44,917
        -
        -
        -
        45,000Stock issued for exercise of options, October 24, 2005
        416,116
        416
        159,863
        -
        -
        -
        160,279Stock issued for services, October 26, 2005
        8,501
        9
        5,602
        -
        -
        -
        5,611Stock issued for exercise of options, November 7, 2005
        30,000
        30
        7,470
        -
        -
        -
        7,500Stock issued for conversion of debt, November 7, 2005
        11,917
        12
        7,138
        -
        -
        -
        7,150Stock issued for services, November 7, 2005
        11,898
        12
        7,127
        -
        -
        -
        7,139Stock issued for conversion of debt, November 28, 2005
        51,100
        51
        24,476
        -
        -
        -
        24,527Beneficial conversion feature on warrants (Note 4)
        -
        -
        245,600
        -
        -
        -
        245,600Share purchase warrants from acquisition of working interest
        -
        -
        -
        -
        18,600
        -
        18,600Obligation to issue shares
        -
        -
        -
        59,250
        -
        -
        59,250Net loss
        -
        -
        -
        -
        -
        (3,065,271)
        (3,065,271)Balance, December 31, 2005(as restated*)
        32,873,500
        $    32,874
        $ 10,167,668
        $   59,250
        $  205,200
        $  (9,359,742)
        $  1,105,250  * See Note 12  The accompanying notes are an integral part of these consolidated financial statements      41   PETROGEN CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005  NOTE 1  NATURE OF OPERATIONS & BASIS OF PRESENTATION  Petrogen Corp. (the Company) was incorporated in the State of Nevada.   The Company currently trades on the OTC Bulletin Board under the symbol "PTGC" and the Frankfurt Stock Exchanges under the symbol "PTD".  Effective February 12, 2003 the Company completed the acquisition of Petrogen Inc. (Petrogen) by way of a reverse merger and issued 7,000,000 restricted shares of common stock to the Petrogen shareholders and 300,000 restricted shares of common stock as a finders fee resulting in a change in control of the Company  With operations based in Houston, Texas, the Company and its wholly owned subsidiary, Petrogen Inc., is a junior domestic upstream oil and gas company focused on acquiring, developing and producing proven reserves in mature areas.  The Companys core strategy is to acquire interests in proved developed reserves that couple immediate recompletion opportunities with undeveloped upside.  The Companys principal geographic areas of focus lie in the Gulf of Mexico, Rocky Mountains and Permian Basin regions, with core assets presently located in the Baxterville Field in southern Mississippi, Enos Creek Field in central Wyoming, Emily Hawes Field in southern Texas and the Tiller Ranch Lease located within the Tom Graham Field, Jim Wells County, Texas .  The Company also holds the rights to develop interests in the Adams Ranch Field in east Texas.  To date, the Company has commenced commercial operations in both the Emily Hawes Field and the Tiller Ranch Lease.  The Companys efforts to date have focused on the investigation, acquisition and development of oil and gas property interests, implementing its business strategy and raising working capital through equity financing or short-term borrowings.  As at December 31, 2005, the Company has a working capital deficiency of $1,595,169 and has realized significant losses to date.  The Companys continuance of operations is contingent on raising additional capital, settling its outstanding debts and on the future acquisition and successful development of oil and gas properties.  Accordingly, these factors raise substantial doubt about the Companys ability to continue as a going concern.  Production revenue, advances from certain significant shareholders and funding from private placements will form the primary source of short-term funding for the Company during the next twelve months.  NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Basis of Presentation These consolidated financial statements have been presented in United States dollars and prepared in accordance with United States Generally Accepted Accounting Principles (US GAAP).  Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Petrogen, Inc.  All significant intercompany transactions and account balances have been eliminated.  Oil and Gas Properties The Company follows the full cost method of accounting for its oil and gas operations whereby all cost related to the acquisition of petroleum and natural gas interests are capitalized.  Such costs include land and lease acquisition costs, annual carrying charges of non-producing properties, geological and geophysical costs, costs of drilling and equipping productive and non-productive wells, and direct exploration salaries and related benefits.  In addition, the Company is the operator of its properties and as per its contract with third party working interest partners, the Company charges them operator fees. These operator fees represent a reimbursement of general and administration expenses which have been allocated to the exploration and maintenance of the Emily Hawes Field property.    In fiscal year 2004, the Company reclassified $105,716 in operator fees to general and administration expenses,. the
reclassification  did not affect  assets, liabilities or stockholders equity. Proceeds from the disposal of oil and gas properties are recorded as a reduction of the related capitalized costs without recognition of a gain or loss unless the disposal would result in a change of 20 percent or more in the depletion rate.  The Company operates in one cost center, being the U.S.A.  To date the Company has commenced initial production of gas but has not yet quantified proven reserves from evaluations from third party independent reservoir engineers. Depletion and depreciation of the carrying value of unproved oil and gas properties are computed using the unit-of-production method based on the estimated reserves of oil and gas as determined by management.       42   PETROGEN CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005  NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  Oil and Gas Properties (Continued)  Estimated future removal and site restoration costs are provided over the life of proven reserves on a unit-of-production basis.  Costs, which include the cost of production equipment removal and environmental clean-up, are estimated each period by management based on current regulations, costs, technology and industry standards.   The charge is included in the provision for depletion and depreciation and the actual restoration expenditures are charged to the accumulated provision accounts as incurred.  The Company applies a ceiling test to capitalized costs to ensure that such costs do not exceed estimated future net revenues from production of proven reserves at year end market prices less future production, administrative, financing, site restoration, and income tax costs plus the lower of cost or estimated market value of unproved properties.  If capitalized costs are determined to exceed estimated future net revenues, an impairment of the carrying value is charged in the period.  Use of Estimates and Assumptions Preparation of the Companys financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures.  Accordingly, actual results could differ from those estimates.  Significant areas requiring managements estimates and assumptions are reviewing the carrying values of oil and gas properties for impairment, determining fair value for stock based compensation and the amortization rate for furniture and equipment.  Furniture and Equipment Furniture and equipment are stated at cost.  Depreciation is computed on a declining balance basis at 20% per year.  Foreign Currency Translation The financial statements are presented in United States dollars.  In accordance with SFAS No. 52, "Foreign Currency Translation", foreign denominated monetary assets and liabilities are translated to their United States dollar equivalents using foreign exchange rates which prevailed at the balance sheet date.  Revenue and expenses are translated at average rates of exchange during the period.  Related translation adjustments are reported as a separate component of stockholders' equity, whereas gains or losses resulting from foreign currency transactions are included in results of operations  Net Earnings (Loss) per Common Share Basic earnings (loss) per common share include no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period.  Dilutive earnings (loss) per share reflect the potential dilution of securities that could share in the earnings of the Company.  Diluted loss per share figures are equal to those of basic loss per share for each period since the effects of stock options and warrants have been excluded as they are anti-dilutive.  Revenue Recognition Oil and natural gas revenues are recorded using the sales method whereby the Company recognizes oil and natural gas revenue based on the amount of oil and gas sold to purchasers when title passes, the amount is determinable and collection is reasonably assured. Actual sales of gas are based on sales, net of the associated volume charges for processing fees and for costs associated with delivery, transportation, marketing, and royalties in accordance with industry standards. Operating costs and taxes are recognized in the same period of which revenue is earned.  Stock-Based Compensation In December 2002, the Financial Accounting Standards Board issued Financial Accounting Standard No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure (SFAS No. 148), an amendment of Financial Accounting Standard No. 123 Accounting for Stock-Based Compensation (SFAS No. 123).  The purpose of SFAS No. 148 is to: (1) provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation, (2) amend the disclosure provisions to require prominent disclosure about the effects on reported net income of an entitys accounting policy decisions with respect to stock-based employee compensation, and (3) to require disclosure of those effects in interim financial information.  The disclosure provisions of SFAS No. 148 were effective for the Company
for the period ended September 30, 2003.       43   PETROGEN CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005  NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  Stock-Based Compensation (Continued)  The Company has elected to continue to account for stock options granted to employees and officers using the intrinsic value based method in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB No. 25) and comply with the disclosure provisions of SFAS No. 123 as amended by SFAS No. 148 as described above.  Under APB No. 25, compensation expense is recognized based on the difference, if any, on the date of grant between the estimated fair value of the Companys stock and the amount an employee must pay to acquire the stock.  Compensation expense is recognized immediately for past services and pro-rata for future services over the option-vesting period.  In addition, with respect to stock options granted to employees, the Company provides pro-forma information as required by SFAS No. 123 showing the results of
applying the fair value method using the Black-Scholes option-pricing model.  In accordance with SFAS No. 123, the Company applies the fair value method using the Black-Scholes option-pricing model in accounting for options granted to consultants.  The following table illustrates the pro forma effect on net income (loss) and net income (loss) per share as if the Company had accounted for its stock-based employee compensation using the fair value provisions of SFAS No. 123 using the assumptions as described in Note 8:  For the years ended December 312005
        
        2004Net loss as reported
        
        $   (3,065,271)
        
        $   (4,003,722)SFAS No. 123 Additional Compensation Expense
        
        $        (56,020)
        
        $      (981,100)Pro forma net loss under SFAS No. 123
        
        $   (3,121,291)
        
        $   (4,984,822)Basic loss per common share as reported
        
        $ 0.10
        
        $ 0.22Pro forma net loss per common share under SFAS No. 123
        
        $ 0.10
        
        $ 0.28  The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with SFAS No. 123 and the conclusions reached by the Emerging Issues Task Force (EITF) in Issue No. 96-18.  Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable.  The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18.  The Company has also adopted the provisions of the Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation  An Interpretation of APB Opinion No. 25 (FIN 44), which provides guidance as to certain applications of APB No. 25.  Income Taxes The Company follows the liability method of accounting for income taxes.  Under this method, deferred income tax assets and liabilities are recognized for the estimated tax consequences attributable to differences between the financial statement carrying values and their respective income tax basis (temporary differences).  The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantial enactment.  A valuation allowance is provided for deferred tax assets if it is more likely than not that the Company will not realize the future benefit, or if future deductibility is uncertain.  Fair Value of Financial Instruments In accordance with the requirements of SFAS No. 107, the Company has determined the estimated fair value of financial instruments using available market information and appropriate valuation methodologies. The fair value of financial instruments classified as current assets or liabilities including cash, restricted cash, accounts receivable, notes receivable, prepaids and deposits, accounts payable and accrued liabilities, debenture payable and amounts due to related parties approximate carrying values due to the short-term maturity of the instruments.       44   PETROGEN CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005  NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  Recent accounting pronouncements  In May 2003, SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", was issued. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. Generally, a financial instrument, whether in the form of shares or otherwise, that is mandatorily redeemable, i.e. that embodies an unconditional obligation requiring the issuer to redeem it by transferring its shares or assets at a specified or determinable date (or dates) or upon an event that is certain to occur, must be classified as a liability (or asset in some circumstances). In some cases, a financial
instrument that is conditionally redeemable may also be subject to the same treatment. This Statement does not apply to features that are embedded in a financial instrument that is not a derivative (as defined) in its entirety. For public entities, this Statement is effective for financial instruments entered into or modified after May 31, 2003. The adoption of SFAS 150 did not affect the Company's financial position or results of operations.  In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletins ("ARB") No. 51, Consolidated Financial Statements ("FIN 46").  FIN 46 applies immediately to variable interest entitles created after January 31, 2003, and in the first interim period beginning after June 15, 2003 for variable interest entities created prior to January 31, 2003.  The interpretation explains how to identify variable interest entities and how an enterprise assesses its interest in a variable interest entity to decide whether to consolidate that entity.  The interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved.  Variable interest entities that effectively disperse risks will not be consolidated
unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed.  The adoption of FIN 46 did not have a material effect on the Company's financial position or results of operations.  In December 2003, the FASB issued FASB Interpretations No. 46 (Revised December 2003) Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46R).  FIN 46R is an update of FIN 46 and contains different implementation dates based on the types of entities subject to the standard and based on whether a company has adopted FIN 46.  The Company does not expect the adoption FIN 46R will have a material impact on the Companys financial position or results of operations.  In December 2004, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 123R, Share-Based Payment, which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services.  A key provision of this statement is the requirement of a public entity to measure the cost of employee services received in exchange for an award of equity instruments (including stock options) based on the grant date fair value of the award.  That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (i.e., the requisite service period or vesting period).  This standard becomes effective for the Company for its first annual or interim period ended on or after December 15, 2005.  The Company will adopt SFAS 123R no later than the beginning of the Company's fourth quarter ending December
31, 2005.  The adoption of SFAS 123 did not have a material impact on the Company's financial position or results of operations.  In December 2004, the FASB issued SFAS No. 153,Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions(SFAS 153) SFAS 153 requires that exchanges of non-monetary assets are to be measured based on fair value and eliminates the exception for exchanges of non-monetary, similar productive assets, and adds an exemption for non-monetary exchanges that do not have commercial substance. SFAS 153 will be effective for fiscal periods beginning after June 15, 2005.  Management does not believe that the adoption of this standard will have a material impact on the Companys financial position or results of operations.  In December 2003, the United States Securities and Exchange Commission issued Staff Accounting Bulletin No. 104, "Revenue Recognition" (SAB 104), which supersedes SAB 101, "Revenue Recognition in Financial Statements."  The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superseded as a result of the issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."  While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104.  The adoption of SAB 104 did not have a material impact on the Company's financial position or results of operations.       45   PETROGEN CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005  NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  Recent accounting pronouncements  In May 2005, the FASB issued SFAS No. 154, Accounting for Changes and Error Corrections  A Replacement of APB Opinion No. 20 and FASB Statement No. 3. Under the provisions of SFAS No. 154, a voluntary change in accounting principle requires retrospective application to prior period financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. A change in depreciation, amortization, or depletion method for long-lived, non financial assets must be accounted for as a change in accounting estimate effected by a change in accounting principle. the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate was not changed. The Company will implement this new standard beginning January 1, 2006. This standard is not expected to have a
significant effect on the Companys reported financial position or earnings.  NOTE 3  NOTES RECEIVABLE  Pursuant to the Companys 2004 Stock Option Plan, during 2005 a total of 2,530,000 stock options were exercised at a price of $.25 per share for proceeds of $632,500 which the Company agreed to loan the optionees. These loans were secured by demand promissory notes bearing interest at 8% per annum.  At December 31, 2005 interest of $1,614 has been accrued, $550,000 was repaid, and $70,000 was offset against outstanding debt with $12,500 of these notes remaining outstanding at year end.  NOTE 4  OIL AND GAS PROPERTIES  December 31,
        Incurred in the year
        December 31,
        Incurred in the year
        December312003
        
        2004
        
        2005Oil and gas properties,Unproved:
        $
        
        $
        
        $Acquisition costs
        250,646
        -
        250,646
        617,500
        868,146Exploration costs
        491,277
        733,486
        1,224,763
        679,093
        1,903,856741,923
        733,486
        1,475,409
        1,296,593
        2,772,002Less accumulated depletion and impairment
        -
        -
        -
        121,062
        121,062741,923
        733,486
        1,475,409
        1,175,531
        2,650,940  The Company's oil and gas activities are currently conducted in the United States.  During the current year the Company incurred acquisition costs of $617,500 and exploration costs of $679,093 on its properties.  Emily Hawes Field, Calhoun County, Texas  By agreement dated May 20, 2002 Petrogen acquired a 95% working interest (WI) and 77.5% net revenue interest (NRI) in 1,571.5 acres of oil and gas leases located in Calhoun County, Texas.  As consideration Petrogen issued 365,000 shares of common stock, issued a floating charge debenture in the amount of $75,000, and issued notes payable totaling $47,145 to various lessors.  During the year ended September 30, 2003 the notes payable were repaid in full.  On May 26, 2004 the Company entered into a participation agreement with Nortex Corporation of Texas for a 37.5% WI, and a 29.063% NRI.  The Company received $66,112 as cash consideration for the assignment of Nortexs proportionate WI share of the leases and charged the monies against oil and gas properties to offset future costs from drilling the property.  On June 4, 2004 the Company entered into a participation agreement with Darcy Energy, LLC. (Darcy) (formerly Bazmo Exploration, LLC) of Texas for a 25% WI, and a 19.375% NRI . The Company received $42,680 as cash consideration for the assignment of Darcys proportionate WI share of the leases and credited the monies against the carrying value of oil and gas properties to offset future costs from drilling the property.  On September 20, 2004, the Company entered an agreement whereby it purchased a 5% working interest for $3,536 resulting in the Company retaining a total 29.06% NRI of a 37.5% WI in the Emily Hawes Field. PETROGEN CORP.       46   NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005  NOTE 4  OIL AND GAS PROPERTIES (CONTINUED)  Emily Hawes Field, Calhoun County, Texas (Continued)  On April 1, 2005, the Company entered into a purchase and sale agreement with Nortex Corporation, Danny L. Stephens Interests and Robert W. Kent (Nortex, et al), pursuant to which it purchased Nortex, et als 37.5% working interests (the Nortex Interests) in and to the Companys Emily Hawes Field property, Calhoun County, Texas. As consideration for the Nortex Interests, the Company made a one time cash payment to Nortex, et al of $300,000. As additional consideration for the Nortex Interests, the Company agreed to accrue and pay any and all costs associated with the Nortex Interests from January 1 to March 31, 2005.  On May 25th, 2005, the Company entered into a farm-out agreement with an individual investor, pursuant to which the Company sold a 1.5% working interest in and to the Emily Hawes Field for $150,000. In addition, the Company granted the individual investor 75,000 two year warrants with a fair market value of $18,600 (refer to Note 7) and the option to convert the working interest into shares of restricted common stock for a period of two years.  On July 21st, 2005, the Company entered into an agreement with one of the existing joint interest owners to Emily Hawes Field, Darcy Energy, LLC, (Darcy) pursuant to which Darcy and Petrogen had entered into an agreement related to a prescribed to Area of Mutual Interest (AMI) surrounding the Emily Hawes Field, whereby Darcy elected to acquire a 25% interest in the 37.5% working interest the Company purchased from Nortex et al on April 1st, 2005. As consideration, Darcy paid to the Company a one time cash payment of $111,005 for receipt of a 9.375% working interest in and to the Companys Emily Hawes Field, increasing Darcys overall working interest to 34.375%. To date Petrogen has capitalized a net total of $1,358,384 of expenditures relating to this property.  After the sales to the individual investor and Darcy, the Company now hold a 64.125% working interest and a 77.5% net revenue interest (resulting in 49.697%  net of all proceeds of hydrocarbon sales) in the Emily Hawes Field.  Baxterville Field, Mississippi  Effective November 12, 2002, Petrogen entered into an agreement with US Gas Systems, Inc. (USG) of Mississippi, whereby Petrogen agreed to recomplete four existing well-bores and further develop additional infill drilling opportunities and proven undeveloped oil and gas reserves upon six hundred acres of the USG Dunn and Swan Tracts of North Baxterville Field, Marion County, Mississippi.  Upon completion, Petrogen, as operator, will have earned the right to further develop the underlying leases and Petrogen shall farm-in to a 75% WI and 56.25% NRI on any and all oil development and a 50% WI and a 37.5% NRI on all gas production from the property The agreement provides that Petrogen can further extend the Option Period by meeting certain operational and development milestones within set periods of time, and to date, has negotiated the necessary extensions with USG to enable Petrogen the opportunity to
further evaluate its future operational presence within Baxterville Field.  To date Petrogen has capitalized a total of $409,949 of expenditures relating to this property.  S.J. Hooper #1 wellbore, Baxterville Field, Mississippi  Effective October 25, 2002, Petrogen entered into a Letter of Intent with Crown Royalties of Louisiana, Inc. (CR) of Mississippi, whereby Petrogen will acquire a 100% WI and 77% NRI in the S.J. Hooper #1.  Petrogen paid $22,500 to acquire this interest.  To date the Company has capitalized a total of $51,554 of expenditures relating to this property.  The Company has been developing operations at Baxterville Field and to date has recompleted the Moody #6 wellbore and the SJ Hooper # 1 wellbore. Initially, production was established at the SJ Hooper #1 wellbore with a production rate of 17 barrels of oil per day. The Company thereafter attempted a secondary recompletion upon the wellbore to increase production from it, however resulting in a hole in the tubing causing the wellbore to fail. The Company completed operations upon the Moody #6 wellbore and attempted to establish production, however, formation waters were too significant to overcome and operations were shut down to reduce any further costs, Currently, the Moody #6 wellbore and the SJ Hooper #1 wellbore are in a shut-in status as they are not producing any economic quantities of hydrocarbons. The Company is currently assessing opportunities related to the potential divestiture of its interests
in Baxterville Field.       47   PETROGEN CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005  NOTE 4 OIL AND GAS PROPERTIES (CONTINUED)  Enos Creek Field, Wyoming  Effective October 31, 2002, Petrogen acquired from Coronado Oil Company LLC (Coronado) a 100% WI and a 77.5% NRI in the Brown Government Lease (the Property), located in the Enos Creek gas field, Hot Springs County, Wyoming.  Petrogen has agreed to pay to Coronado 50% of its production income net of royalties to a maximum of $75,000.  In addition, the agreement provides Coronado the right to back-in to a 50% WI upon Petrogen having completed development operations upon the Property and recouping all of its expenses related to those developments and upon Coronado forfeiting its 5% overriding royalty interest.  To date Petrogen has capitalized a total of $334,487 of expenditures relating to this property.  Adams Ranch and Harrell Ranch properties, Crockett County, Texas  The Company holds certain rights to develop an average 100% working interest and 77.5% net revenue interest located on approximately 20,180 acres of developed and undeveloped acreage on the Adams Ranch and Harrell Ranch prospects in Crockett County, Texas, which consists of 6,480 net acres of shallow development rights and 13,700 net acres of deep development rights. After assessing certain risks and economic variables related to the Permian Basin Fields and the general area geologically as a potential investment for ongoing hydrocarbon development, as well as taking into consideration managements focused agenda to develop the Texas Gulf Coast properties exclusively going forward, management elected to allow the options and rights of first refusal to develop the Permian Basin Properties to lapse. As a result, at December 31, 2005, the Company has abandoned this property and expensed a total of
$109,804 of previously capitalized expenditures relating to these properties.  Matagorda Island Pipeline  On March 10, 2003,Petrogen International Limited (PIL), a company with directors in common with the Company,entered into a Lease Assignment Agreement (the Lease) with James Timothy Roche (Roche), whereby PIL leased a natural gas transmission pipeline located on Matagorda Island, Calhoun County, Texas from Roche.  The terms of the Lease stipulate that Petrogen advances the sum of $3,000 to Roche as a partial payment toward the debt owing to Roche under the terms of a Promissory Note entered into between Petrogen and Roche on May 22, 2002.  PIL thereafter entered into an assignment agreement (the Assignment) with the Company, whereby PIL assigned the Lease for consideration of certain operator fees and royalties of between $0.09 and $0.25 per MCF payable to PIL from Petrogen as Lease assignee upon the sales of any natural gas transmitted through the pipeline. In December of 2003, PIL assigned all rights, title and interest in and to the pipeline lease to the Company for no consideration and any and all terms related to payment of royalties from the Company to PIL were extinguished.  On March 30, 2005, the Company entered into a purchase agreement (the Purchase Agreement), with Roche pursuant to which it purchased the natural gas transmission pipeline located on Matagorda Island. As consideration for the pipeline the Company agreed to pay $5,000 and issue to Roche 175,000 restricted shares of common stock valued at $87,500 and agreed to pay a further consideration for the pipeline purchase whereby it will pay a combined royalty of $0.16 per Mcf transmitted through the pipeline up to a total amount of $50,000 and thereafter, pay to Roche $0.12 per MCF transmitted through the pipeline, both amounts of which will be payable upon an accrued total of natural gas transmitted through the pipeline of no more than 4 billion cubic feet of natural gas. The original acquisition costs of $92,500 have been reduced by depletion of $6,938, to date the Company has capitalized a total of
$85,562 of expenditures relating to this property.  Additionally, the Company previously entered into a Management Services Agreement (the MSA) with Tim Roche, on March 15th, 2003, whereby Roche is to provide his services to the Company as a qualified land man specializing in oil and gas property acquisition opportunities throughout the Texas Gulf Coast region. As consideration to Roche under the Management Services Agreement, the Company has provided Roche with a stock option agreement to purchase 25,000 shares of common stock in the first year at a price of $0.50 per share and 25,000 shares of common stock in the subsequent year at a price 20% below the average trading price at a rate of 3,000 shares in the first month and 2,000 shares in the next 11 months.  The MSA renews automatically on year by year basis if not specifically terminated in accordance with the provisions outlined in the MSA.  To date, the MSA remains in effect.       48   PETROGEN CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005  NOTE 4  OIL AND GAS PROPERTIES (CONTINUED)  Tiller Ranch  On June 3, 2005, pursuant to an assignment of lease agreement, the Company acquired a 100% working interest and 70% net revenue interest in and to the Tiller Ranch Lease consisting of 822 acres located within the Tom Graham Field, Jim Wells County, Texas.  The Company has incurred $186,004 of capitalized expenditures and paid $225,000 for the lease acquisition costs.  As of December 31, 2005, the Company sold a 24% WI (16.80% NRI) for proceeds of $660,000. These net proceeds were used to offset the costs of drilling and developing the property in the last quarter of 2005. Three investors who collectively purchased working interests totaling 9% for $180,000 have an option to convert their WI into common stock of the Company at prices ranging from $0.25 - $0.45 commencing January 1, 2006 for a period of six months.  The conversion price was less than the market price of the Companys stock at the date
these agreements were entered into, thus giving rise to an intrinsic value conversion feature.The Company recognized the intrinsic value of the beneficial conversion feature of $245,600 asfinancing fees.  After the sales to the individual investors, the Company now holds a 76.0% working interest and a 53.2% net revenue interest (resulting in 49.697% net of all sales) in the Tiller Ranch Lease.  NOTE 5  SUBSCRIPTION PROCEEDS  Under the terms and conditions of certain 2004 and 2005 private placement subscription agreements, proceeds from these financings constitute an interest free loan until the securities are issued and delivered to the investors.  As at December 31, 2005, the Company has four offerings of units outstanding.  The first offering is for 283,333 units at $0.30 per unit, each unit consisting of one common share and 1⁄2 share purchase warrant; each full warrant is exercisable into one common share of the Company at an exercise price of $0.60 for a period of one year. The second offering is for 1,900,000 units at $0.25 per unit, each unit consisting of one common share only.. The third offering is for 200,000 units @ $0.25 per unit, each unit consisting of one common share and 1⁄2 share purchase warrant, each full warrant is exercisable into one common share of the Company at an exercise price of $0.50 for a
period of one year. The fourth offering is for 416,080 units at $0.50 per unit, each unit consisting of one common share and one share purchase warrant; each warrant is exercisable into one common share at an exercise price of $1.00 for one year.  The Company received $250,000 towards a future private placement, the terms of which have not yet been finalized.  The Company also received $141,390 for the exercise of 314,200 outstanding warrants at $0.45.  See Note 7 and 11.  NOTE 6  RELATED PARTY TRANSACTIONS  During the year ended December 31, 2005, management fees of $274,500 (2004: $132,000) were incurred to one director and officer and one former director and officer of the Company of which $67,500 (2004: $42,000) has been capitalized as oil and gas development costs.  During the year ended December 31, 2005 additional management bonuses of $45,000 and 750,000 shares with a fair value of $322,500 (2004: $315,000) were incurred to these individuals.  In October 2005, one of these directors and officers left the Company and as at December 31, 2005 the Company has accrued severance of $121,500 to this director. The Company is committed to pay the remaining director $17,250 in management fees per month.  At December 31, 2005, these directors and officers were owed a total of $138,195. (December 2004: $16,679 was owed by these directors and officers for advances).  During the year ended December 31, 2005, management fees of $72,000 (2004: $15,000) were incurred to a director of the Company.  During the year ended December 31, 2005 additional management bonuses of $NIL (2004: $10,000) were incurred to this director.  During the year, this director exercised 172,667 stock options and accepted a debt settlement of 35,000 common shares for net proceeds in the amount of $126,500, which amount was utilized to off-set the debt due and owing to this director. At December 31, 2005, this director was owed $4,000 (December 2004: $67,500) for unpaid management fees. The Company is committed to pay this director $5,000 in management fees per month.  During the year ended December 31, 2005, management fees of $120,000 (2004: $NIL) were incurred to an officer of the Company. During the year ended December 31, 2005, additional management bonuses of $15,000 and 200,000 shares with a fair value of $78,000 (2004: $NIL) were incurred to this officer.  At December 31, 2005, this officer is owed $65,000 (December 2004: $40,787) for management fees due.  The Company is committed to pay this officer $10,000 in management fees per month. During the year ended December 31, 2005, management fees of $36,000 (2004: $NIL) were incurred to an officer of the Company. During the year ended December 31, 2005, additional bonuses of $7,500 and 25,000 shares with a fair value of $8,750 (2004: $NIL) were incurred to this officer of the Company.  The Company is committed to pay this officer $4,500 in management fees per month.       49   PETROGEN CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005  NOTE 6  RELATED PARTY TRANSACTIONS (CONTINUED)  At December 31, 2005, $62,949 (December 2004: $73,626) is owing to PIL for work on the Baxterville Field, Enos Creek Field and S.J. Hooper #1.  Also during the nine months ended December 31, 2005 management fees of $10,000 were paid to a former director.  During the year ended December 31, 2005, consulting fees of $30,000 (2004: $30,000) were incurred to a relative of a director of the Company. During the year, this consultant retired a note receivable owing to the Company of $22,500 and exercised 30,000 stock options for net proceeds in the amount of $7,500, which both amounts were utilized to off-set the consulting fees due and owing to this consultant. The Company is committed to pay this director $2,500 in consulting fees per month.  All related party transactions are in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.  Other related party transactions are disclosed in Notes 3, 4 and 6.  NOTE 7  CAPITAL STOCK  Common Shares  On January 30, 2004, 50,000 shares were returned to treasury and cancelled.  During the year ended December 31, 2004, the Company issued an aggregate of 6,339,600 shares of common stock for options exercised at prices ranging from $0.20 to $0.50 per share. The proceeds received were $1,715,400 of which $239,500 was received in cash, $632,500 was notes receivable (of which $550,000 was repaid and $50,000 was settled for debt) and $843,400 was used to reduce existing debt.  On August 18, 2004 the Company issued 2,934,690 shares to retire the convertible debenture in the amount of $733,673.  On September 21, 2004 the Company issued 7,464,000 units at a price of $0.25 per unit for cash proceeds of $1,866,000.  Each unit consists of one common share, one 1⁄2 warrant, whereby each full warrant can be converted into one common share at a price of $0.50 exercisable to January 31, 2005, and a piggy-back warrant with a conversion price of $1.00 that can be exercised to January 31, 2006, subsequent to the exercise of the $0.50 half warrants.  In addition, 100,000 units were issued as a finders fee.  Management estimated that the fair value of all the share purchase warrants associated with the private placement was $186,600. Refer to Note 8.  During the year ended December 31, 2005 the Company issued a total of 5,651,919 common shares valued at $1,987,952 as follows: 671,400 common shares for finders fees on prior share issuances, 175,000 common shares for the purchase of the Matagorda Island Pipeline valued at $92,500 as detailed in Note 4; 235,030 common shares for $82,025 of debt conversion for work performed on the Emily Hawes property, 501,366 common shares for consulting services valued at $238,178; and 180,000 common shares for subscription proceeds of $45,000 received in 2004. Under the Companys 2003, 2004, and 2005 stock option plan, 2,306,123 shares were issued for the exercise of stock options for net proceeds of $868,949, of which $346,949 was utilized to off-set debt owing to a director and five vendors.  In addition, 1,583,000 common shares valued at $661,300 were issued as management bonuses.  Warrants  A summary of the Companys warrants at December 31, 2005 and the changes for 2005 and 2004 are as follows:  Weighted
        
        WeightedAverage
        
        AverageWarrants
        
        Exercise
        
        RemainingOutstanding
        
        Price
        
        LifeBalance, December 31, 2003
        
        119,759
        
        $0.50Issued
        
        3,642,000
        
        0.50Exercised / Cancelled
        
        -
        
        -Expired
        
        (119,759)
        
        -Balance, December 31, 2004
        
        3,642,000
        
        0.50
        
        0.72 yearsIssued
        
        165,000
        
        0.25Exercised / Cancelled / Expired
        
        -
        
        -Balance December 31, 2005
        
        3,807,000
        
        $0.45
        
        0.27 years        50   PETROGEN CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005  NOTE 7  CAPITAL STOCK (CONTINUED)  Of the above warrants, 75,000 two year warrants are exercisable at $0.25 per share until June 1, 2006 or at $0.30 per share until June 1, 2007.  The remaining 3,732,000 warrants and 7,464,000 piggyback warrants were set to expire on September 30, 2005 but under a new agreement with all the investors that cancelled the piggyback warrants, the 3,732,000 original warrants have been extended to March 31, 2006 with the exercise price re-priced from $0.50 to $0.45.  The fair value of the piggyback warrants that were cancelled was calculated to be $904,300 at the date of issuance by applying the fair value method using the Black-Scholes option pricing model using an expected life of 0.33 years, a risk-free interest rate of 3% and an expected volatility of 111%.  The incremental increase in the fair value resulting from the re-pricing of the 3,732,000 options was $353,100 by applying the fair value method using the Black-Scholes option pricing model using an expected life ranging from 0.03 to 0.33 years,a risk-free interest rate of 3% and an expected volatility of 111%.  As the fair value of the cancelled piggyback warrants exceeded the incremental increase in the fair value of the 3,732,000 warrants, no additional expense has been recorded.  Obligation to issue shares  The Company entered into a consulting agreement dated February 1, 2005 for a term of one year under which the Company agreed to issue 432,000 common shares over time and pay $6,500 per month.  On October 1, 2005 this agreement was terminated, and as of December 31, 2005 75,000 shares with a fair value of $59,250 were owing and were subsequently issued.  NOTE 8  STOCK OPTION PLAN  The Board of Directors of the Company has ratified, approved and confirmed the adoption of a series of amendments to its incentive stock option plan (2003 Stock Option Plan), to provide for the issuance of stock options to employees, consultants and directors to purchase a total number of shares of common stock of the Company not to exceed 10,000,000 shares.  On July 22, 2004, the Board of Directors of the Company ratified, approved and confirmed the adoption of a 2004 Stock Option Plan providing for the granting of up to 6,000,000 shares of common stock.  The Company filed an S-8 Registration Statement for 5,000,000 shares under the 2004 Plan during  July 2004 and has granted 3,985,000 options to officers, directors and consultants.  On November 1, 2003, the Company granted a total of 3,200,000 stock options at exercise prices of $0.20 to $0.25 per common share.  Of these options, 1,500,000 options were granted to non-employees.  These non-employee stock options all vested immediately.  The remaining 1,700,000 stock options were granted to employees, including officers and directors, of the Company.  Of these employee stock options, 500,000 vested immediately, and 1,200,000 were subject to vesting on a straight-line basis over 60 months, of which 500,000 have vested at December 31, 2005 (December 31, 2004: 260,000).  In accordance with the provisions of SFAS 123, with respect to stock options granted to employees, pro-forma disclosures have been provided in Note 2 reflecting the results of applying the fair value method to these options. The application of the fair value method as described below resulted in pro-forma stock based compensation totaling $382,600 of which $130,510 was recorded to December 31, 2003, $32,680 was recorded to December 31, 2004, $56,020 was recorded to December 31,2005 and the remaining $163,390 will be disclosed upon vesting of the underlying stock options.  The Company estimated the fair value of the November 1, 2003 stock options by applying the fair value method using the Black-Scholes option pricing model using expected lives ranging from three to ten years, a risk-free interest rate of 3% and an expected volatility of 174%.  During the year ended December 31, 2004 the Company granted a total of 8,985,000 stock options at exercise prices ranging from $0.25 to $1.00 per common share under the 2003 Stock Option Plan (5,000,000) and the 2004 Stock Option Plan (3,985,000).  Of these options, 5,810,000 options were granted to non-employees.  These non-employee stock options vested immediately.  The remaining 3,175,000 stock options were granted to employees, including officers and directors, of the Company.  These employee stock options all vested immediately.  The Company estimated the fair value of stock options by applying the fair value method using the Black-Scholes option pricing model using expected lives ranging from three to ten years, a risk-free interest rate of 3% and expected volatilities ranging from 172% to 205%.       51   PETROGEN CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005  NOTE 8  STOCK OPTION PLAN (CONTINUED)  Of the options granted during the year ended December 31, 2004, certain of the employee options were granted with exercise prices less than the market value of the Companys common stock resulting in an intrinsic value expense in the period of $163,600.  In addition, with respect to the employee options disclosure has been provided in Note 2 reflecting the results of applying the fair value method to share options resulting in a further pro-forma stock based compensation of $981,000.  With respect to the options granted to non-employees, the Company recorded a stock based compensation expense of  $1,883,050.  During the year ended December 31, 2005 the Company granted a total of 300,000 stock options to a director and an officer of the Company at exercise prices ranging from $0.50 to $0.75 per common share and 560,000 stock options to a consultant at exercise prices ranging from $0.25 to $0.50 per common share under the 2004 Stock Option Plan (3,985,000). These stock options vested immediately.  The Company estimated the fair value of stock options by applying the fair value method using the Black-Scholes option pricing model using an expected life of three to ten years, a risk-free interest rate of 3% and an expected volatility of 126% resulting in a stock based compensation expense of  $259,900.  Subsequent to year end the Company adopted a new 2006 Performance Stock Incentive Plan. Refer to Note 11.       52   PETROGEN CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005  NOTE 8  STOCK OPTION PLAN (CONTINUED) Number of Options
        Date of Issue
        Exercise Price
        Expiry Date
        Weighted Average Exercise Price
        Weighted Average Remaining Contractual LifeBalance, December 31, 2003
        5,631,000
        04-Mar-04
        0.25
        04-Mar-07
        $     0.32
        4.35 yearsGranted during the year
        1,750,000
        04-Mar-04
        0.25
        04-Mar-07765,000
        04-Mar-04
        0.25
        04-Mar-141,650,000
        04-Mar-04
        0.50
        04-Mar-07460,000
        04-Mar-04
        0.50
        04-Mar-14375,000
        04-Mar-04
        0.75
        04-Mar-07700,000
        22-Jul-04
        0.30
        22-Jul-142,250,000
        22-Jul-04
        0.30
        22-Jul-0760,000
        22-Jul-04
        0.30
        03-Mar-07450,000
        22-Jul-04
        0.75
        22-Jul-14325,000
        22-Jul-04
        1.00
        22-Jul-14200,000
        01-Oct-04
        0.50
        30-Sep-06Exercised during the year
        (530,000)
        
        0.50
        12-Feb-06(470,000)
        
        0.25
        10-Sep-06(100,000)
        
        0.50
        10-Sep-06(60,000)
        
        0.25
        10-Sep-06(1,600,000)
        
        0.20
        01-Nov-08(400,000)
        
        0.25
        01-Nov-08(40,000)
        
        0.25
        01-Nov-13(495,000)
        
        0.50
        04-Mar-14(1,584,600)
        
        0.75
        04-Mar-07(60,000)
        
        0.30
        03-Mar-07(1,000,000)
        
        0.30
        22-Jul-07Balance, December 31, 2004
        8,276,400
        
        
        
        $     0.45
        4.62 yearsGranted during the year
        100,000
        02-May-05
        0.50
        02-May-08100,000
        02-May-05
        0.75
        02-May-08100,000
        01-Jul-05
        0.50
        01-Jul-08150,000
        01-Jul-05
        0.25
        01-Jul-15350,000
        01-Jul-05
        0.50
        01-Jul-1560,000
        01-Jul-05
        0.50
        01-Jul-08Exercised during the year
        (1,250,000)
        
        0.30
        22-Jul-07(90,000)
        
        0.75
        10-Sep-06(37,500)
        
        0.50
        04-Mar-07(119,840)
        
        0.50
        04-Mar-07(200,000)
        
        0.50
        22-Jul-07(20,000)
        
        0.25
        10-Sep-06(18,000)
        
        0.50
        12-Feb-06(41,116)
        
        0.25
        10-Sep-06(50,000)
        
        0.50
        10-Sep-06(14,667)
        
        0.75
        10-Sep-06(30,000)
        
        0.25
        04-May-14(150,000)
        
        0.25
        01-Jul-15(125,000)
        
        0.50
        01-Jul-15(100,000)
        
        0.50
        01-Jul-08(60,000)
        
        0.50
        01-Jul-08Cancelled during the year
        (100,000)
        
        0.30
        22-Jul-14(100,000)
        
        0.75
        22-Jul-14(100,000)
        
        1.00
        22-Jul-14(1,000,000)
        
        0.50
        04-Mar-07(250,000)
        
        0.75
        22-Jul-14(125,000)
        
        1.00
        22-Jul-14(25,000)
        
        0.25
        04-Mar-07Options granted, December 31, 2005
        5,130,277
        
        
        
        $     0.44
        4.47 yearsOptions not yet vested
        (350,000)
        
        0.25
        01-Nov-08(350,000)
        
        0.25
        01-Nov-13Options exercisable, December 31, 2005
        4,430,277
        
        
        
        $     0.47
        4.33 years        53   PETROGEN CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005  NOTE 9  CONTINGENCIES  On September 15, 2004, a lawsuit was filed by Petroguard Company, Inc. ("Petroguard") against Petrogen and a director of Petrogen, Inc. The claims made by Petroguard Company, Inc. in its complaint allege conversion, unjust enrichment, fraud, and negligent representation regarding the geologic and geophysical interpretations of a three-dimensional seismic survey of approximately 135 square miles constituting Esperitu-Santo Bay and most of Matagorda Island, and that Petrogen wrongfully obtained the seismic survey.  Petroguard is claiming injunctive relief including a cease and desist order against Petrogen.  Petrogen has responded in its answer to the complaint denying receipt of the seismic data as alleged and counterclaiming that Petrogen is in possession of some related data that is not three-dimensional, which it properly acquired from a third party. Petrogen intends to aggressively defend all such claims
and to pursue all such legal actions remedies against Petroguard.  On October 20, 2004 the Company commenced an action against X-Clearing Corp. (X-Clearing), the Companys previous transfer agent, in the District Court for the City and County of Denver, State of Colorado for return of the Companys stock record documents.  X-Clearing has filed an answer and counterclaim asserting that the Company is liable to X-Clearing for certain legal expenses incurred by X-Clearing Corp. in prosecuting an action against the Depository Trust Company, which legal expenses are undeterminable.  The Company presently intends to aggressively pursue all such claims and to pursue all legal actions and remedies against X-Clearing.  On or about April 6, 2005, Petrogen filed a lawsuit against Davis Gulf Coast (Davis) in the 55th Judicial District Court of Harris County, Texas, Civil Action No. 2004-65553. The claims made by Petrogen in its complaint against David generally allege breach of contract. Previously, Petrogen and Davis had entered into an agreement pursuant to which Davis agreed to provide support and services for the drilling program on Matagorda Island. The complaint alleges that David breached its agreement by failing to perform services in a timely and proper manner. Davis has filed an answer and counterclaim to the complaint alleging that Petrogen failed to compensate it in the amount of $177,234.53. On August 12, 2005, Petrogen and Davis entered into a settlement agreement. The parties have at all times denied all allegations asserted by each party, however, the parties desire that all matters in
dispute between them be terminated and resolved without further legal proceedings.  The outcome and the loss, if any, from these legal proceedings is presently not determinable and no provision for loss has been provided in the financial statements.  The Company operates in the field of oil and gas exploration and is therefore subject to state and federal environmental regulations.  Due to the diversity of these regulations compliance at all times cannot be assured.        54   PETROGEN CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005  NOTE 10  INCOME TAXES  December 31, 2005
        
        December 31, 2004Net Operating Loss
        $
        
        $Net loss per financial statements
        (3,065,271)
        
        (4,003,722)Add:Stock based compensation
        259,900
        
        2,046,650Non-deductible expenses
        4,157
        
        5,146Net operating loss for the year
        (2,801,214)
        
        (1,951,926)Net Operating Losses CarryforwardPrior year cumulative total
        3,520,230
        
        1,568,304Current year net operating loss
        2,801,214
        
        1,951,926Net operating losses carryforward cumulative
        6,321,444
        
        3,520,230Effective Tax RateFederal statutory tax rate
        35.00%
        
        34.00%State taxes
        0.00%
        
        0.00%35.00%
        
        34.00%Deferred Tax AssetNet Operating Loss
        2,212,505
        
        1,196,878Valuation allowance
        (2,212,505)
        
        (1,196,878)Net tax asset
        0
        
        0        55   PETROGEN CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005  NOTE 11  SUBSEQUENT EVENTS  On March 6, 2006 the board of directors approved the adoption of a performance stock incentive plan  2006 (the PSIP 2006) with an effective date of March 1, 2006 (the Effective Date).  The terms of the PSIP 2006 provide that a total of 30,000,000 shares will be issued in escrow and subject to the following terms:  (a)
        a total of 3,500,000 escrowed performance shares can be purchased from escrow by a participant at a price of $0.50 per share commencing one year from the Effective Date for up to five years;  (b)
        a total of 4,500,000 escrowed performance shares can be purchased from escrow by a participant at a price of $1.00 per share on or before the first thee years after the Effective Date, if the Companys assets increase by 50%, the market share price of the Companys common stock achieves a minimum of $1.25, and the Company financial statements reflect a minimum of $3,000,000 profit before taxes, depletion, amortization and stock based compensation charges;  (c)
        a total of 6,.000,000 escrowed performance shares can be purchased from escrow by a participant at a price of $1.25 per share on or before the first five years after the Effective Date, if the Companys assets increase by 100%, the market share price of the Companys common stock achieves a minimum of $2.00, and the Company financial statements reflect a minimum of $6,000,000 profit before taxes, depletion, amortization and stock based compensation charges;  (d)
        a total of 7,.500,000 escrowed performance shares can be purchased from escrow by a participant at a price of $1.50 per share on or before the first seven years after the Effective Date, if the Companys assets increase by 200%, the market share price of the Companys common stock achieves a minimum of $3.00, and the Company financial statements reflect a minimum of $9,000,000 profit before taxes, depletion, amortization and stock based compensation charges; and  (e)
        a total of 8,500,000 escrowed performance shares can be purchased from escrow by a participant at a price of $2.00 per share on or before the first seven years after the Effective Date, if the Companys assets increase by 400%, the market share price of the Companys common stock achieves a minimum of $4.00, and the Company financial statements reflect a minimum of $15,000,000 profit before taxes, depletion, amortization and stock based compensation charges.  Subsequent to December 31, 2005, the Company issued 34,803,307 common shares as follows: 30,000,000 escrow common shares at par value of $.001 under the PSIP 2006; 2,799,413 common shares for subscriptions received in 2005 for proceeds of $818,040; 700,000 common shares for the exercise of stock options for proceeds of $210,000; 447,533 common shares for the exercise of warrants for proceeds of $201,390 of which $141,390 was received by the Company in 2005; 213,861 commons shares for the settlement of debt of $117,624; 567,500 common shares to certain officers and directors for bonuses totalling $311,750; and 75,000 common shares valued at $59,250 under a termination agreement.  NOTE 12  RESTATEMENT OF COMPARATIVE FIGURES  In fiscal year 2004, the Company reclassified $105,716 in operator fees to general and administration expenses, the reclassification  did not affect assets, liabilities or stockholders equity.  In addition, the Statement of Stockholders Equity has been restated in 2003 to reflect the reverse merger recapitalization of the past share activity of Petrogen to reflect the equivalent number of shares received in the acquisition. Costs associated with the reverse merger totalling $60,000 and the fair value of the share purchase warrants issued to acquire Petrogen of $357,800 were previously charged directly to stockholders deficit in 2003 but have now been reflected as a direct expense to operations as  non-recurring costs of the share exchange. As a result of these restatements certain reclassifications were made within the Statement of Stockholders Equity.  These restatements did not result in any change to reported results of operations for 2005 and 2004 or the carrying value of assets and liabilities and total Stockholders Equity as at December 31, 2005 or 2004.        56   ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.  Our principal independent accountant from March 2001 to the current date is Dale Matheson Carr-Hilton LaBonte Chartered Accountants (DMCL). DMCLs address is 1500-1140 West Pender Street, Vancouver, British Columbia, Canada V6E 4G1.  ITEM 8A. CONTROLS AND PROCEDURES  An evaluation was conducted under the supervision and with the participation of our management, including Sacha Spindler, our Chief Executive Officer (CEO), and Brian Fiddler, our Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2005. Based on that evaluation, Messrs. Spindler and Fiddler concluded that our disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Such officers also confirm that there was no change in our internal control over financial reporting during the year ended December 31, 2005 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. ITEM 8B. OTHER INFORMATION Not applicable.  PART III  ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT  IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS  All of our directors hold office until the next annual general meeting of the shareholders or until their successors are elected and qualified. Our officers are appointed by our Board of Directors and hold office until their earlier death, retirement, resignation or removal.  As of the date of this Annual Report, our directors and executive officers are as follows:  Name
        Age
        PositionS. Sam Sen
        46
        PresidentSacha H. Spindler
        43
        Chief Executive Officer and Chairman/DirectorBrian Fiddler
        44
        Chief Financial OfficerJustin Perryman
        37
        DirectorTimothy G. Russell
        65
        Director  Biographies of the Executive Officers/Directors  The following is a brief account of the education and business experience of each director, executive officer and key employee during at least the past five years, indicating each person's principal occupation during the period, and the name and principal business of the organization by which he or she was employed.  SACHA H. SPINDLER is our Chairman of the Board, a Director and the Chief Executive Officer. As a successful business entrepreneur and venture capitalist, Mr. Spindler brings Petrogen over 27 years of experience in all aspects of business management, corporate development, finance and venture capital markets. Prior to founding Petrogen, Mr. Spindler was instrumental in the formation and subsequent growth of several start-up companies in the high technology, resource and oil and gas industries. Among his demonstrated strengths, Mr. Spindler possesses in-depth knowledge of the equity markets and investment industry, as well as a strong fundamental background in the responsibilities of corporate development and operations. During the past 8 years, Mr. Spindler has successfully applied his knowledge and expertise in the areas of finance, structure, negotiations and business development to companies in the oil
and gas industry.       57   S. SAM SEN has been our President since February 1st, 2005. Mr. Sen brings Petrogen over twenty-four years of senior business and technical experience in the energy industry. Prior to joining Petrogen, Mr. Sen served in the capacities of Project Manager, Worldwide Business Development and New Venture Development with Anadarko Petroleum. Prior to Anadarko, Mr. Sen worked with leading multi-national oil companies such as Unocal, Suncor and Gulf Canada Resources, where he held positions ranging from project geologist to business development manager. Throughout his accomplished career, Mr. Sen has established a successful track record in the commercial analysis, negotiation, support, and capture of value-adding upstream, midstream, downstream, and acquisition and divestiture projects ranging in size from $10 million to over $1 billion. Mr. Sen is recognized for his strong technical background and was the lead
geologist on exploration teams responsible for hydrocarbon discoveries of up to 100 MMBOE (gross) reserves. Mr. Sen received his MBA from the Warwick Business School/Wolsey Hall, Oxford U.K., as well as a BSc (Honors) in Geology from Carleton University, Canada. He holds memberships in industry associations including the AAPG, AIPN and APEGGA, and is a professional geologist.  BRIAN FIDDLER is our Chief Financial Officer. Mr. Fiddler is a resident professional who brings Petrogen over 21 years of corporate accounting and operations experience. Mr. Fiddler is widely recognized for his specialized skills in the areas of finance, auditing, reporting, governance and treasury responsibilities for public companies. Mr. Fiddler also brings extensive experience working specifically with resource-based companies both as a consultant and as an Officer. Mr. Fiddler's expertise is specifically suited to serve the needs of Petrogen and he will undoubtedly play an instrumental role in Petrogen's ongoing operations as the Company continues to grow as a strong emerging natural gas development and production Company.  JUSTIN PERRYMAN is one of our directors. Mr. Perryman brings the Petrogen team over 12 years of legal, finance, corporate and trade business experience. Mr. Perryman is an accomplished attorney at law possessing specialized skills in the area of general corporate and business law with extensive experience working for publicly listed companies as well as oil & gas companies. In addition to his demonstrated skill and practice as an attorney at law, Mr. Perryman also brings Petrogen a compliment of extensive entrepreneurial knowledge and expertise in the fields of international trade, corporate finance and investment banking. Mr. Perryman received his Juris Doctor Diploma and Masters in International Business Degree from the Washington University School of Law, specializing in international and domestic banking and corporate and securities law. Mr. Perryman is also a captain in the United States Army, Texas Army National Guard Office of the Judge Advocate General, 36th Infantry Division.  TIMOTHY G. RUSSELL is one of our directors. Mr. Russell is a key contributor to Petrogen bringing a wealth of knowledge, business acumen, planning and technical skills gained through 37 years experience in the oil and gas industry. This includes a twenty-five year tenure with industry leader Amoco Production Company, where Mr. Russell was instrumental in the development of exploration operations throughout the Middle East, serving as Exploration Manager and Division Geologist. During his tenure with Amoco, Mr. Russell served as a company representative to local petroleum ministries in several countries and directed numerous exploration and development initiatives that resulted in discoveries exceeding 100 MMBOE. Mr. Russell earned his BA, Geology, at Vanderbilt University and received his Masters Degree in Geology, from the University of Tennessee.  Family Relationships  There are no family relationships among our directors or officers.  Involvement in Certain Legal Proceedings  During the past five years, none of our directors, executive officers or persons that may be deemed promoters is or have been involved in any legal proceeding concerning (i) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (ii) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (iii) being subject to any order, judgment or decree, not subsequently reversed, suspended, or vacated, of any court of competent jurisdiction permanently or temporarily enjoining, barring, suspending or otherwise limiting involvement in any type of business, securities or banking activity; or (iv) being found by a court, the Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated a federal or state securities or commodities law (and the judgment has not been reversed, suspended or vacated).       58   Audit Committee  As of the date of this Annual Report, we have not appointed members to an audit committee and, therefore, the respective role of an audit committee has been conducted by our Board of Directors. When established, the audit committee's primary function will be to provide advice with respect to our financial matters and to assist our Board of Directors in fulfilling its oversight responsibilities regarding finance, accounting, tax and legal compliance. The audit committee's primary duties and responsibilities will be to: (i) serve as an independent and objective party to monitor our financial reporting process and internal control system; (ii) review and appraise the audit efforts of our independent accountants; (iii) evaluate our quarterly financial performance as well as our compliance with laws and regulations; (iv) oversee management's establishment and enforcement of financial policies and business
practices; and (v) provide an open avenue of communication among the independent accountants, management and our Board of Directors.  The Board of Directors has considered whether the regulatory provision of non-audit services is compatible with maintaining the principal independent accountant's independence.  Audit Committee Financial Expert  As of the date of this Annual Report, our Board of Directors has determined that we do not have an audit committee financial expert nor do we have an audit committee.  Compliance with Section 16(a) of the Exchange Act  Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and officers, and the persons who beneficially own more than ten percent of our common stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Copies of all filed reports are required to be furnished to us pursuant to Rule 16a-3 promulgated under the Exchange Act. Based solely on the reports received by us and on the representations of the reporting persons, we believe that these persons have complied with all applicable filing requirements during the fiscal year ended December 31, 2005.  Adoption of Code of Ethics  On May 23, 2005, we adopted a code of business conduct and ethics policy (the Code of Ethics). The adoption of the Code of Ethics allows us to: (i) describe our core values and beliefs; (ii) provide the foundation for all business conduct; and (iii) provide guidance to each of our directors and officers to assist them in recognizing and dealing with ethical issues and risks, providing mechanisms to report unethical conduct and helping foster a culture of honesty and accountability.  Insider Trading Policy  On May 23, 2005, we adopted an insider trading policy ( the Insider Trading Policy). The establishment of the Insider Trading Policy allows us to assist our officers and directors to ensure compliance with federal securities laws which prohibit trading in the securities of a company on the basis of inside information. Our insiders and officers receive, as part of their compensation packages, shares of our restricted common stock for resale. Pursuant to the terms and provisions of the Insider Trading Policy, there are four blackout periods during which our directors and officers are prohibited from trading in our securities, these blackout periods begin on March 31st, June 30th, September 30th and December 31st of each fiscal year and end when two full trading days have passed on the NASDAQ Over-the-Counter Bulletin Board Stock Market after
we announce our results for the preceding fiscal period through quarterly and annual filings with the Securities and Exchange Commission.  ITEM 10. EXECUTIVE COMPENSATION  COMPENSATION OF OFFICERS AND DIRECTORS  During fiscal years ended December 31, 2005, 2004, and 2003, certain of our officers and directors were compensated for their roles as executive officers. Messrs. Spindler, Kerrigan and Sen derive remuneration from us for consulting services rendered. See Summary Compensation Table below. Our officers and directors may be reimbursed for any out-of-pocket expenses incurred by them on our behalf. We presently have no pension, health, annuity, insurance, profit sharing or similar benefit plans.  Executive compensation is subject to change concurrent with our requirements. Currently, Mr. Spindler receives compensation in the amount of $17,250 per month.       59   Contractual Arrangement with Mr. Spindler  Mr. Spindler, our Chief Executive Officer and one of our directors, currently invoices us $17,250 per month, plus expenses. During fiscal year ended December 31, 2005, $207,000 was accrued for such monthly fees for services rendered by Mr. Spindler to us and to Petrogen, which commenced September 2001. During fiscal year ended December 31, 2005, a bonus of $245,000 was incurred to Mr. Spindler. During fiscal year ended December 31, 2005, we paid approximately $252,430 to Mr. Spindler for consulting fees and/or reimbursement of expenses. During fiscal year ended December 31, 2005, we settled an aggregate amount of $215,000 due and owing Mr. Spindler by the issuance of 500,000 shares of common stock at $.43 per share. Therefore, at December 31, 2005, Mr. Spindler owed approximately $4,529.  Contractual Arrangement with Mr. Kerrigan  Mr. Kerrigan, our previous Co-President, invoiced us $7,500 per month, plus expenses. During fiscal year ended December 31, 2005, $67,500 was accrued for such monthly fees for services rendered by Mr. Kerrigan to us and to Petrogen, which commenced September 2001. During fiscal year ended December 31, 2005, a bonus of $122,500 was incurred to Mr. Kerrigan. During fiscal year ended December 31, 2005, we paid $62,500 to Mr. Kerrigan for consulting fees and/or reimbursement of expenses. During fiscal year 2005, we have agreed to pay Mr. Kerrigan an aggregate amount of $121,500 as severance payment. During fiscal year ended December 31, 2005, we settled an aggregate amount of $107,500 due and owing Mr. Kerrigan by the issuance of 250,000 shares of common stock at $0..43 per share. Therefore, at December 31, 2005, Mr. Kerrigan was owed approximately $142,724. Effective October 7, 2005, Mr. Kerrigan tendered his
resignation as a Co-President and as a director.  Contractual Arrangement with Mr. Sen  Mr. Sen, our President, currently invoices us for management services rendered, plus expenses. During fiscal year ended December 31, 2005, $120,000 was accrued for such fees for services rendered by Mr. Sen to us. During fiscal year ended December 31, 2005, a bonus of $93,000 was incurred to Mr. Sen. During fiscal year ended December 31, 2005, we paid approximately $110,786 to Mr. Sen for management fees and/or reimbursement of expenses. During fiscal year ended December 31, 2005, we settled an aggregate amount of $78,000 due and owing Mr. Sen by the issuance of 100,000 shares of common stock at $.35 per share and 100,000 shares of common stock at $0.43 . Therefore, at December 31, 2005, Mr. Sen is owed approximately $65,000.  Contractual Arrangement with Mr. Fiddler  Mr. Fiddler, our Chief Financial Officer, currently invoices us for management services rendered, plus expenses. During fiscal year ended December 31, 2005, $36,000 was accrued for such fees for services rendered by Mr. Fiddler to us. During fiscal year ended December 31, 2005, a bonus of $16,250 was incurred to Mr. Fiddler. During fiscal year ended December 31, 2005, we paid approximately $52,500 to Mr. Fiddler for management fees and/or reimbursement of expenses. Therefore, at December 31, 2005, Mr. Fiddler is owed approximately $-0-.  CONTRACTUAL ARRANGEMENT WITH MR. RUSSELL  Mr. Russell, one of our directors, derives remuneration from us as compensation for management services rendered. During fiscal year ended December 31, 2005, $72,000 in management fees were incurred by us relating to Mr. Russell for management services rendered. During fiscal year ended December 31, 2005, we paid an aggregate of $11,000 to Mr. Russell for such management services. During fiscal year ended December 31, 2005, Mr. Russell exercised an aggregate 172,667 Stock Options and accepted a debt settlement of 35,000 shares of common stock for net proceeds in the amount of $126,500, which amount was utilized by us to offset the aggregate amount of management fees due and owing Mr. Russell. Thus, at December 31, 2005, we owed Mr. Russell an aggregate of $4,000 for accrued management fees.       60   SUMMARY COMPENSATION TABLE  SUMMARY COMPENSATION TABLEAnnual Compensation
        Long Term CompensationAwards
        PayoutsName & Principal Position
        Year
        Salary
        Bonus
        Other
        RSA
        Options
        LTIP
        OtherSacha SpindlerCEO
        200520042003
        -0--0--0-
        $245,000245,000-0-
        $207,000189,000139,645
        -0--0--0-
        -0-800,0001,250,000
        -0--0--0-
        -0--0--0-William KerriganPrior Co-Pres
        200520042003
        -0--0--0-
        $122,50070,000-0-
        $67,50086,000$90,500
        $121,500-0--0-
        -0-800,000675,000
        -0--0--0-
        -0--0--0-Sam SenPresident
        2005
        -0-
        $93,000
        $120,000
        -0-
        -0-
        -0-
        -0-Brian FiddlerCFO
        2005
        -0-
        $16,250
        $36,000
        -0-
        200,000
        -0-
        -0-T. RussellDirector
        200520042003
        -0--0--0-
        $ -0-10,000-0-
        $72,00060,0007,500
        -0--0--0-
        -0--0--0-
        -0--0--0-
        -0--0--0-  STOCK OPTIONS/SAR GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2005  As of the date of this Annual Report, there are an aggregate of 5,130,277 Stock Options issued and outstanding. During fiscal year ended December 31, 2005, an aggregate of 860,000 Stock Options were granted. Stock Options granted to our executive officers and directors during fiscal year ended December 31, 2005 are as reflected below in the "Options/SAR Grants Table. As of the date of this Annual Report, certain Stock Options have been exercised. See Aggregate Options/SAR Exercises below.  Stock Option/SAR Grants in Last Fiscal Year  Name
        Number of Securities Underlying Options
        Percent of Total Options
        Exercise Price
        Date of ExpirationTimothy Russell(1)
        200,000100,000
        
        $050$0.75
        04/02/0804/02/08Total
        300,000
        34.88%  Aggregated Options/SAR Exercises in Last Fiscal Year  Name
        Shares Acquired on Exercise
        Value Realized
        Number of Securities Underlying Unexercised
        Value of Unexercised in the money OptionsTimothy Russell(1)
        40,000
        $
        -0-
        n/a  (1) Pursuant to certain Notice and Agreements of Option, Mr. Russell exercised an aggregate 132,667 Stock Options to acquire 132,667 shares of our common stock as follows: ( i) 50,000 Stock Options were exercised on May 1, 2005 at an exercise price of $0.75 per share; (ii) 14,667 Stock Options were exercised on September 5, 2005 at an exercise price of $0.75 per share; (iii) 50,000 Stock Options were exercised on September 5, 2005 at an exercise price of $0.50 per share; and (iv) 18,000 Stock Options were exercised on September 5, 2005 at an exercise price of $0.50 per share. Based upon an average trading price of: (i) $0..35 on May 1, 2005, Mr. Russell realized an aggregate net value of approximately $-0-; (ii) $0..46 on September 5, 2005, Mr. Russell realized an aggregate net value of approximately $-0-; (iii) $0..46 on September 5, 2005, Mr. Russell realized an aggregate net value of approximately $-0-; and
(iv) $0..46 on September 5, 2005, Mr. Russell realized an aggregate net value of approximately $-0-.       61   ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS  As of the date of this Annual Report, the following table sets forth the name and address and the approximate number of our shares of Common Stock owned of record or beneficially by each person who owned of record, or was known by us to own beneficially, more than five percent (5%) of our Common Stock, and the name and shareholdings of each officer and director, and all officers and directors as a group.  As of the date of this Annual Report, there are 67,676,807 shares of Common Stock issued and outstanding.  Name and Address of Beneficial Owner
        Amount and Nature of Beneficial Owner(1)
        Percentage of Class(2)Sacha Spindler322  2000 South Dairy AshfordHouston, Texas 77077
        19,417,310(2)
        28. 69%Sam Sen322  2000 South Dairy AshfordHouston, Texas 77077
        6,750,000(3)
        9.97%Justin Perryman322  2000 South Dairy AshfordHouston, Texas 77077
        3,458,988(4)
        5.11%Timothy Russell322  2000 South Dairy AshfordHouston, Texas 77077
        1,486,229(5)
        2.20%Brian Fiddler322  2000 South Dairy AshfordHouston, Texas 77077
        1,050,000(6)
        1.55%All officers/directors as a group (5 persons)
        32,162,527(7)
        47.52% (1) These are restricted shares of common stock. (2) This figure includes: (i) 17,741,310 shares of restricted common stock, of which 15,000,000 shares are Escrowed Performance Shares subject to the terms and provisions of the Performance Stock Incentive Plan; and (ii) the assumption of the exercise of 1,676,000 Stock Options into 1,676,000 shares of common stock. (3) This figure includes 6,750,000 shares of restricted common stock, of which 6,000,000 shares are Escrowed Performance Shares subject to the terms and provisions of the Performance Stock Incentive Plan. (4) This figure includes: (i) 2,653,988 shares of restricted common stock, of which 2,000,000 shares are Escrowed Performance Shares subject to the terms and provisions of the Performance Stock Incentive Plan; and (ii) the assumption of the exercise of 805,000 Stock Options into 805,000 shares of common stock. (5) This figure includes: (i) 1,267,696 shares of restricted common stock, of which 1,000,000 shares are Escrowed Performance Shares subject to the terms and provisions of the Performance Stock Incentive Plan; and (ii) the assumption of the exercise of 218,533 Stock Options into 218,533 shares of common stock. (6) This figure includes 1,050,000 shares of restricted common stock, of which 1,000,000 shares are Escrowed Performance Shares subject to the terms and provisions of the Performance Stock Incentive Plan. (7) This figure includes: (i) 29,462,994 shares of restricted common stock, of which 25,000,000 shares are Escrowed Performance Shares subject to the terms and provisions of the Performance Stock Incentive Plan; and (ii) the assumption of the exercise of 2,699,533 Stock Options into 2,699,533 shares of common stock.       62   Changes in Control  We are unaware of any contract or other arrangement the operation of which may at a subsequent date result in a change in control of our company.  ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS  CONTRACTUAL RELATIONS WITH CERTAIN OFFICERS/DIRECTORS  As disclosed in Item 10. Executive Compensation, we have entered into contractual relationships with certain of our officers and directors.  INDEMNIFICATION OF DIRECTORS AND OFFICERS  Section 78.7502 of the Nevada Revised Statutes contains provisions for indemnification of our officers and directors. Nevada law provides for indemnification (which may eliminate any personal liability of a director to a company or its shareholders for monetary damages for gross negligence or lack of care in carrying out the director's fiduciary duties) if a director or officer acts in good faith in a manner reasonably believed to be in, or not opposed to, the best interests of the company. A director or officer may be indemnified as to any matter in which he successfully defends himself.  Our officers and directors are accountable to our shareholders as fiduciaries, which means such officers and directors are required to exercise good faith and integrity in handling our affairs.  A shareholder may be able to institute legal action on behalf of himself and all other similarly situated shareholders to recover damages where we have failed or refused to observe the law. Shareholders may, subject to applicable rules of civil procedure, be able to bring a class action or derivative suit to enforce their rights, including rights under certain federal and state securities laws and regulations. Shareholders who have suffered losses in connection with the purchase or sale of their interest due to a breach of a fiduciary duty by one of our officers or directors in connection with such sale or purchase including, but not limited to, the misapplication by any such officer or director of the proceeds from the sale of any securities, may be able to recover such losses from us.  Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by one of our directors, officers or controlling persons in the successful defense or any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.  We have no agreements with any of our directors or executive officers providing for indemnification of any such persons with respect to liability arising out of their capacity or status as officers and directors.  At present, there is no pending litigation or proceeding involving any of our directors or executive officers as to which indemnification is being sought.  ITEM 13. EXHIBITS  The following exhibits are filed as part of this Annual Report:  2.1
        Share Exchange Agreement (1)10.1
        Emily Hawes Field Oil and Lease dated October 24, 2001 (2)10.2
        Lease Assignment Agreement between James T. Roche and Petrogen, Inc. dated May 20, 2002. (2)10.3
        Farm-out Agreement with Nortex Corporation. (2)10.4
        Farm-Out Agreement with Bazno Exploration. (2)10.5
        Sierra Gas Corp. Purchase Agreement with Petrogen Corp. dated May 8, 2003. (2)10.6
        Farm-In Acquisition Agreement between Coronado Oil Co. and Petrogen, Inc. dated December 31, 2002. (2)10.7
        Assignment and Bill of Sale between Crown Royalties and Petrogen, Inc. dated December 16, 2002. (2)        63    10.8
        Memorandum of Understanding between Adam Fees Properties Inc. and Petrogen International Limited dated August 4, 2003. (1)10.9
        Memorandum of Understanding between Adam Fees Properties, Inc. and Petrogen International Limited dated September 3, 2003. (1)10.10
        Debenture Agreement between Petrogen Corp. and Acceder Technology Pte. Ltd. dated for reference August 5, 2004. (3)10.11
        2004 Stock Option Plan for Petrogen Corp. (2)10.12
        Amended Management Consulting Services Agreement among Petrogen Corp., Petrogen, Inc. and Leo William Kerrigan dated for reference effective February 12, 2003, executed effective August 18, 2003. (2)10.13
        Amended Management Consulting Services Agreement among Petrogen Corp., Petrogen, Inc. and Sacha Spindler dated for reference effective February 12, 2003, executed effective August 18, 2003. (2)31.1
        Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act.31.2
        Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act.32.1
        Certification of Chief Executive Officer and Chief Financial Officer Under Section 1350 as Adopted Pursuant to Section                 906 of the Sarbanes-Oxley Act.  (1) Incorporated by reference to Exhibits of Petrogen Corp. Annual Report on Form 10-KSB filed with the Commission on April 14, 2004  (2) Incorporated by reference to Exhibits of Petrogen Corp. Annual Report on Form 10-KSB filed with the Commission on April 14, 2005.  (3) Incorporated by reference to Exhibit of Petrogen Corp. Report on Form 8-K filed with the Commission on August 18, 2004.  (4) Incorporated by reference to Exhibit of Petrogen Corp. Report on Form 8-K filed with the Commission on May 26, 2005.  ITEM 14. PROFESSIONAL ACCOUNTANT FEES AND SERVICES  Audit Fees  During fiscal year ended December 31, 2005, we incurred approximately $40,000 in fees to our principal independent accountant for professional services rendered in connection with the audit of our financial statements for fiscal year ended December 31, 2005 and the review of our financial statements for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005.  Financial Information Systems Design and Implementation Fees  During fiscal year ended December 31, 2005, we did not incur any fees for professional services rendered by our principal independent accountant for certain information technology services which may include, but is not limited to, operating or supervising or managing our information or local area network or designing or implementing a hardware or software system that aggregate source data underlying the financial statements.  All Other Fees  During fiscal year ended December 31, 2005, we did not incur any other fees for professional services rendered by our principal independent accountant for all other non-audit services which may include, but is not limited to, tax-related services, actuarial services or valuation services.  SIGNATURES  In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  PETROGEN CORP.Dated: September 5, 2006
        By:/s/ Sacha H. SpindlerSacha H. Spindler, Chief Executive OfficerDated September 5, 2006
        By:/s/ Brian FiddlerBrian Fiddler, Chief Financial Officer   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Signature
    Title
    Date/s/ Sacha H. SpindlerSacha H. Spindler
    Chief Executive Officer and Director
    September 5, 2006/s/ Justin PerrymanJustin Perryman
    Director
    September 5, 2006