**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549


**FORM
      10-QSB/A**


(Mark
      One)


**x
      QUARTERLY REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE**


**ACT
      OF 1934**


**FOR
      THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005**


**o
      TRANSITION REPORT UNDER
      SECTION 13 OR 15(d) OF THE EXCHANGE ACT**


For
      the transition period from ________________ to _______________


000-51484


(Commission
      file number)





FORTUNE
      OIL & GAS INC.


(Exact
      name of small business issuer as specified in its charter)


NEVADA
            88-0393369(State
                or other jurisdiction
            (IRS
                Employerof
                incorporation or organization)
            Identification
                No.)





**305-1676
      Martin Drive**


**White
      Rock, British Columbia**


**Canada
      V4A-6E7**


(Address
      of principal executive offices)


(604)
      531-0385


(Issuer's
      telephone number, including area code)





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.


Yes
      x No o





The
      number of shares of common stock outstanding as of September 30, 2005 was 53,769,393





Transitional
      Small Business Disclosure Format (check one): Yes o No x





The
      registrant is a shell company (check one) Yes o No x











**FORTUNE
      OIL & GAS, INC.**





Table
      of Contents







Page
                NumberPART
              I. FINANCIAL INFORMATION
            
            
            3Item
              1. Interim Financial Statements
            
            
            3Consolidated
                Balance Sheet as of September 30, 2005 (unaudited)
            
            
            3Interim
                Consolidated Statements of Operations for the three months and nine
                months
                ended September 30, 2005 and 2004 (unaudited)
            
            
            4Interim
                Consolidated Statement of Stockholders' Deficit for the
              nine
                months ended September 30 , 2005 (unaudited)
            
            
            5Interim
                Consolidated Statements of Cash Flows for the Nine
              months
                ended September 30, 2005 and 2004 (unaudited)
            
            
            6Notes
              to Interim Consolidated Financial Statements (unaudited)
            
            
            7Item
              2. Management's Discussion and Analysis or Plan of Operations
            
            27Item
              3. Controls and Procedures
            
            
            45PART
              II. OTHER INFORMATION
            
            
            46Item
              1. Legal Proceedings
            
            
            46Item
              2. Unregistered sales of Equity Securities and Use of Proceeds
            
            
            48Item
              3. Other Information
            
            
            48Item
              4. Exhibits
            
            
            48SIGNATURES
            
            
            50Exhibits:











**PART
      I**





**FINANCIAL
      INFORMATION**





**ITEM
      1 - FINANCIAL STATEMENTS**






**FORTUNE
      OIL & GAS, INC.**


**CONSOLIDATED
      BALANCE SHEET**


**(UNAUDITED)**




**September
                30, 2005**
            
            **December
                31, 2004****(Unaudited)****ASSETS****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            6,905
            
            $
            9,776Accounts
                receivable
            
            
            
            
            
            —VAT
                taxes receivable
            
            
            2,678,629
            
            
            3,135,471Joint
                operating account
            
            
            348,933
            
            
            —Other
                current assets
            
            
            149,939
            
            
            138,343Total
                Current Assets
            
            
            3,184,406
            
            
            3,283,590**PROVEN
                OIL AND GAS PROPERTIES, Net**
            
            
            330,779
            
            
            1,102,595**EQUIPMENT,
                Net**
            
            
            473,855
            
            
            39,154**TOTAL
                PROPERTY AND EQUIPMENT, Net**
            
            
            804,634
            
            
            1,141,749**RESTRICTED
                CASH**
            
            
            58,833
            
            
            —**TOTAL
                ASSETS**
            
            $
            4,047,873
            
            $
            4,425,339**LIABILITIES
                AND STOCKHOLDERS’ DEFICIENCY****CURRENT
                LIABILITIES**Accounts
                payable and accrued liabilities
            
            $
            5,598,126
            
            $
            11,855,631Advances
                payable to related parties
            
            
            160,796
            
            
            404,546Directors
                fees payable
            
            
            177,000
            
            
            1,781,000Accrued
                salaries and wages
            
            
            177,473
            
            
            464,775Short
                term debt
            
            
            5,120,496
            
            
            6,522,603Taxes
                payable
            
            
            3,620,886
            
            
            4,622,495Accrued
                interest payable
            
            
            932,331
            
            
            1,277,725Total
                Current Liabilities
            
            
            15,787,108
            
            
            26,928,775**STOCKHOLDERS’
                DEFICIENCY**Common
                stock, $0.001 par value, 100,000,000 authorized,52,454,393
                at September 30, 2005 and 34,912,609at
                December 31,2004
            
            
            52,454
            
            
            34,912Additional
                paid-in capital
            
            
            10,817,150
            
            
            8,856,643Other
                comprehensive loss
            
            
            (28,019
            )
            
            (24,250
            )Accumulated
                deficit
            
            
            (22,580,820
            )
            
            (31,370,741
            )Total
                Stockholder’s Deficiency
            
            
            (11,739,235
            )
            
            (22,503,436
            )**TOTAL
                LIABILITIES AND STOCKHOLDER’S**
              **DEFICIENCY**
            
            $
            4,047,873
            
            $
            4,425,339




The
      accompanying notes are an integral part of these accompanying interim financial
      statements




3


**FORTUNE
      OIL & GAS, INC.**


**CONSOLIDATED
      STATEMENT OF OPERATIONS**


**(UNAUDITED)**




Three
                months ended
            
            Nine
                Months endedSeptember
                30, 2005
            
            September
                30, 2004
            
            September
                30, 2005
            
            September
                30,2004**OIL
                SALES**
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            3,069,747**EXPENSES**Production
                Costs and taxes
            
            
            —
            
            
            64,944
            
            
            —
            
            
            3,085,952Depreciation
                and depletion of oil and gas properties
            
            
            —
            
            
            29,838
            
            
            —
            
            
            340,738Total
                Expenses
            
            
            —
            
            
            94,782
            
            
            —
            
            
            3,426,690**GROSS
                LOSS**
            
            
            —
            
            
            (94,782
            )
            
            —
            
            
            (356,943
            )Selling,
                general and administrative costs
            
            
            616,963
            
            
            659,376
            
            
            (2,860,030
            )
            
            (2,010,739
            )**LOSS
                FROM OPERATIONS**
            
            
            (616,963
            )
            
            (754,158
            )
            
            (2,860,030
            )
            
            (2,367,682
            )Depreciation
            
            
            (27,886
            )
            
            —
            
            
            (81,428
            )Loss
                on disposal of equipment
            
            
            —
            
            
            —
            
            
            —
            
            
            (765
            )Gain
                on sale of oil rights
            
            
            —
            
            
            —
            
            
            9,712,950
            
            
            —Property
                and equipment maintenance costs
            
            
            (191,942
            )
            
            —
            
            
            (554,398
            )
            
            —Gain
                (loss) on settlement of vendor payables
            
            
            (10,679
            )
            
            —
            
            
            3,166,558
            
            
            —Foreign
                exchange gain (loss)
            
            
            7,717
            
            
            (26,058
            )
            
            (85,241
            )
            
            (20,875
            )Legal
                settlement costs
            
            
            (
                90,000
            )
            
            —
            
            
            (
                90,000
            )
            
            —Interest
                Expense
            
            
            (295,675
            )
            
            (238,631
            )
            
            (418,490
            )
            
            (725,806
            )**NET
                INCOME (LOSS) FOR THE PERIOD**
            
            $
            (1,225,428
            )
            $
            (1,018,847
            )
            $
            8,789,921
            
            $
            (3,115,128
            )**BASIC
                NET INCOME (LOSS) PER**
              **COMMON
                SHARE**
            
            $
            (0.02
            )
            $
            (0.03
            )
            $
            0.21
            
            $
            (0.09
            )**DILUTED
                INCOME (LOSS) PER**
              **COMMON
                SHARE**
            
            $
            (0.02
            )
            $
            (0.03
            )
            $
            0.21
            
            $
            (0.09
            )**WEIGHTED
                AVERAGE NUMBER OF**
              **COMMON
                SHARES OUTSTANDING****-
                BASIC**
            
            
            52,454,393
            
            
            34,912,609
            
            
            41,038,688
            
            
            34,345,652**-
                DILUTED**
            
            
            52,482,393
            
            
            34,912,609
            
            
            41,122,688
            
            
            34,345,652




The
      accompanying notes are an integral part of these accompanying interim financial
      statements




4




**FORTUNE
      OIL & GAS, INC.**


**CONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITY**


**FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2005**


**(UNAUDITED)**




Common
                Stock
            
            Additional
            
            OtherNumber
                of
            
            
            
            Paid
                In
            
            Comprehensive
            
            AccumulatedShares
            
            Amount
            
            Capital
            
            Loss
            
            Deficit
            
            TotalBalance
                as of December 31, 2004
            
            
            34,912,609
            
            $
            34,912
            
            $
            8,856,643
            
            $
            (24,250
            )
            $
            (31,370,741
            )
            $
            (22,503,436
            )Stock
                issued for payment of services
            
            
            50,000
            
            
            50
            
            
            4,950
            
            
            
            
            
            
            
            
            5,000Currency
                translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            (3,769
            )
            
            
            
            
            (3,769
            )Stock
                issued in payment of director fees
            
            
            17,491,784
            
            
            17,492
            
            
            1,731,687
            
            
            
            
            
            
            
            
            1,749,179Stock
                based compensation expense
            
            
            
            
            
            
            
            
            223,870
            
            
            
            
            
            
            
            
            223,870Net
                income for the period
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            8,789,921
            
            
            8,789,921Balance
                as of September 30, 2005
            
            
            52,454,393
            
            $
            52,454
            
            $
            10,817,150
            
            $
            (28,019
            )
            $
            (22,580,820
            )
            $
            (11,739,235
            )




The
      accompanying notes are an integral part of these accompanying interim financial
      statements




5


**FORTUNE
      OIL & GAS, INC.**





**CONSOLIDATED
      STATEMENT OF CASH FLOWS**





**(UNAUDITED)**





**Nine
                Months**
            
            **Nine
                Months****Ended**
            
            **Ended****September
                30,**
            
            **September
                30,****2005**
            
            **2004****CASH
                FLOWS FROM OPERATIONS**Net
                income (loss)
            
            $
            8,789,921
            
            $
            (3,115,128
            )Adjustments
                to reconcile net income (loss) to net cash flow
              from
                  operating activities-
                depreciation and depletion expense
            
            
            81,428
            
            
            340,738-
                gain on settlement of vendor payables
            
            
            (3,166,558
            )-
                stock issued in payment of interest
            
            
            
            
            
            119.988-
                compensation expense - stock options
            
            
            223,870-
                gain on sale of oil rights
            
            
            (9,712,950
            )-
                legal settlement costs
            
            
            90,000Changes
                in operating assets and liabilities, net of assets and
              and
                  liabilities acquired-
                joint operating account
            
            
            (348,933
            )-
                restricted cash
            
            
            (58,833
            )-
                taxes receivable
            
            
            456,842
            
            
            (
                16,950
            )-
                other current assets
            
            
            (11,596
            )
            
            (65,497
            )-
                accounts payable and accrued liabilities
            
            
            (3,175,948
            )
            
            430,576-
                inventory
            
            
            
            
            
            1,403,552-
                advances payable - related parties
            
            
            (243,750
            )
            
            (104,392
            )-
                directors fees payable
            
            
            145,179
            
            
            531,000-
                accrued salaries and wages
            
            
            (287,302
            )
            
            47,338-
                taxes payable
            
            
            (1,001,609
            )
            
            (202,937
            )-accrued
                interest payable
            
            
            (345,394
            )
            
            131,298**NET
                CASH PROVIDED BY ( USED IN) OPERATING ACTIVITIES**
            
            
            (8,565,633
            )
            
            (500,414
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES**Purchase
                of property and equipment
            
            
            (531,362
            )
            
            (2,258
            )Proceeds
                on sale of oil rights
            
            
            9,000,000**NET
                CASH USED IN INVESTING ACTIVITIES**
            
            
            8,468,638
            
            
            (2,258
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Short
                term debt
            
            
            97,893
            
            
            491,014**NET
                CASH PROVIDED BY FINANCING**
              **ACTIVITIES**
            
            
            97,893
            
            
            491,014**EFFECTS
                OF EXCHANGE RATE CHANGES**
            
            
            (3,769
            )
            
            7,745**INCREASE
                (DECREASE) IN CASH**
            
            
            (2,870
            )
            
            (3,914
            )**CASH,
                BEGINNING OF PERIOD**
            
            
            9,776
            
            
            12,037**CASH,
                END OF PERIOD**
            
            $
            6,905
            
            $
            8,122**Supplemental
                Disclosures with respect to cash flows-**Cash
                paid for interest
            
            $
            498,586
            
            $
            —Cash
                paid for income taxes
            
            
            —
            
            
            —Cash
                paid for other taxes
            
            $
            1,318,237
            
            $
            537,812




The
      accompanying notes are an integral part of these accompanying interim financial
      statements




6


**FORTUNE
      OIL & GAS, INC.**


**NOTES
      TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005**


**(Unaudited)**





**Note
      1 - Nature of Operations**





Fortune
      Oil & Gas, Inc. (“Fortune”), a Nevada corporation, together with its
      subsidiaries, (the “Company”) is an independent energy company formed on January
      24, 1980 and is engaged in the exploration, development, exploitation and
      production of oil and natural gas. Its operations are focused in the North
      Java
      Sea, Indonesia. In May 2000, the Company acquired 100% of the issued and
      outstanding stock of GFB Resources (Java) Limited, an oil and gas exploration
      and production company which holds a 100% interest in the Bawean Production
      Sharing Contracts (“Bawean PSC). The Bawean PSC covers two oil and gas blocks
      known as the Camar and Tuban fields. On January 14, 2005 the Company sold a
      70%
      interest in the Bawean PSC to Camar Resources Canada Inc. (Refer Note 4). The
      Company is currently party to proceedings that may further dilute its interest
      in the Bawean PSC. ( Refer note 8).




We
      operate
      our business through our wholly owned subsidiaries, Fortune Pacific Management
      Ltd., a British Columbia company (“FPM”), Fortune Ship Management Ltd., a Malta
      company (“FSM”) and Indo-Pacific Oil & Gas, Inc. a British West Indies
      company (“IPOG”) and through IPOG’s wholly owned subsidiary (our second tier
      subsidiary), Indo-Pacific Resources (JAVA) Ltd., a Barbados company (“IPR” or
“IPRJ”) all of which we refer to collectively as “our subsidiaries”. The
      Company’s principal revenue producing asset is directly owned and operated by
      IPR. None of our other subsidiaries perform any operations that generate
      revenue.





**Unaudited
      Interim Financial Statements**





The
      accompanying unaudited interim financial statements have been prepared in
      accordance with United States generally accepted accounting principles for
      interim financial information and with the instructions to Form 10-QSB of
      Regulation S-B. They may not include all information and footnotes required
      by
      United States generally accepted accounting principles for complete financial
      statements. However, except as disclosed herein, there have been no material
      changes in the information disclosed in the notes to the financial statements
      for the period ended December 31, 2004 included in the Company’s Form 10-SB
      filed with the Securities and Exchange Commission. The interim unaudited
      financial statements should be read in conjunction with those financial
      statements included in the From 10-SB. In the opinion of Management, all
      adjustments considered necessary for a fair presentation, consisting solely
      of
      normal recurring adjustments, have been made. Operating results for the nine
      months ended September 30, 2005 are not necessarily indicative of the results
      that may be expected for the year ending December 31, 2005.





**Note
      2 - Going Concern**





These
      financial statements have been prepared on a going concern basis. However,
      the
      Company has suffered recurring operating losses and, during the three months
      ended September 30, 2005 and 2004, the Company incurred a net loss of
      $(1,225,428) and $(1,018,847),
      respectively. Although
      the Company realized non recurring gains on the sale of a 70% interest in its
      oil rights and settlement of vendor payables totaling $12,602,702  during
      the
      nine months ended September 30, 2005, the Company had a working capital
      deficiency of $12,543,868 and an accumulated deficit of
      ($22,580,820)  at
      September 30, 2005. During the nine months ended September 30, 2004, the Company
      had an operating loss of ($3,115,128), a working capital deficiency of
      $22,596,202 and an accumulated deficit of ($30,335,497). The Company requires
      additional capital to finance operations, current operating losses and to settle
      current debts in order to commence oil production in Indonesia. The Company’s
      ability to continue as a going concern is dependent upon its ability to generate
      profitable operations in the future and/or to obtain the necessary financing
      to
      meet its obligations and repay its liabilities arising from normal business
      operations when they become due. The outcome of these matters cannot be
      predicted with any certainty at this time.





7


**FORTUNE
      OIL & GAS, INC.**


**NOTES
      TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005**


**(Unaudited)**





On
      August
      26, 2005, the Company’s wholly owned subsidiary Indo-Pacific Resources (Java)
      Ltd. (“IPRJ”) filed a Request for Arbitration (the “Complaint”) against Camar
      Resources Canada Inc. (CRC), the operator and seventy percent owner of the
      Company’s oil and gas property at the Camar field, with the International Court
      of Arbitration (the “Court”) in Paris, France. IPRJ alleges CRC breached the
      Joint Operating Agreement (JOA), which regulates the operations of the Camar
      field, and also breached its **.**


fiduciary
      duty to IPRJ by failing to take all necessary acts to commence oil production
      in
      the Camar field. On October 7, 2005, CRC filed an Answer to IPRJ’s Request for
      Arbitration. CRC denies the breaches of the JOA alleged by IPRJ. In their Answer
      to IPRJ’s Request for Arbitration, CRC states that as operator under the JOA it
      is their duty to comply with laws of Indonesia. As part of such compliance,
      CRC
      should obtain
      approval from the government regulatory body overseeing the activities of the
      Oil and Gas industry of the budget and work program of the Camar field. CRC
      alleges that the government regulatory body has informed them it will not
      approve the budget and work program until such time as the Company has settled
      its various obligations to contractors and the Indonesian government. Without
      approval of the budget and work program production at the Camar field would
      technically not be in compliance with Indonesian regulations. CRC alleges that
      if the Company does not satisfy its various debt obligations, the work approvals
      will not be issued. As a result, the Company may require additional capital,
      amounting to approximately $5 million, to settle current obligations, finance
      operations and current operating losses. The financing
      may be in the form of a sale of securities, the assumption of debt, or a
      combination thereof. In addition, the Company’s ability to continue as a going
      concern, in the long term, is dependent upon it **s** ability
      to
      generate profitable operations. The outcome of these matters cannot be predicted
      with any certainty
      at this time.





Since
      inception, the Company has satisfied its capital needs primarily by issuing
      equity securities, by incurring short and long term debt and the sale of a
      70%
      interest in ites oil and gas property for $10.5 million. Management’s current
      plans are to ensure that sufficient capital will be available to provide for
      its
      capital needs with minimal borrowings and may issue equity securities to raise
      additional capital if available. However, there is no guarantee that the Company
      will be successful in obtaining sufficient capital through selling equity
      securities or other borrowings. All of the above raises substantial doubt as
      to
      the Company’s ability to continue as a going concern. These financial statements
      do not include any adjustments to the amounts and classification of assets
      and
      liabilities that may be necessary should the Company cease to continue operating
      as a going concern. See Note 8 - Subsequent Events.





**Note
      3 - Summary of Significant Accounting Policies**





**Principles
      of Consolidation**





These
      consolidated financial statements are presented in accordance with generally
      accepted accounting principles in the United States. The consolidated financial
      statements include the accounts of the Company and its wholly owned subsidiaries
      (Fortune Pacific Management Ltd., Indo-Pacific Oil & Gas Inc., Fortune Ship
      Management Ltd., and Indo-Pacific Resources (Java) Ltd. (formerly GFB Resources
      (Java) Ltd.). All significant inter-company accounts and transactions are
      eliminated upon consolidation.





**Estimates**





The
      preparation of these consolidated financial statements requires the use of
      certain estimates by management in determining the Company's assets,
      liabilities, revenues and expenses. Actual results could differ from such
      estimates.





Depreciation,
      depletion and amortization of oil and gas properties and the impairment of
      oil
      and gas properties are determined using estimates of oil and gas reserves.
      There
      are numerous uncertainties in estimating the quantity of reserves and in
      projecting the future rates of production and timing of development
      expenditures, including future costs to dismantle, dispose, and restore the
      Company's properties. Oil and gas reserve engineering must be recognized as
      a
      subjective process of estimating underground accumulations of oil and gas that
      cannot be measured in an exact way. Proved reserves of oil and natural gas
      are
      estimated quantities that geological and engineering data demonstrate with
      reasonable certainty to be recoverable in the future from known reservoirs
      under
      existing conditions.




8


**FORTUNE
        OIL & GAS, INC.**
 **NOTES
        TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER
        30, 2005**
 **(Unaudited)**





**Oil
      and Natural Gas Properties**





Investments
      in oil and natural gas properties are accounted for using the full-cost method
      of accounting. All costs directly associated with the acquisition, exploration
      and development of oil and natural gas properties are capitalized. Such costs
      include lease acquisitions, seismic surveys, and drilling and completion
      equipment. Maintenance and repairs are expensed as incurred.





Oil
      and
      natural gas property costs are depleted based on the unit-of-production method
      using estimates of proved reserve quantities. Investments in unproved properties
      are not amortized until proved reserves associated with the projects can be
      determined or until they are impaired. Unevaluated properties are assessed
      periodically for impairment on a country-by-country basis. If the results of
      an
      assessment indicate that
      the
      properties are impaired, the amount of the impairment is added to the proved
      oil
      and natural gas property
      costs to be amortized. The amortizable base includes estimated future
      development costs and dismantlement, restoration and abandonment costs, net
      of
      estimated salvage values. Depletion recorded in these financial statements
      is
      based upon a reserve report by Petroleum Geo-Services (UK) Ltd. dated March
      18,
      2005.





Dispositions
      of oil and natural gas properties are accounted for as adjustments to
      capitalized costs with no gain or loss recognized, unless such adjustments
      would
      significantly alter the relationship between capitalized costs and proved
      reserves.





The
      net
      capitalized costs of proved oil and natural gas properties are subject to a
      “ceiling test” which limits such costs to the estimated present value,
      discounted at a 10% interest rate, of future net revenues from proved reserves,
      based on current economic and operating conditions. If net capitalized costs
      exceed this limit, the excess is charged to operations through depreciation
      and
      depletion. Because of the volatility of oil and natural gas prices, no assurance
      can be given that there will not be further write-down in future periods.





**Oil
      and Natural Gas Reserve Estimates**





Estimating
      quantities of proved reserves is a subjective process and involves estimating
      underground accumulations of hydrocarbons that cannot be measured in an exact
      manner. The reserve data included in these financial statements are estimates
      prepared by Petroleum Geo-Services (UK) Ltd. The process relies on
      interpretation of available geologic, geophysical, engineering and production
      data. The extent, quality and reliability of this data can vary. The process
      also requires certain economic assumptions regarding drilling and operating
      expenses, capital expenditures, taxes and availability of funds. The SEC
      mandates some of these assumptions, such as oil and natural gas prices and
      the
      present value discount rate.





Proved
      reserve estimates prepared by others may be substantially higher or lower than
      the Company’s estimate. Because these estimates depend on many assumptions, all
      of which may differ from actual results, reserve quantities actually recovered
      may be significantly different than estimated. Material revisions to reserve
      estimates may be made depending on the results of drilling, testing, and rates
      of production.





**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.




9


**FORTUNE
      OIL & GAS, INC.**


**NOTES
        TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER
        30, 2005**
 **(Unaudited)**
  **Inventory
        valuation**





Oil
      inventories and material and supplies inventories are valued at the lower of
      average cost or net realizable value.





**Cash
      and Cash Equivalents**





For
      the
      purpose of the statements of cash flows, the Company considers all highly liquid
      investments purchased with original maturities of three months or less to be
      cash and cash equivalents.





**Equipment**





Equipment
      is stated at cost. For office furniture, equipment, computers and vehicles
      the
      Company provides for depreciation, in general, using the straight line method
      over the estimated useful lives of three to five years. Gains or losses on
      the
      sale of property and equipment are reflected in the statements of operations.





**Impairment
      of Long-Lived Assets**





Management
      evaluates long-lived assets for impairment whenever changes in circumstances
      indicate that the carrying value of an asset may not be recoverable. If the
      estimated future undiscounted cash flows from the use of an asset are less
      than
      the carrying value, impairment would be recorded to reduce the related asset
      to
      its estimated fair value.





**Comprehensive
      Income**





The
      Company utilizes SFAS NO. 130 “Reporting Comprehensive Income.” This statement
      establishes standards for reporting comprehensive income and its components
      in a
      financial statement. Comprehensive income as defined includes all changes in
      equity (net assets) during a period from non-owner sources. Examples of items
      to
      be included in comprehensive income, which are excluded from net income, include
      foreign currency translation adjustments, minimum pension liability adjustments,
      and unrealized gains and losses on available-for-sale securities.





**Stock-Based
      Compensation**





SFAS
      No.
      123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148,
“Accounting for Stock-Based Compensation - Transition and Disclosure,” defines a
      fair value based method of accounting for stock-based compensation. However,
      SFAS No. 123 allows an entity to continue to measure compensation cost related
      to stock and stock options issued to employees using the intrinsic method of
      accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees.” Entities electing to remain with the
      accounting method of APB No. 25 must make pro forma disclosures of net income
      and earnings per share as if the fair value method of accounting defined in
      SFAS
      No. 123 had been applied . The
      Company  has
      elected to account for its stock-based compensation to employees using the
      fair
      value method under SFAS No. 123. Due to the adoption of SFAS 123 no pro forma
      disclosures are presented as required by SFAS 148.





Common
      stock issued for salaries and other services are recorded at the estimated
      fair
      value at the time of issuance.






10


**FORTUNE
      OIL & GAS, INC.**


**NOTES
      TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005**


**(Unaudited)**




**Significant
      Customer**





During
      the
      three and nine months ended September 30, 2005 and the three months ended
      September 30, 2004, the Company did not have any sales of oil. During the nine
      months ended September 30, 2004, sales to a Singaporean privately owned company
      accounted for 100% of revenues. The Company believes that there are numerous
      alternative buyers in the marketplace should this customer cease purchasing
      the
      Company’s oil.





**Income
      Taxes**





The
      Company accounts for income taxes under the liability method, which requires
      the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Under this method, deferred income taxes are recognized for the
      tax
      consequences in future years of differences between the tax bases of assets
      and
      liabilities and their financial reporting amount at each period end based on
      enacted tax laws and statutory tax rates


applicable
      to the periods in which the differences are expected to affect taxable income.
      Valuation allowances are established, when necessary, to reduce deferred tax
      assets to the amount expected to be realized.





Significant
      components of the Company’s United States provision for income taxes for the
      years ended December 31, 2004 and 2003 are:




Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,2005
            
            2004
            
            2005
            
            2004CurrentFederal
            
            $
            -0-
            
            $
            -0-
            
            $
            -0-
            
            $
            -0-DeferredFederal
            
            $
            -0-
            
            $
            -0-
            
            $
            -0-
            
            $
            -0-Provision
                for Income Taxes
            
            $
            -0-
            
            $
            -0-
            
            $
            -0-
            
            $
            -0-





For
      the
      three months ended September 30, 2005 and 2004, the Company incurred net losses
      of $1,225,428 and $1,018,847, respectively. For the nine months ended September
      30, 2005 and 2004, the Company had net income of $8,789,922 and net losses
      of
      $3,115,128, respectively.





The
      Company is chartered in the State of Nevada which does not impose a State Income
      Tax. The Company does not engage in significant operation in North America.
      Currently its income from oil and gas operation will not be taxable by the
      Federal Government until the earnings are repatriated to North America.








11


**FORTUNE
      OIL & GAS, INC.**


**NOTES
      TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005**


**(Unaudited)**





A
      reconciliation of the Company’s United States expected income tax (benefit)
      computed using the federal statutory income tax rate to the Company’s effective
      income tax rate is as follows :





Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,2005
            
            2004
            
            2005
            
            2004Income
                tax computed at the Federal Statutory rate
            
            
            34.0
            %
            
            34.0
            %
            
            34.0
            %
            
            34.0%-Changes
                in valuation allowance
            
            
            (34.0
            )%
            
            (34.0
            )%
            
            (34.0
            )%
            
            (34.0
            )%Effective
                Tax Rate
            
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %




Significant
      components of the Company’s deferred tax assets (liabilities) at December 31,
      2004 and 2003 consist of the following:




Nine
                Months EndedSeptember
                30
            
            December
                312005
            
            2004Net
                operating loss carry forward
            
            $
            6,072,547
            
            $
            12,827,374Valuation
                allowance
            
            $
            (6,072,547
            )
            $
            (12,827,374
            )Net
                Deferred Tax Asset
            
            $
            -0-
            
            $
            -0-





As
      of
      September 30, 2005, the Company has Net Operating Loss Carry forwards for
      federal income tax purposes of approximately $6,072,547, which expire through
      2019. The utilization of net operating loss carry forwards may be limited due
      to
      the ownership change under the provisions of the Internal Revenue Code Section
      382, or eliminated completely under Internal Revenue Code Section
      338.





The
      entire
      deferred income tax assets of the Company have been offset by a valuation
      allowance since management does not believe the recoverability of the deferred
      income tax assets during the next year is more likely than not. In addition,
      due
      to the uncertainty of the Company to continue as a going concern, as discussed
      in Note 2, management believes that significant doubt exists as to the Company’s
      ability to realize any tangible value. Accordingly, a deferred income tax
      benefit for the period ending September 30, 2005 and the year ended December
      31,
      2004.





**Risk
      Management**





The
      Company is engaged in oil and gas production and manages related industry risk
      issues directly. The Company is at risk for environmental issues and
      fluctuations in commodity pricing. The Company is not exposed to significant
      credit concentration risk. The Company is not exposed to significant interest
      rate risk, hedging or other activities to manage this risk. The Company’s
      functional currency is the US dollar. All current oil production occurs within
      Indonesia and accordingly the Company is exposed to foreign exchange risk.
      The
      Company does not currently engage in derivatives.





12


**FORTUNE
      OIL & GAS, INC.**


**NOTES
      TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005**


**(Unaudited)**





**Fair
      Value of Financial Instruments**





The
      carrying value of cash, accounts receivable, joint operating account, other
      current assets, accounts payable and accrued liabilities, advances payable,
      director’s fees payable, accrued salary and wages, taxes payable, accrued
      interest payable and short term debt approximates their fair value because
      of
      the short maturity of these instruments. Unless otherwise noted, it is
      management’s opinion that the Company is not exposed to significant interest,
      currency or credit risks arising from these financial instruments.





**Per
      Share Information**





The
      Company presents basic earnings (loss) per share (“EPS”) and diluted EPS on the
      face of the statements of operations. Basic EPS is computed as net income (loss)
      divided by the weighted average number of common shares outstanding for the
      period. Diluted EPS reflects the potential dilution that could occur from common
      shares issuable through stock options, warrants, and other convertible
      securities which are exercisable during or after the reporting period. In the
      event of a net loss, such incremental shares are not included in EPS since
      their
      effects are anti-dilutive.





The
      following table sets forth the computation of basic and diluted net income
      (loss) per share for the periods indicated:




Three
                months endedSeptember 30,
            
            Nine
                months ended
              September
                30,2005
            
            2004
            
            2005
            
            2004Numerator:Net
                Income (loss)
            
            $
            (1,225,428
            )
            $
            (1,018,847
            )
            $
            8,789,921
            
            $
            (3,115,128
            )Denominator:Denominator
                for basic calculation weighted average shares
            
            
            52,454,393
            
            
            34,912,609
            
            
            41,038,688
            
            
            34,345,652Dilutive
                common stock equivalents:Options
            
            
            
            
            
            
            
            
            84,000Denominator
                for diluted calculation weighted average shares
            
            
            52,482,393
            
            
            34,912,609
            
            
            41,122,688
            
            
            34,345,652Net
                income (loss) per share:Basic
                net income (loss) per share
            
            $
            (0.02
            )
            $
            (0.03
            )
            $
            0.21
            
            $
            (0.09
            )Diluted
                net income (loss) per share (1) (2)
            
            $
            (0.02
            )
            $
            (0.03
            )
            $
            0.21
            
            $
            (0.09
            )




(1)
      The
      Company has issued stock for payment of debt and/or interest payments on short
      term debt during the nine months ended September 30, 2004. The effect of the
      issuances of shares was anti-dilutive. However, in the nine months ended
      September 30, 2005, the Company issued 17,491,784 shares of common stock to
      Messrs. Wensveen and Nunn, Chief Executive Office and President, respectively,
      for payment of accrued board of director fees. The effect of such issuances
      has
      been accounted for in the Basic and Diluted net income per share above. However,
      if the shares were treated as though they were issued as of the beginning of
      the
      nine months ending September 30, 2005, the diluted net income per share would
      have been $0.17 per share and the denominator for the dilutive calculation
      weighted average shares would have been 52,538,393.




13


**FORTUNE
      OIL & GAS, INC.**


**NOTES
      TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005**


**(Unaudited)**





(2)
      The
      Company has secured the services of a law firm to assist them with the SEC
      filing requirements and, in payment thereof, has agreed to pay the firm a cash
      fee plus 1,000,000 shares of common stock with an effective date of July 9,
      2004. Such payment will be made when the Company becomes trading on the OTCBB.
      If the shares were treated as though they were issued as of July 9, 2004, the
      Denominator would have been 38,825,652  for
      the
      three months ended September 30, 2004  and
      34,651,107  for
      the
      nine months ended September 30,  2004
      and
      they would have been anti-dilutive during the three months and nine months
      ended
      September 30, 2004. However, if the shares were treated as though they were
      issued as of the beginning of the periods for the three months and nine months
      ending September 30, 2005 the diluted net income per share would have been
      $(0.02) for the three months ended September 30, 2005 and $0.20 for the nine
      months ended September 30, 2005 and the denominator for the dilutive calculation
      weighted average shares would have been 53,482,393  for
      the
      three months ended September 30, 2005 and  42,122,688  for
      the
      nine months ended September 30, 2005.





(3)
      If
      both (1) and (2) were considered issued as of the beginning of the three months
      and nine months ending September 30, 2005, the Dilutive net income per share
      would have been $(0.02) and $0.16, respectively and the denominator for the
      dilutive calculation weighted average shares would have been 53,482,393 and
      53,538,393 respectively.





**Recent
      Accounting Pronouncements**





In
      March
      2004, the FASB issued EITF No. 03-1, *The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments* (“EITF
      03-1”). The objective of EITF 03-1 is to provide guidance for identifying
      impaired investments. EITF 03-1 also provides new disclosure requirements for
      investments that are deemed to be temporarily impaired. In October 2004, the
      FASB delayed the recognition and measurement provisions of EITF 03-1 until
      implementation guidance is issued. The disclosure requirements are effective
      for
      annual periods ending after June 15, 2004, and remain in effect. Management
      believes that the adoption of EITF 03-1 did not have a material impact on the
      Company’s financial condition or results of operations.





In
      November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS 151 amends
      the accounting for abnormal amounts of idle facility expense, freight, handling
      costs, and wasted material (spoilage) under the guidance in APB Opinion No.
      43,
      Chapter 4, "Inventory Pricing". Paragraph 5 of APB 43, Chapter 4, previously
      stated that ". . . under some circumstances, items such as idle facility
      expense, excessive spoilage, double freight, and rehandling costs may be so
      abnormal as to require treatment as current period charges. . . ." SFAS 151
      requires that those items be recognized as current-period charges regardless
      of
      whether they meet the criterion of "so abnormal". In addition, SFAS 151 requires
      that allocation of fixed production overheads to the costs of conversion be
      based on the normal capacity of the production facilities. This statement is
      effective for inventory costs incurred during fiscal years beginning after
      June
      15, 2005. Management does not expect adoption of SFAS 151 to have a material
      impact on the Company's financial statements.





In
      December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets",
      and an amendment to APB Opinion No. 29, "Accounting for Nonmonetary
      Transactions". SFAS 153 eliminates certain differences in the guidance in APB
      29
      as compared to the guidance contained in standards issued by the International
      Accounting Standards Board. The amendment to APB 29 eliminates the fair value
      exception for nonmonetary exchanges of similar productive assets and replaces
      it
      with a general exception for exchanges of nonmonetary assets that do not have
      commercial substance. Such an exchange has commercial substance if the future
      cash flows of the entity are expected to change significantly as a result of
      the
      exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring in
      periods beginning after June 15, 2005. Earlier application is permitted for
      nonmonetary asset exchanges occurring in periods beginning after December 16,
      2004. Management does not expect adoption of SFAS 153 to have a material impact
      on
      the Company's financial statements.




14


**FORTUNE
        OIL & GAS, INC.**
 **NOTES
        TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER
        30, 2005**
 
 **(Unaudited)**




In
      December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment". SFAS
      123(R) amends SFAS 123 and APB 25. SFAS 123(R) requires that the cost of
      share-based payment transactions (including those with employees and
      non-employees) be recognized in the financial statements. SFAS 123(R) applies
      to
      all share-based payment transactions in which an entity acquires goods or
      services by issuing (or offering to issue) its shares, share options, or other
      equity instruments (except for those held by an ESOP) or by incurring
      liabilities (1) in amounts based (even in part) on the price of the entity's
      shares or other equity instruments, or (2) that require (or may require)
      settlement by the issuance of an entity's shares or other equity instruments.
      This statement is effective (1) for public companies qualifying as SEC
      small business issuers, as of the first interim period or fiscal year beginning
      after December 15, 2005, or (2) for all other public companies, as of the first
      interim period or fiscal year beginning after June 15, 2005, or (3) for all non
      public
      entities, as of the first fiscal year beginning after December 15, 2005.
      Management intends to adopt
      this
      policy for the quarter ending March 31, 2006. Management is currently assessing
      the effect of SFAS 123(R) on the Company's financial statements.





**Note
      4 - Sale of Oil Rights**





On
      November 26, 2004, IPR entered into an Asset Purchase and Sale Agreement with
      CRC, for the sale of a 70% interest in the Bawean PSC dated February 12, 1981
      rights in exchange for $10,500,000 as follows:




·
              $1,500,000
                  advance payment·
              $1,000,000
                  to be deposited in a Joint Operating Account·
              $4,500,000
                  to be deposited in a Trade Debt Settlement Account·
              $3,500,000
                  directly to the Company





The
      required advance payments were made on November 19, 2003 and February 4, 2004
      in
      the amounts of $1,000,000 and $500,000 respectively. These payments were treated
      as short term debt pending the closing of the agreement and were secured by
      (i)
      inventory and equipment, (ii) a continuing right to all crude entitlements,
      and
      (iii) the 70% interest in the Bawean PSC noted in the Asset Purchase and Sale
      Agreement. The security interest was to be released upon repayment of the
      advance or execution of the Asset Purchase and Sale Agreement.





The
      agreement completed on January 14, 2005 at which time the remaining $9,000,000
      was paid to the Company and the advance payments of $1,500,000 were applied
      to
      the purchase price.





The
      properties sold a net book value of $1,102,595 at December 31, 2004 and, at
      closing (January 14, 2005), the Company recorded a gain on the sale of
      $ 9,712,950.
      The Agreement called for the settlement of debts of the Company amounting to
      $9,862,622, and required that $4.5 million of the total purchase price of $10.5
      million be set aside for the purpose of settled amounts.





Under
      the
      terms of the Asset Purchase and Sale Agreement, the Company agreed to endeavor
      to negotiate the settlement of outstanding trade debt with creditors, less
      the
      amount owed to the Indonesian Government for Value Added Tax (“VAT”), to an
      amount approximating the $4.5 million which has been deposited in a Trade Debt
      Settlement Account. The trade debt is unsecured obligations of the Company
      and
      do not encumber the assets of the Company or the Asset Purchase and Sale
      Agreement. As of December 31, 2004, the total amount owing for such debts was
      $9,826,622. If, after six months from the date of the Agreement, there remains
      a
      debt balance, the Company has the option of either paying off the remaining
      debt
      balance or having CRC pay off the remaining balance on behalf of the Company.
      If
      CRC pays off the remaining owing balances, IPR’s interest in the PSC will be
      reduced by one percentage point for every $150,000 remaining owing and paid
      by
      CRC, and such reduced interest will be transferred to CRC. If IPR’s interest is
      reduced to 5%, the maximum reduction per the Agreement, IPR shall have no
      obligation to fund future operations
      but shall be entitled to retain its 5% ownership. CRC shall continue to have
      the
      right to recover the remaining debt balance paid on behalf of IPR. To September
      30, 2005, CRC had $1,122,580 in settlement of the Company’s debts in terms of
      the Asset Purchase and Sale Agreement. See Note 8 - Subsequent
      Events.




15


**FORTUNE
      OIL & GAS, INC.**


**NOTES
        TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER
        30, 2005**
 
 **(Unaudited)**


Pursuant
      to the Asset Purchase and Sale Agreement, CRC is required to pay the VAT amount
      owed to the Indonesian government in the amount of $2,808,448 at December 31,
      2004 excluding any VAT receivable and all interest expense accrued on late
      payments, and IPR shall reimburse CRC for such payment within 6 months, from
      the
      date on which CRC paid the VAT, plus interest at 1.5% per month. Finally, if
      there is a judgment against IPR in the Enterprise lawsuit (see Note 6 -
      Litigation) in excess of $2,550,000, then IPR shall transfer to CRC percentage
      interests in the PSC accordance with the same formula stated above for trade
      debt settlement. At September 30, 2005, CRC, in accordance with the Asset
      Purchase and Sale Agreement, paid $1,142,159 of VAT taxes owed to the Indonesian
      government. (See Note 5 - Composition of Certain Financial Statement Captions,
      Note 5 - Litigation and Note 8 - Subsequent Events.)





In
      addition to the Asset Purchase and Sale Agreement, the Company also entered
      into
      a Joint Operating Agreement (“JOA”) The purpose of the Joint Operating Agreement
      was to establish the rights and obligations of the parties with regard to
      operating activities including joint exploration, appraisal, development,
      production and disposition of hydrocarbons in the PSC. The parties to the
      agreement have the following percentage rights of net proceeds and expenses
      and
      liabilities: CRC - 70%; IPR - 30%, upon signing subject to the dilution clause
      discussed above. CRC is to act in the position of Operator of the project and
      shall be reimbursed by the Company for their proportionate share of expenses
      necessary to run the operations. As required by the Asset Purchase and Sale
      Agreement, $1.0 million of the gross sales price of $10.5 million was deposited
      directly into the Joint Operating Account as the Company’s proportional share of
      anticipated future operating costs of the Operator. The funds deposited in
      the
      Joint Operating Account are to be used by the Operator as the Company’s 30%
      ownership of operating expenses whereas the remaining 70% of operating expenses
      is to be paid by CRC as their share of operating expenses. The Joint Operations
      Account is replenished through quarterly cash-calls by the Operator of the
      Bawean PSC to the Joint Venture Partners. Should CRC elect to resign as
      Operator, it must give a 120 day notice; however, should CRC become insolvent
      or
      bankrupt it may be removed immediately.





At
      September 30, 2005, the Company had a balance of $348,933  in
      the
      Joint Operating Account representing the unutilized portion of the $1.0 million
      sales proceeds deposited in this account and a balance of $58,833 in the Trade
      Debt Settlement Account representing the unutilized portion of the $4.5 million
      deposited in this account. The amount remaining in the Trade Debt Settlement
      Account has been recorded as Restricted Cash in the accompanying Balance Sheet.





Should
      either party default from paying its share of the joint expenses, the
      non-defaulting party shall issue a Notice of Default in which the defaulting
      party shall have 5 days to cure the default. During the defaulting period,
      the
      defaulting party shall not be entitled to a right of Entitlement (quantity
      of
      hydrocarbons). The Operator can sell the entitlements and, after deducting
      expenses, pay the net proceeds to the non-defaulting party in proportion to
      the
      amounts they are owed by the defaulting party and apply any other proceeds
      to
      the establishment of a Reserve Fund. If the default is not cured within 30
      days
      of the Default Notice, the non-defaulting party may require the defaulting
      party
      to terminate the Agreement. If executed, the defaulting party’s interest shall
      be transferred to the non-defaulting party.





16





**FORTUNE
      OIL & GAS, INC.**


**NOTES
      TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005**


**(Unaudited)**





If
      either
      party has a Change in Control (any direct or indirect change in control of
      a
      Party whether through merger, sale of shares or other equity interests) the
      non-acquired party shall have the right to acquire the other party’s
      participating interest as follows:




·
            The
                acquired party shall determine and give the non-acquired party a
                Notice of
                Cash Value whichrepresents
                what the acquired party believes its participating interest is worth.




·
              If
                    the parties cannot agree on a Cash Value within 15 days of the
                    Notice,
                    then the valuation shall besubmitted
                    to an independent third party. If the independent third party’s valuation
                    is 5% or less thanthe
                    acquired party’s Cash Value, then the acquired party’s valuation shall be
                    accepted. If the independentthird
                    party’s valuation is greater than 5% of the acquired party’s Cash Value,
                    then the independentparty’s
                    valuation shall be accepted.


Either
      Party has the right to withdraw from the Joint Operating Agreement. However,
      if
      so, the withdrawing Party may continue to be liable for certain expenses.





**Note
      5 - Composition of Certain Financial Statement Captions**





**Property
      and Equipment**





Property
      and equipment consist of the following:




September
                  30,
                2005
            
            
            December
                  31,
                2004Proven
                oil and natural gas properties at cost, subject to
              depreciation
                and depletion
            
            $
            3,182,180
            
            $
            10,607,268Accumulated
                depreciation and depletion
            
            
            (2,851,401
            )
            
            (9,504,673
            )Net
            
            $
            330,779
            
            $
            1,102,595Equipment
            
            $
            606,394
            
            $
            117,455Accumulated
                depreciation
            
            
            (132,539
            )
            
            (78,301
            )Net
            
            $
            473,855
            
            $
            39,154Total
                Property and equipment, net
            
            $
            804,634
            
            $
            1,141,749





Equipment
      with a net book value of $429,146 at September 30, 2005 is held as assets for
      sale.





**Accounts
      Payable and Accrued Liabilities**





The
      Company’s accounts payable and accrued liabilities consisted of the following
      major payables:




Vendor
                name
            
            September
                30,2005
            
            December
                31,2004Haliburton
                Services PT
            
            $
            —
            
            $
            1,055,012Patra
                Drilling Contractor
            
            
            3,297,855
            
            
            3,297,855Prosafe
                Production Services Pte. Ltd
            
            
            —
            
            
            1,581,387Others
                under 10% of total
            
            
            2,300,271
            
            
            5,921,377Total
                Accounts Payable and accrued liabilities
            
            $
            5,598,126
            
            $
            11,855,631




17


**FORTUNE
      OIL & GAS, INC.**


**NOTES
      TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005**


**(Unaudited)**





The
      gain
      on the settlement of trade payables at less than recorded values results from
      negotiations with various unsecured creditors for the settlement and payment
      of
      the amounts owed at amounts less than that of the recorded liability. As of
      September 30, 2005, the Company settled the following debts:




Vendor
            
            As
                of September 30, 2005
            
            As
                of December31, 2004
            
            Payments
                inCash
            
            Forgiveness
                ofDebt
            
            Increase
                inPayablesHaliburton
                Services PT
            
            $
            —
            
            $
            1,055,012
            
            $
            158,252
            
            $
            896,760
            
            $
            —Patra
                Drilling Contractor
            
            
            3,297,855
            
            
            3,297,855
            
            
            —
            
            
            —
            
            
            —Prosafe
                Production Services Pte. Ltd
            
            
            —
            
            
            1,581,388
            
            
            385,337
            
            
            1,196,051
            
            
            —Other
                vendors (1)
            
            
            2,300,271
            
            
            5,921,376
            
            
            4,560,529
            
            
            1,073,747
            
            $
            2,013,171Total
            
            $
            5,598,126
            
            $
            11,855,631
            
            $
            5,104,118
            
            $
            3,166,558
            
            $
            2,013,171





(1)
      Vendors listed include those with a balance of 10% or greater of total accounts
      payable and accrued liabilities as of December 31, 2004.





On
      August
      20, 2005, CRC, on behalf of the Company, paid $1,122,580 of vendor debts. The
      amount paid by CRC is included in short term debt as of September 30, 2005.
      The
      Company is continuing to negotiate and settle any debts that have not been
      settled as of September 30, 2005 with the anticipation that all negotiations
      will be completed by the end of the calendar year.





During
      the
      period from January 14, 2005 through September 30, 2005, the Company negotiated
      the settlement of certain of its debts. As of September 30, 2005 the Company
      has
      settled approximately $6,126,000 of debts as of December 31, 2004 in
      consideration of $2,959,000 of cash which resulted in a gain of approximately
      $3,167,000. See Note 8 - Subsequent Events.




**Taxes
      Payable**




***Value
      Added Taxes***





Value
      Added Tax (“VAT”) is a tax assessed on certain products and services sold or
      purchased within Indonesia. The seller of the products assesses the tax against
      the buyer, collects the tax and remits it to the government. However, because
      the buyer of all of the petroleum of IPR is either the Government of Indonesia
      or State allowed companies, VAT is not calculated and included in the selling
      price of the petroleum. The Company, however, has recorded both the payable
      in
      respect of sales and the receivable in respect of purchases, as required by
      current Indonesian law. As a result, there remains at any time, a receivable
      and
      a payable of VAT. This law was changed in January 2004 eliminating the need
      to
      withhold any further VAT. Additionally, the law allows for the payment of a
      2%
      per month interest factor on any accrued but unpaid VAT. Such interest is
      accrued for a period of two years after which no further interest is accrued.
      The VAT payable, receivable, interest and net VAT payable is as follows:




As
              at,
            
            
            VAT
                Receivable
            
            
            VAT
                Payable
            
            
            Accrued
                InterestSeptember
                30. 2005
            
            $
            2,678,629
            
            $
            1,196,729
            
            $
            1,186,707December
                31, 2004
            
            $
            3,135,471
            
            $
            2,808,448
            
            $
            1,306,447




18


**FORTUNE
      OIL & GAS, INC.**


**NOTES
      TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005**


**(Unaudited)**





Pursuant
      to the Asset Purchase and Sale Agreement, CRC is required to pay the VAT amount
      owed to the Indonesian government in the amount of $2,808,448 as of December
      31,
      2004, such amount excluding any VAT receivable and all interest expense accrued
      on late payments, and IPR shall reimburse CRC for such payment within 6 months
      from the date on which CRC paid the VAT, plus interest at 1.5% per month. The
      Company anticipates repaying CRC for the payment of the VAT, less related
      interest and penalties, from the VAT receivable of $2,678,629 at September
      30,
      2005 which becomes due and payable from the Republic of Indonesia upon the
      payment, in full, of the VAT payable. On the September 26, 2005, CRC paid the
      Indonesian government $1,142,159 of VAT payable. See Note 6 - Litigation and
      Note 8 - Subsequent Events.





***Income
      Withholding Taxes***





Indonesia
      law requires companies to withhold a portion of the payments due to vendors
      for
      purchases and services for potential corporate income taxes that the vendor
      may
      owe the government. The withheld taxes are to be remitted to the government
      authorities. Remittance of withheld taxes, unless paid on a timely basis, is
      interest bearing to the entity collecting the taxes. The amount owing for taxes
      due at December 31, 2004 was paid in full during the nine month ended September
      30, 2005 and the remaining amount of $8,857 represents the current balance
      due
      for 2005 taxes.





The
      withheld tax and related interest are as follows:




As
                at
            
            
            Taxes
                Payable
            
            
            Accrued
                InterestSeptember
                30, 2005
            
            $
            8,857
            
            $
            1,228,594December
                31, 2004
            
            $
            176,078
            
            $
            331,523





**Short
      term debt**





Short-term
      debt consisted of the following:




September
                  30,
                2005
            
            December
                  31,
                2004Unsecured:Unsecured
                short term loans
            
            $
            —
            
            $
            1,150,076Unsecured,
                non interest bearing loans
            
            
            316,018
            
            
            188,220Secured:Canadian
                Imperial Bank of Commerce
            
            
            —
            
            
            933,750RBM
                Financial
            
            
            —
            
            
            210,820NOWMCO
            
            
            2,539,737
            
            
            2,539,737CRC
            
            
            2,264,741
            
            
            1,500,000Total
                short-term debt
            
            $
            5,120,496
            
            $
            6,522,603





**Unsecured
      short term loans**





Since
      the
      end of the calendar year December 31, 2000, various companies and individuals
      had advanced the Company short term funds which were used to finance operations.
      These loans bear interest at current market rates, as applicable to the Company,
      and are payable on demand. The loans were repaid on January 14,
      2005.





19


**FORTUNE
      OIL & GAS, INC.**


**NOTES
      TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005**


**(Unaudited)**





**Unsecured
      non interest bearing loans**





Since
      the
      end of calendar year ending December 31, 2000 through December 31, 2004, two
      related entities had advanced the Company short term funds which totaled
      $188,220 as of December 31, 2004 and $316,018 at September 30, 2005. There
      are
      no formal arrangements for repayment and no interest expense has been accrued
      for the loans. The loans were repaid on January 14, 2005.





**Canadian
      Imperial Bank of Commerce (CIBC)**





On
      May 23,
      2000, the Company borrowed $1,500,000, consisting of seventeen promissory notes,
      from CIBC for the purchase of GFB Resources (Java) Ltd. The notes were secured
      by a pledge of the shares in IPR. The notes bore interest at 6% per annum.
      The
      first note of $250,000 was due the earlier of five months after the start of
      production in the Camar field or eight months from the date of the agreement.
      Notes two to seventeen of $78,125 each become payable, at monthly intervals,
      starting the earlier of nine months after the start of production in the Camar
      field or twelve months from the date of the agreement. At December 31, 2004,
      the
      Company was in default on the CIBC loan and consequently the loan was classified
      as a current liability. The loan was repaid in full on January 14, 2005 and
      the
      security was discharged.




**RBM
      Financial Inc. (“RBM”)**





Between
      December 30, 2000 and February 21, 2001, the Company borrowed $620,000 from
      RBM.
      Since the date of the loans but prior to January 31, 2004, the Company made
      payments in the amount of $260,000 leaving a balance owed at January 31, 2004
      of
      $360,000 plus accrued interest of $111,600, for a total amount of $471,600.
      On
      June 30, 2004, the Company made a payment of $25,000 and on July 8, 2004, the
      Company made a payment of $150,000 leaving a balance at December 31, 2004 of
      $226,000, inclusive of $15,180 of accrued interest. On December 30, 2004, RBM
      obtained an order for payment of $550,000 (Canadian) or $401,000 (US) which
      included the two payments totaling $175,000 made in 2004. The final payment
      of
      $236,000, pursuant to the order, was made on January 14, 2005.





**NOWMCO
      Debt**




On
      February 11, 2002 the Company and its wholly owned subsidiaries FSL and IPR
      entered into a $3,000,000 debt financing with National Oil Well Maintenance
      (NOWMCO) for the purpose of providing financing for the purchase and
      retrofitting of a vessel.





The
      financing came in two deposits; $530,000 made on February 11, 2002 and
      $2,470,000 made on February 15, 2002. In addition, a related entity of NOWMCO
      advanced the Company $250,000 on July 17, 2002. As evidence of the debt, two
      promissory notes for $1,500,000 each were executed.





Additionally,
      IPR granted NOWMCO a right of first refusal to provide IPR a program of
      analysis, remediation, production maximization and future development for IPR’s
      Camar Field Operation. In exchange for the right of first refusal, NOWMCO
      provided an additional $1,200,000 of debt financing. Gross funds of $1,200,000,
      less legal expenses amounting to $66,519 were received on June 6, 2002. As
      evidence of this debt, a promissory note for $1,200,000 was executed.





The
      promissory notes were secured by 5,000,000 treasury shares of the Company’s
      common stock. Upon full payment of principal and interest of Promissory Note
      1,
      the common stock was to be released as security. Upon payment of Promissory
      Note
      2, NOWMCO was to deliver a registerable discharge of the Vessel Mortgage. The
      promissory notes were to be repaid based on IPR oil sales at the rate of $2.00
      for every barrel of the Camar Crude Oil sold plus an amount equal to the
      Discount Price defined as the prevailing market price less $2.00 per barrel.
      The
      5,000,000 treasury shares were never issued by the Company, but rather were
      secured by a Treasury Order dated February 11, 2002, which was irrevocable until
      the
      agreement was settled in accordance with the promissory note, or at its
      expiration date of December 31, 2003, which ever occurs first. The treasury
      order expired on December 31, 2003.





20


**FORTUNE
        OIL & GAS, INC.**
 **NOTES
        TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 **SEPTEMBER
        30, 2005**
 
 **(Unaudited)**




On
      July
      11, 2002, NOWMCO assigned it rights under the Loan Agreement, including the
      irrevocable Treasury Order, to Enterprise Trading Limited. No payments were
      made
      against the outstanding loan nor were any demands made upon the Treasury Order.
      On August 19, 2004, Enterprise foreclosed on the loan and took ownership of
      the
      vessel.





The
      Company recorded the net book value of the vessel, $1,910,262, as a reduction
      in
      the loan payable. The Company is currently in legal proceedings with NOWMCO.
      See
      Note 6 - Litigation




**CRC**





In
      anticipation of an agreement between CRC and the Company (See Note 4) for the
      sale of a 70% interest in the oil rights of the Bawean PSC, CRC made two advance
      payments to the Company; $1,000,000 on November 19, 2003 and $500,000 on
      February 4, 2004. The advances were secured by (i) inventory and equipment,
      (ii)
      a continuing right to all crude entitlements, and (iii) the 70% interest in
      the
      Bawean PSC referenced in the Asset Purchase and Sell Agreement. The security
      interest was to be released upon repayment of the advance or execution of the
      Asset Purchase and Sale Agreement. The Agreement was executed on November 26,
      2004 and funds, as described in the agreement, were transferred to the Company
      on January 14, 2005. The advance payments of $1,500,000 received in November
      2003 and February 2004 were applied against the total purchase price upon final
      execution of the agreement and the securities were released.





On
      August
      30, 2005 and September 26, 2005, CRC paid, on behalf of the Company, $1,122,580
      for vendor related debts and $1,142,159 for VAT taxes due the Indonesian
      government, respectively. Advances made for tax liabilities and vendor
      obligations bear interest at the rate of 1 1⁄2% per month. During the three months
      ended September 30, 2005, the Company accrued $13,817 of interest payable.
      See
      Note 6 - Litigation and Note 8 - Subsequent Events.





**Accrued
      interest payable**





September
                30,
              2005
            
            December
                31,
              2004Canadian
                Imperial Bank of Commerce
            
            $
            —
            
            $
            317,293RBM
                Financial
            
            
            -
            
            
            15,180NOWMCO
            
            
            918,514
            
            
            763,959CRC
            
            
            13,817
            
            
            -Unsecured
                short term loans
            
            
            -
            
            
            181,293Total interest payable
            
            $
            932,331
            
            $
            1,277,725





21





**FORTUNE
      OIL & GAS, INC.**


**NOTES
      TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005**





**(Unaudited)**





**Note
      5 - Stockholders’ Equity**





**Stock
      Issued**





During
      the
      nine months ending September 30, 2005 and the year ended December 31, 2004,
      the
      Company issued 17,541,784, and 1,199,900, shares of common stock respectively
      in
      payment of services or salaries provided/owed and for settlement debts and/or
      interest as follows:





**Stock
      Issued in Payment of Services**





On
      February 28, 2005, the Company issued 50,000 shares of common stock valued
      at
      $0.10 per share to its attorney as payment for legal services rendered.





On
      June
      30, 2005, the Company issued 9,664,052 shares of common stock valued at $0.10
      per share to its Chief Executive Officer, Mr. Wensveen as payment for accrued
      salary and expenses in the amount of $966,405. On June 30, 2005, the Company
      also issued 7,827,732 shares of common stock valued at $0.10 per share to its
      President, Mr. Nunn as payment for accrued salary and expenses in the amount
      of
      $782,774.





**Stock
      Issued in Payment of Debt and/or Interest**





During
      the
      year ended December 31, 2004, 1,199,900 shares of common stock valued at
      $119,989 in payment of debt and accrued interest.





**Stock
      Options**





In
      January
      2005, the Company granted options to purchase 1,400,000 shares of common stock
      to each of Mr. Wensveen and Mr. Nunn, at an exercise price of $0.07 per shares.
      These options are fully vested. These options will expire on January 1, 2015.
      No
      portions of the options have been exercised. These options were not issued
      under
      our 2005 Equity Incentive Plan. In connection with these grants, the Company
      recorded compensation expense of $223,870 using the Black-Sholes valuation
      model
      (assuming volatility of 220%, a risk-free interest rate of 4.22%, expected
      lives
      of 10 years and no dividend yield).





The
      Company’s Board of Directors and our shareholders approved the Fortune Oil &
Gas, Inc. 2005 Equity Incentive Plan (the “Plan”) which permits the Company to
      grant, for a ten year period, both stock purchase rights and stock options.
      The
      Plan reserved 10,000,000 shares of our Common Stock for issuance to our
      directors, employees and consultants under the Plan. The Plan is administered
      by
      the Board of Directors. As the administrator of the Plan, the Board of Directors
      has the authority and discretion, subject to the provisions of the Plan, to
      select persons to whom stock purchase rights or options will be granted, to
      designate the number of shares to be covered by each option or stock purchase
      right, to specify the type of consideration to be paid, and to establish all
      other terms and conditions of each option or stock purchase right. Options
      granted under the Plan will not have a term that exceeds ten years from date
      of
      grant.





As
      of
      September 30, 2005, the Company has granted no awards of stock or options under
      the Plan and , during
      the
      year ended 2004, the Company did not grant any options or Stock Appreciation
      Rights.





22





**FORTUNE
      OIL & GAS, INC.**


**NOTES
      TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005**





**(Unaudited)**





**Note
      6 - Litigation**





**National
      Oil Well Maintenance (“NOWMCO”) and Enterprise Trading Limited (“Enterprise”)
      versus Fortune Oil & Gas, Inc. (the “Company”), Fortune Ship Management Ltd
      (FSM”) and Indo-Pacific Resources (Java) Ltd. (“IPR”)**




On
      September 20, 2002, NOWMCO and Enterprise filed suit against the Company and
      its
      two wholly owned subsidiaries, FSM and IPR, for repayment of the total loan
      amount of $4,450,000 plus applicable interest and for the right to retain
      possession of the vessel currently in their possession. See Note 5 NOWMCO Debt.





The
      Company contends that it relinquished possession of the vessel to Enterprise
      on
      August 14, 2004 and that the vessel should have been valued at $3,000,000 based
      on an independent third party valuation of the scrap value of the vessel. The
      Company contends, based upon the belief that the credit is valid, that the
      outstanding loan amount should be reduced to $1,450,000 plus applicable
      interest.





On
      December 2, 2002, the Company filed suit against NOWMCO and Enterprise alleging
      breach of contract for remediation work on the Camar Field oil wells and
      fraudulent and negligent misrepresentation as to the qualifications of skills
      of
      NOWMCO and Enterprise. The counterclaim asks for compensatory, consequential
      and
      punitive judgments, pre and post judgment interest, declaration of violation
      of
      the agreements between the parties, performance of contractual obligations
      and
      costs and expenses, including reasonable attorney fees.





The
      Company has recorded the full amount of the loans, $4,450,000, less the net
      book
      value of the vessel, $1,910,262, plus accrued interest expense of $918,514
      for a
      balance owed of $3,458,252.


**Glencore
      International AG (Glencore) versus Indo-Pacific Resources (Java) Ltd (“IPR”)**





The
      Company had committed, by a sales contract dated March 3, 2003, to sell crude
      oil to Glencore. The Company was unable to meet the commitment and Glencore
      entered action against the Company on June 30, 2003 claiming damages for lost
      profits, indemnity, interest and legal costs of approximately $250,000.





The
      Company filed a defense that based on unforeseen difficulties, as a claimed
      result of force majeure, it was not able to fulfill the sales contract. In,
      September  2005,
      the
      Company’s subsidiary, IPRJ and Glencore settled this matter and have entered
      into a settlement agreement whereby IPRJ shall pay to Glencore the sum of
      $290,000 in one lump sum on or before October 31, 2005. The Company has
      guaranteed this payment. The full amount of the settlement has been accrued
      as
      of September 30, 2005. The proceedings are currently on hold and would resume
      should settlement payment not be made or upon payment in full of the settlement
      amount, the case will be dismissed.  As
      of
      November 4, 2005 the full amount of the settlement had not been made and the
      payment date for such settlement has been deferred to December 15, 2005, by
      verbal agreement between the parties.





**Patra
      Drilling Contractor (“Patra”) and Somaser, S.N.C. (“Somaser”) versus
      Indo-Pacific Resources (Java) Limited (“IPR”)**





Patra
      and
      Somaser claim breach of contract in the amount of approximately $2.7 million
      plus interest of approximately $800,000 under a contract for offshore oil and
      gas well drilling services. Patra and Somaser have requested that the dispute
      be
      settled by the Indonesian National Board of Arbitration (“BANI”). It is





23





**FORTUNE
      OIL & GAS, INC.**


**NOTES
      TO INTERIMCONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005**


**(Unaudited)**





the
      position of the Company that BANI has no jurisdiction over the case. The outcome
      of this legal action is presently not determinable and the Company has recorded
      $3,297,855 as owing to Patra. See Note 8, Subsequent Events.





**RBM
      Financial Inc. (“RBM”) versus Fortune Oil & Gas, Inc. (“the Company”)**





RBM
      loaned
      the Company $620,000 between December 30, 2000 and February 21, 2001. The
      Company has made payments against this loan in the amount of $260,000 and,
      therefore owed RBM the principal sum of $360,000 plus $111,600 of accrued
      interest, for a total amount owed of $471,600. On January 2002,RMB filed an
      action for collection of amounts unpaid. On June 30, 2004 the Company made
      a
      payment of $25,000 and on July 8, 2004, the Company made a further payment
      of
      $150,000 leaving a balance at December 31, 2004 of $226,000, inclusive of
      $15,180 of accrued interest. On December 23, 2004, RBM obtained a court order
      for $550,000 (Canadian), or $401,000 (US), which included the two payments
      made
      in 2004. The final payment, pursuant to the order, was made on January 14,
      2005.





**Singapore
      Technologies Marine Ltd. (“STM”) versus Fortune Ship Management LTD. (“FSM”) and
      the Company**





STM
      performed conversion and repair work on a vessel to become a floating offshore
      storage vessel, pursuant to the terms of a contract dated January 9, 2002.
      The
      work was contracted for, performed but never paid for by the Company. STM
      claimed damages and accrued interest to which the Company filed a defense.
      On
      August 14, 2004, a Notice of Discontinuance was issued by the Court and there
      has not been activity since the filing. The Company has recorded
      $535,208  as
      owing
      to STM at September 30, 2005 and December 31, 2004.





**Indo-Pacific
      Resources (JAVA) Ltd. versus Camar Resources Canada Inc. (International Chamber
      of Commerce, International Court of Arbitration, Paris,
      France**





On
      August
      26, 2005, the Company’s wholly owned subsidiary Indo-Pacific Resources (Java)
      Ltd. (“IPRJ”) filed a Request for Arbitration (the “Complaint”) against CRC with
      the International Court of Arbitration (the “Court”) in Paris, France. The
      Complaint alleges CRC breached the Joint Operating Agreement and also
      breached its fiduciary duty to IPRJ by failing to take all necessary acts to
      commence oil production in the
      Camar
      field. The Company seeks a finding that such breaches constitute sufficient
      grounds for the removal of CRC as operator under the JOA and for the appointment
      of a new operator that IPRJ can choose without any input from CRC. IPRJ is
      seeking monetary damages including approximately $4,850,000 for lost profits
      that will increase at a net rate of $550,000 every month (based on current
      crude
      prices) for every month the Camar field is not put into production and also
      approximately $319,440 for the fixed charges related to the mooring system
      and
      which will also continue to accrue at an average monthly rate of $36,500. The
      Company commenced the Arbitration as means to compel CRC into proper action
      including the
      charter of a vessel that will culminate in reinstated production at the Camar
      field. The Company still believes
      that CRC is suited to operate the field and is a viable partner in the Joint
      Venture. However, the Company and its management believes that in order to
      protect the value of the Company and to protect its shareholders from further
      losses associated with the lack of production, it needed to instigate a
      proceeding that would force CRC to be responsive and move forward immediately
      to
      resume operations at the Camar field.





On
      October
      7, 2005, CRC filed an Answer to IPRJ’s Request for Arbitration an also a
      Counterclaim against IPRJ. CRC denies the breaches of the JOA alleged by IPRJ.
      CRC’s Counterclaim alleges IPRJ has breached the Asset Purchase and Sale
      Agreement (“PSA”) that the parties entered into on November 26, 2004 because
      IPRJ has failed to settle all of its trade debts and value added tax principal
      obligations (including
      tax penalties and associated interest charges owed to Indonesia and hereinafter
      referred to as the “Settlement Obligations” under the Asset Purchase and Sale
      Agreement). As a result of IPRJ’s breach,




24




**FORTUNE
      OIL & GAS, INC.**


**NOTES
      TO INTERIMCONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005**


**(Unaudited)**





CRC
      alleges that BPMIGAS, the Indonesian regulatory body that issues the work
      program and budget approvals in connection with oil production under the Bawean
      PSC, did not approve the 2004 and 2005 work programs and budgets for operation
      of the Camar Field. CRC is seeking monetary damages including $12,000,000
      representing lost production suffered by CRC because of IPRJ’s failure to settle
      the Settlement Obligations, $1,000,000 per month commencing on the date of
      the
      filing of the Complaint for each month production is not obtained from the
      properties subject to the Bawean PSC, and an award of costs and interest on
      the
      damage amounts stated above. See Note 8 - Subsequent Events.





**Note
      7 - Related Party Transactions**





On
      January
      1, 2005, the Company entered into Employment Agreements with the Chief Executive
      Officer and the President. Each of the Agreements are for a term ending on
      December 31, 2014 and commit the Company, for each of the executives, to an
      annual salary of $360,000 with annual salary increases of not less than 7%
      per
      year, incentive stock options of 1,400,000 shares exercisable at $0.07 cents
      per
      share (or $100,000) which vest immediately and terminate 10 years from the
      date
      of the grant, health benefits provided by the Company, and annual vacation
      and
      sick leave allowances. In the event of a merger, selling of a controlling
      interest, or selling of a majority of its assets, the Company is obligated
      to
      pay each Executive three times his annual salary as is then in effect. In the
      event the Agreement is terminated prior to its expiration date, for any reason,
      the Executive shall receive the then current Base Salary and all accrued and
      earned, but unpaid bonuses or benefits described above. Additionally, the
      Executive shall have the right to retain all rights to shares and vested stock
      options as well as other granted equity rights, if any. If the Executive dies
      during the term of the agreement, the Executive’s estate shall be entitled to
      receive the Executive’s then current base salary for one year from date of
      death. However, the Company may terminate the Executive for “cause” as defined
      in the Agreement if (1) the Executive was given a minimum of thirty (30) days
      prior written notice of termination and (2) the Executive had one hundred twenty
      (120) days to correct any breach, default or causation. On January 1, 2005
      the
      stock options were granted in terms of the employment agreement.





On
      January
      14, 2005, the following payments for expenses and advances, which were all
      payable as of December 31, 2004 were made to the Company’s Chief Executive
      Officer and the Company’s President, $390,973 in respect of director fees which
      were accrued for periods prior to December 31, 2004; $229,455 in
      repayment.





On
      June
      30, 2005, the Company issued 9,664,052 shares of common stock valued at $0.10
      per share to its Chief Executive Officer, Mr. Wensveen as payment for accrued
      salary and expenses in the amount of $966,405. On June 30, 2005, the Company
      also issud 7,827,732 shares of common stock valued at $0.10 per share to its
      President. Mr. Nunn as payment for accrued salary and expenses in the amount
      of
      $782,774. of
      advances received from the Company’s subsidiaries; $17,279 in respect of accrued
      wages; $188,248 in respect
      of
      unsecured, non interest bearing loans; and $174,045 in respect of accrued
      expenses.





Advances
      from related parties are unsecured, have no fixed terms of repayment and are
      interest free.





25





**FORTUNE
      OIL & GAS, INC.**


**NOTES
      TO INTERIMCONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2005**


**(Unaudited)**





**Note
      8 - Subsequent Events**





**Transactions
      and events with CRC**





**Request
      for Arbitration against CRC with the International Court of
      Arbitration**





On
      October
      3, 2005, CRC made a second payment of $981,733 of the VAT Payable to the
      Indonesian government on behalf of the Company leaving a balance due of
      $217,834. Once the VAT payable has been paid in the full, the Indonesian
      government is obligated to refund, to the Company the amount of the VAT
      receivable, amounting to $2,678,629 which will be assigned to CRC for their
      payments of the VAT payable and interest expense.





On
      October
      7, 2005, CRC filed an Answer to IPRJ’s Request for Arbitration an also a
      Counterclaim against IPRJ. CRC denies the breaches of the JOA alleged by IPRJ.
      CRC’s Counterclaim alleges IPRJ has breached the Asset Purchase and Sale
      Agreement (“PSA”) that the parties entered into on November 26, 2004 because
      IPRJ has failed to settle all of its trade debts and value added tax principal
      obligations


(including
      tax penalties and associated interest charges owed to Indonesia and hereinafter
      referred to as the “Settlement Obligations” under the Asset Purchase and Sale
      Agreement). As a result of IPRJ’s breach, CRC alleges that BPMIGAS, the
      Indonesian regulatory body that issues the work program and budget approvals
      in
      connection with oil production under the Bawean PSC, did not approve the 2004
      and 2005 work programs and budgets for operation of the Camar Field. CRC is
      seeking monetary damages including $12,000,000 representing lost production
      suffered by CRC because of IPRJ’s failure to settle the Settlement Obligations,
      $1,000,000 per month commencing on the date of the filing of the Complaint
      for
      each month production is not obtained from the properties subject to the Bawean
      PSC, and an award of costs and interest on the damage amounts stated
      above.





On
      October
      25, 2005, CRC paid $2,250,000 of the Patra Drilling Contractor payable on behalf
      of the Company and settled the total amount due at an amount $1,047,855 less
      than the recorded amount due.





On
      October
      26, 2005, the Company received a Notice of Dilution from CRC alleging that
      the
      Company has not discharged its requirement to settle and pay all outstanding
      vendor and VAT tax obligations and that CRC has settled and paid $3,402,580
      of
      vendor obligations and $2,123,892 of VAT obligations. Under the terms of the
      Asset Purchase and Sale Agreement, the Company has 45 days to reimburse CRC
      for
      the payment of such non-settled vendor obligations and, if CRC is not
      reimbursed, is subject to a dilution in their ownership interest in the joint
      operations by a factor of one percentage point for each $150,000 paid by CRC
      except that the Company ownership position shall not be diluted beyond 5% of
      the
      joint operations. Per the Notice of Dilution, CRC claims that the Company’s
      ownership should be reduced to 7.12%. Under the terms of the Asset Purchase
      and
      Sale Agreement, the Company is entitled to reimburse CRC for the payment of
      such
      debts and avoid the dilution in the Company’s ownership interest. The Company
      intends to respond to the Notice of Dilution within the time frame permitted
      under the Asset Purchase and Sale Agreement. The Company does not believe that
      the payment of the debts by CRC was in accordance with the terms of the Asset
      Purchase and Sale Agreement and accordingly that the Notice of Dilution is
      not
      enforceable and the Company does not believe that CRC is entitled to reduce
      the
      Company’s ownership percentage in the Bawean PSC.




...




26





**ITEM
      2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





**Forward
      Looking Statements and Safe Harbor**





This
      Quarterly Report on Form 10-QSB contains “forward-looking statements”. These
      forward-looking statements are based on our current expectations, assumptions,
      estimates and projections about our business and our industry. Words such as
      “believe,”  “anticipate,”  “expect,”  “intend,” 
“plan,”  “may,” and other similar expressions identify forward-looking
      statements. In addition, any statements that refer to expectations, projections
      or other characterizations of future events or circumstances are forward-looking
      statements. These forward-looking statements are subject to certain risks and
      uncertainties that could cause actual results to differ materially from those
      reflected in the forward-looking statements. Factors that might cause such
      a
      difference include, but are not limited to as the following:


·
              whether
                    or not we are able to successfully develop and market our concept,




·
            whether
                or not we will be able to obtain the financial resources we need
                to start
                and continue our operations;





·
            whether
                or not we will be able to compete successfully with others in our
                industry;





·
            whether
                or not we will continue to receive the services of our management
                team;





and
      other
      factors, some of which will be outside our control. You are cautioned not to
      place undue reliance on these forward-looking statements, which relate only
      to
      events as of the date on which the statements are made. We undertake no
      obligation to publicly revise these forward-looking statements to reflect events
      or circumstances that arise after the date hereof. You should refer to and
      carefully review the information in future documents we file with the Securities
      and Exchange Commission.





Additional
      information of additional factors that could affect our business or financial
      results or condition is included in our Registration on Form 10 Report, as
      amended, and filed on October 18, 2005.





**GENERAL
      OVERVIEW**





The
      oil
      properties of the Company consist of the Bawean Production Sharing Contract
      (“PSC”) in the North Java Sea approximately 430 miles east of Jakarta, Indonesia
      and 50 miles north of the island of Java. The Bawean PSC consists of two
      offshore areas which include the Camar and Tuban Blocks. The petroleum lands
      had
      been under exploration and development since February 12, 1981 by predecessor
      firms granted by Pertamina, the government owned oil company in Indonesia with
      the authority to grant PSCs and similar agreements with operators. Predecessor
      firms include Kerr-McGee Corporation, Cities Service Oil Co. (“CITGO”) and
      Enterprise Oil plc (which was acquired by Royal Dutch Shell in 2002). The assets
      consist of all rights and entitlements relating to the 100% interest in the
      Bawean PSC and the South Camar Utilization and Unit Operating Agreement (“UOA”),
      all technical and proprietary information acquired pursuant to the Bawean PSC
      and Camar UOA, equipment and inventory.





The
      Camar
      Block is operated under a production sharing contract. There is no royalty
      payable, although there is a “First Tranche Petroleum” provision (“FTP”), which
      is a percentage of the gross production revenue that is shared directly with
      the
      Indonesian government, before any cost of recovery or profit oil is taken.
      The
      FTP is 20% of the gross production revenue, and the Company is entitled to
      a
      45.45% share of it, up to a maximum of 89.09%. Allowable costs are recovered
      from the remaining 80% of the gross production, with any unused cost oil being
      shared with the government in the same proportions as the FTP. Because the
      field
      has not performed as well as the previous operator(s) had predicted, there
      is a
      large un-recovered cost pool, amounting to approximately $165,479,000 still
      associated with the Camar oil field, and consequently all of permitted cost
      oil
      allowances will revert to the contractor group. Therefore, the Company retains
      89.09% of the proceeds of all crude oil sales. We believe that our association
      with Camar Resources Canada, Inc (“CRC”), the sale of a 70% interest in the
      Bawean Block Production Sharing Contract to CRC, CRC acting as the Operator
      of
      the joint venture, and CRC’s production and management skills in oil production
      as well as the favorable relations with the Indonesian government will help
      to
      overcome the difficulties that prior operators of the field experienced.
      However, until a vessel is secured by purchase or lease, the production and
      off
      loading of oil cannot commence and thus revenues will not be realized. On
      September 27, 2005, CRC entered into an agreement for the use of a storage
      tanker at the Camar field with PT. Panji Adi Samudera (PAS) Maritne (“PAS”). The
      Company anticipates that the storage tanker will be in the field and operational
      by November 15, 2005.




27




On
      November 26, 2004, we entered into an Asset Purchase and Sale Agreement with
      Camar Resources Canada, Inc. (“CRC”) for the sale of a 70% interest in the
      Bawean Block Production Sharing Contract in exchange for $10,500,000. The
      purchase price was allocated between amounts to be placed in a Joint Operating
      Account ($1,000,000), amounts to be used for the settlement of trade debt
      ($4,500,000) and funds to the Company for general operations ($5,000,000).
      Under
      the terms of the agreement CRC is to act as the Operator of the project. The
      net
      proceeds from the operation are to be shared 70% by CAMAR and 30% by the
      Company. The transaction was completed on January 14, 2005 and all remaining
      funds due us were transferred as of that date. As a result of the above
      transaction, $9,712,950 was reported as a gain on the sale of oil rights during
      the quarter ended June 30, 2005.





The
      funds
      deposited in the Joint Operating Account are to be used by the Operator as
      our
      30% of operating expenses whereas the remaining 70% of operating expenses is
      to
      be paid by CRC as their share of operating expenses. The Joint Operations
      Account is replenished through quarterly cash-calls by the Operator of the
      Bawean PSC to the Joint Venture Partners. As of September 30, 2005, we have
      a
      credit remaining of $348,933 in the Joint Operating Account for future
      expenditures.





The
      $4,500,000 of funds deposited in the Trade Debt Settlement Account is to be
      used
      for the settlement of debt with creditors, less amounts owed to the Indonesian
      Government for VAT. As of December 31, 2004, the total amount owing for such
      debts was $9,826,622. As of September 30, 2005, we were successful in reducing
      the debt balance by $6,125,566by negotiating favorable settlement agreements
      with creditors. Of the amount of debt balance reduce, $1,122,579 was a result
      of
      CRC paying the vendors directly. As a result of these settlement agreements,
      we
      recorded a gain, in other income, of $3,166,558  for
      the
      nine months ended September 30, 2005. It should be noted that if we are not
      able
      to settle the remaining amounts due, we could request CRC to pay off such
      amounts in exchange for a reduction in our remaining 30% share interest. Our
      agreement allows for the reduction of 1 percentage point of ownership for each
      $150,000 paid by CRC on our behalf.





Additionally,
      under the terms of the agreement, CRC is to pay the gross VAT payable amount
      owing the Indonesian government, amounting to $1,196,729 as of September 30,
      2005, net of all interest expense accrued as of the time of the payment by
      CRC.
      VAT paid by PSC’s in Indonesia is a refundable tax. We are to reimburse CRC for
      such payment, or for any part of such payment that has not been refunded by
      the
      Indonesian Government, within six months with interest at 1.5% per month.





Finally,
      if there is a final settlement in the National Oil Well Maintenance Company
      and
      Enterprise Trading Limited versus Fortune Oil and Gas Inc, Fortune Ship
      Management Ltd and Indo-Pacific Resources (Java) Ltd. lawsuit that we are unable
      to satisfy, CRC will pay the short fall and we shall transfer to CRC percentage
      interests in accordance with the same formula as stated in the previous
      paragraph. As of September 30, 2005, the parties had not reached a settlement
      agreement





For
      the
      year ended December 31, 2004, we achieved revenues from oil properties of
      $3,069,747. Our oil production during the year was curtailed in April 2004
      due
      to production difficulties associated with pipeline blockage and equipment
      malfunctions complicated by cash flow shortfalls which further delayed repairs
      of the oil production capabilities. Finally, on August 19, 2004, the vessel
      used
      for the storage of produced crude oil was handed over to the debt holder of
      the
      vessel for non-payment of debt obligations. From the date of loosing the vessel
      used for storage we had no alternative arrangement for the use of a tanker
      for
      storage of oil produced at the Camar field. Therefore we suspended oil
      production and have not generated revenue from oil production since. As a
      result, we sold 96,940 barrels of oil during the year ended December 31, 2004
      down from 134,894 barrels of oil sold during the year ended December 31, 2003.




28




In
      the past we have experienced production delays due to mechanical malfunctions
      and cash flow difficulties. We believe that the joint venture agreement with
      CRC
      will assist in overcoming these difficulties. The production of oil in 2004
      was
      negatively impacted causing negative gross margins after production costs,
      net
      losses for the applicable years and negative cash flow from operations.
      Likewise, for the nine months ended September 30, 2005 there was not any
      production of oil. However, the past trend of negative operations will, we
      believe, reverse itself due to: the maintenance and operation of the oil fields
      being operated by CRC as the Operator; CRC being responsible for 70% of total
      operating costs while we will be responsible for 30% of the operating costs;
      securing of a vessel to off load the oil production and the ability to sell
      the
      oil to third parties and the general price increases in the price per barrel
      in
      the world markets. Once oil production is commenced, we believe that the gross
      oil revenues of the joint operations will increase and will produce profitable
      operations to the Joint Partners and thus to our 30% share of operational
      results.





During
      the
      months of January through March, the geographical location of our oil properties
      often experiences storms and high seas. While such conditions make it difficult
      to impossible to off load oil production, it does not, in general, preclude
      us
      from producing oil and storing it in the moored vessel that will be used of
      storage. Once calm seas are returned, the production stored may be off loaded
      and sold.





Our
      financial results are largely dependent on a number of factors, including
      commodity prices. Commodity prices are outside of our control and historically
      have been and are expected to remain volatile. Commodity prices are affected
      by
      changes in market demands, overall economic activity, weather, pipeline capacity
      constraints, inventory storage levels, basis differentials and other factors.
      As
      a result, we cannot accurately predict future crude oil prices and therefore,
      cannot accurately predict revenues. In the nine months ended September 30,
      2005,
      we did not realize any revenues from oil production due to the lack of a vessel
      to store oil production. In 2004, for the oil produced and sold, our realized
      oil price was 42.3% higher than in 2003.





**Outlook**





The
      following information summarizes management’s outlook for calendar year
      2005:





·
            We
                expect that the Joint Venture Operation will have secured a vessel
                to be
                used for storing produced oil prior to sell to customers will be
                secured
                during the fourth quarter.


·
            We
                expect that the Joint Venture Operation will commence oil production
                approximately sixty to ninety days after a storage vessel is chartered,
                although the production levels will be minor in
                amount.


·
            We
                do not expect that the oil production occurring during the quarter,
                if
                any, will be sold to customers and, therefore, the production will
                be held
                as inventories as of the end of the year.


·
            Once
                production is resumed at the Camar field, we believe we will be able
                to
                produce approximately 1,500 barrels of processed oil per day over
                the
                balance of 2005.


·
            We
                believe that as we continue to execute our strategy, we will see
                improved
                liquidity through cash generated by operating activities. We believe
                that
                we will need additional capital to finance operation, current operating
                losses and to settle current debts. Our current working capital deficit,
                the anticipated sale of our mooring system, the credit balance in
                our
                joint operating account, and the continuing settlement of vendor
                payables
                at less than recorded values will not be sufficient to maintain our
                current operating levels without the additional
                capital.





29





**Critical
      Accounting Policies**





**Oil
      and Natural Gas Properties**





Investments
      in oil and natural gas properties are accounted for using the full-cost method
      of accounting. All costs directly associated with the acquisition, exploration
      and development of oil and natural gas properties are capitalized. Such costs
      include lease acquisitions, seismic surveys, and drilling and completion
      equipment. Maintenance and repairs are expensed as incurred.





Oil
      and
      natural gas property costs are depleted based on the unit-of-production method
      using estimates of proved reserve quantities. Investments in unproved properties
      are not amortized until proved reserves associated with the projects can be
      determined or until they are impaired. Unevaluated properties are assessed
      periodically for impairment on a country-by-country basis. If the results of
      an
      assessment indicate


that
      the
      properties are impaired, the amount of the impairment is added to the proved
      oil
      and natural gas


property
      costs to be amortized. The amortizable base includes estimated future
      development costs and dismantlement, restoration and abandonment costs, net
      of
      estimated salvage values. Depletion recorded in these financial statements
      is
      based upon a reserve report by Petroleum Geo-Services (UK) Ltd dated March
      18,
      2005.





Dispositions
      of oil and natural gas properties are accounted for as adjustments to
      capitalized costs with no gain or loss recognized, unless such adjustments
      would
      significantly alter the relationship between capitalized costs and proved
      reserves.





The
      net
      capitalized costs of proved oil and natural gas properties are subject to a
      “ceiling test” which limits such costs to the estimated present value,
      discounted at a 10% interest rate, of future net revenues from proved reserves,
      based on current economic and operating conditions. If net capitalized costs
      exceed this limit, the excess is charged to operations through depreciation
      and
      depletion. Because of the volatility of oil and natural gas prices, no assurance
      can be given that there will not be further write-down in future periods.





**Oil
      and Natural Gas Reserve Estimates**





Estimating
      quantities of proved reserves is a subjective process and involves estimating
      underground accumulations of hydrocarbons that cannot be measured in an exact
      manner The reserve data included in these financial statements are estimates
      as
      of December 31, 2004 and were prepared by Petroleum Geo-Services (UK) Ltd.,
      The
      process relies on interpretation of available geologic, geophysical, engineering
      and production data. The extent, quality and reliability of this data can vary.
      The process also requires certain economic assumptions regarding drilling and
      operating expenses, capital expenditures, taxes and availability of funds.
      The
      SEC mandates some of these assumptions, such as oil and natural gas prices
      and
      the present value discount rate.





Proved
      reserve estimates prepared by others may be substantially higher or lower than
      the Company’s estimate. Because these estimates depend on many assumptions, all
      of which may differ from actual results, reserve quantities actually recovered
      may be significantly different than estimated. Material revisions to reserve
      estimates may be made depending on the results of drilling, testing, and rates
      of production.





**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.





**Impairment
      of Long-Lived Assets**





Management
      evaluates long-lived assets for impairment whenever changes in circumstances
      indicate that the carrying value of an asset may not be recoverable. If the
      estimated future undiscounted cash flows from the use of an asset are less
      than
      the carrying value, impairment would be recorded to reduce the related asset
      to
      its estimated fair value.




30




**Stock-Based
      Compensation**





SFAS
      No.
      123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148,
“Accounting for Stock-Based Compensation - Transition and Disclosure,” defines a
      fair value based method of accounting for stock-based compensation. However,
      SFAS No. 123 allows an entity to continue to measure compensation cost related
      to stock and stock options issued to employees using the intrinsic method of
      accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees.” Entities electing to remain with the
      accounting method of APB No. 25 must make pro forma disclosures of net income
      and earnings per share as if the fair value method of accounting defined in
      SFAS
      No. 123 had been applied . The
      Company  has
      elected to account for its stock-based compensation to employees using the
      fair
      value method under SFAS No. 123. Due to the adoption of SFAS 123 no pro forma
      disclosures are presented as required by SFAS 148.





Common
      stock issued for salaries and other services are recorded at the estimated
      fair
      value at the time of issuance.





**RESULTS
      OF OPERATIONS**





**Three
      Months Ended September 30, 2005 Compared to the Three Months Ended September
      30,
      2004**





The
      following tables set forth the percentage relationship to total revenues of
      items included in the Company’s Consolidated Statements of Operations for the
      quarters ended September 30, 2005 and 2004.





**Revenues**





We
      did not
      have any revenues from oil production in the three months ended September 30,
      2005 as a result of not having a vessel available for the off loading and
      storage of produced oil. Additionally, there were not any revenues from oil
      production in the three months ended September 30, 2004 as a result of the
      discontinuance of oil operations on April 5, 2004, due to a mechanical
      malfunction in our largest producing well, CM-1. Additionally, on August 14,
      2004 the vessel, into which the produced oil was to be stored, off loaded and
      brought to market, was handed over to the debt holder as partial payment for
      the
      loan secured by the vessel. The Company did not have an alternative method
      to
      store oil production thereafter.





We
      do not
      presently have the ability to transport or store gas produced and consequently
      we derive no revenues from gas production. All gases are flared at the oil
      platform.





**For
                the three months ended September 30,**
            
            **$**
            
            **$**
            
            **$**
            
            **%****2005**
            
            **2004**
            
            **Change**
            
            **Change****Income
                from Oil and Gas Properties**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **-**
            
            
            **N/A**





The
      Company and CRC have identified a storage tanker for lease that can be used
      at
      the Camar field. CRC is in advanced discussions with PAS for the use,
      maintenance and staffing of the storage tanker “Fortuna Ayu” (which was
      previously owned by the Company and surrendered to NOWMCO) PAS acquired the
      ship
“Fortuna Ayu” from NOWMCO’s assignee, Enterprise, in September 2005 in
      anticipation of entering into the charter agreement for the ship for the Camar
      field with CRC. We believe chartering a storage tanker is a better approach
      for
      economic and operating reasons than attempting to acquire ownership of another
      storage tanker and obtaining the financing necessary to undertake that
      commitment. We anticipate the cost to charter the storage tanker will be
      approximately $10,750 per day. That cost will include all staffing, maintenance,
      upkeep and related items necessary to keep the storage tanker in continuous
      operations in the field. We anticipate that the storage tanker will be
      operational at the Camar field in March 2006.





31





**Expenses**





**Production
      Costs**





**For
                the three months ended September 30,**
            
            **$**
            
            **$**
            
            **$**
            
            **%****2005**
            
            **2004**
            
            **Change**
            
            **Change****Production
                Costs**
            
            **$**
            **-**
            
            **$**
            **64,944**
            
            **$**
            **(64,944**
            **)**
            
            **(100**
            **%)****Percentage
                of Total Revenues**
            
            
            **N/A**
            
            
            **N/A**





During
      the
      three months ended September 30, 2005, the production facilities were idle
      and,
      therefore, all cost incurred have been reported as Other Expense -property
      and
      equipment maintenance csosts. The total costs incurred in the three months
      ended
      September 30, 2004 were approximately $65,000 . Revenues  ceased
      on
      April 5, 2004. However, certain fixed and variable costs, such as payroll
      expenses, routine maintenance, and supervisory personnel costs, continued to
      be
      incurred. As a result, the Company generated a negative gross margin from
      operations of $65,000 due to continuing oil production related costs as the
      source of the well malfunction was investigated and attempts were made to solve
      the problems. On August 19, 2004, the vessel was handed over to the debt holder
      of the vessel as partial payment on the loan and, therefore, until a replacement
      vessel is secured, the Company does not have the ability to generate revenues.
      As a result of the equipment malfunctions and the loss of the vessel, the
      Company has not had production capabilities since April 5, 2004.





**Depreciation
      and depletion of oil and gas properties**





**For
                the three months ended September 30,**
            
            **$**
            
            **$**
            
            **$**
            
            **%****2005**
            
            **2004**
            
            **Change**
            
            **Change****Depreciation
                and depletion**
            
            **$**
            **27,886**
            
            **$**
            **29,838**
            
            **$**
            **(
                1,952**
            **)**
            
            **(6.5**
            **)%****Percentage
                of Total Revenues**
            
            
            **N/A**
            
            
            **N/A**





Depreciation
      costs incurred in the three months ended September 30, 2005 have been classified
      as Idle Depreciation in Other Income and Expenses below. Depletion of the oil
      reserves was not charged to operations in the three months ended September
      30,
      2005 because the oil production facilities had been idle since August 19, 2004
      when the owner of the vessel foreclosed on the loan, due to non-payment, and
      took possession of the vessel. Comments included in this section relate to
      the
      decrease in depreciation expense for the three month periods ending September
      30, 2005 and 2004.





Depreciation
      of oil equipment and depletion of oil properties decreased by 6.5% for the
      three
      months ended September 30, 2005 from the three months ended September 30, 2004.
      On February 18, 2005, the Company purchased a mooring system, which is required
      for vessel off loading of oil production, at a gross cost of approximately
      $500,000 and commenced depreciation during the period. Depreciation expense
      of
      $27,886 for the three months ended September 30, 2005 was included in Other
      income (expense) - idle production costs in the Statement of Operations for
      the
      period then ended as the Company was not facilitated for oil production during
      the period.





32





**Selling,
      general and administrative costs**





**For
                the three months ended September 30,**
            
            **$**
            
            **$**
            
            **$**
            
            **%****2005**
            
            **2004**
            
            **Change**
            
            **Change****Selling,
                General and Administrative Costs**
            
            **$**
            **616,963**
            
            **$**
            **659,376**
            
            **$**
            **(42,413**
            **)**
            
            **(6.43**
            **)%****Percentage
                of Total Revenues**
            
            
            **N/A**
            
            
            **N/A**





Selling,
      general and administrative costs increased by $42,413 or 6.43% primarily due
      the
      addition of one accounting staff in the Corporate Office and consulting services
      in connection with financial reporting.





**Other
      Income and Expense**





Other
      income and expense consisted of the following items:





**For
                the three months ended September 30,****$**
            
            **$**
            
            **$**
            
            **%****2005**
            
            **2004**
            
            **Change****Gain
                (loss) on settlement of trade payables at less than recorded values**
            
            **$**
            **(10,679**
            **)**
            **$**
            **-**
            
            **$**
            **(10,679**
            **)**
            
            **100.0**
            **%****Foreign
                exchange gain (loss)**
            
            
            **7,717**
            
            
            **(26,058**
            **)**
            ****
            **33,775**
            ****
            ****
            **129.6**
            **%****Interest
                expense**
            ****
            ****
            **295,675**
            ****
            ****
            **238,631**
            ****
            ****
            **57.044**
            ****
            ****
            **23.9**
            **%****Idle
                depreciation**
            ****
            ****
            **27,886**
            ****
            ****
            **-**
            ****
            ****
            **27,886**
            ****
            ****
            **100.0**
            **%****Property
                and equipment maintenance costs**
            ****
            ****
            **191,942**
            ****
            ****
            **-**
            ****
            ****
            **191,942**
            ****
            ****
            **100.0**
            **%****Legal
                Settlement Costs**
            ****
            ****
            **90,000**
            ****
            ****
            **-**
            ****
            ****
            **90,000**
            ****
            ****
            **100.0**
            **%**




The
      loss
      on the settlement of trade payables at less than recorded values results from
      negotiations with various unsecured creditors for the settlement and payment
      of
      the amounts owed at amounts less than that the recorded liability. During the
      three months ended September 30, 2005 debts were settled for less than the
      recorded value amounting to $55,129 offset by a new claim, which appeared valid,
      amounting to $65,808. As of September 30, 2005, the Company was successful
      in
      settling the following debts:





Vendor
            
            As
                of September 30, 2005
            
            As
                of December 31, 2004
            
            Payments
                in Cash
            
            Forgiveness
                of Debt
            
            Increase
                in PayablesHaliburton
                Services PT
            
            $
            -
            
            $
            1,055,012
            
            $
            158,252
            
            $
            896,760
            
            $
            -Patra
                Drilling Contractor
            
            
            3,297,855
            
            
            3,297,855
            
            
            -
            
            
            -
            
            
            -Prosafe
                Production Services Pte. Ltd
            
            
            -
            
            
            1,581,388
            
            
            385,337
            
            
            1,196,051
            
            
            -Other
                vendors (1)
            
            
            2,300,271
            
            
            5,921,376
            
            
            4,560,529
            
            
            1,073,747
            
            
            2,013,171Total
            
            $
            5,598,126
            
            $
            11,855,631
            
            $
            5,104,118
            
            $
            3,166,558
            
            $
            2,013,171





(1)
      Vendors listed include those with a balance of 10% or greater of total accounts
      payable and accrued liabilities as of December 31, 2004.





We
      are
      continuing to negotiate and settle any debts that have not been settled as
      of
      September 30, 2005, with the anticipation that all negotiations will be
      completed by the end of the calendar year. On October 25, 2005, CRC paid
      $2,250,000 of the Patra Drilling Contractor payable on behalf of the Company
      and
      settled the total amount due.





The
      net
      foreign exchange gain (loss) was due to gains realized from accounts payable
      recorded in foreign currencies and the related fluctuations of such currencies
      at the time of payment and unrealized gains or (losses) recorded for the change
      in the stated value of assets or liabilities as of the end of the quarter.




33




Property
      and equipment maintenance costs incurred during the three months ended September
      30, 2005 of $191,942, and idle depreciation expense of $27,886 relates to the
      fixed costs and continuing employee and related costs incurred during the period
      in which the Company had no production and all facilities were idle.





Interest
      expense consists of interest on short term obligations, VAT taxes payable and
      withholding of corporate income taxes and personal income tax withholdings
      and
      the accrued interest related to the NOWMCO outstanding debt. The amount of
      interest expense for the three months ended September 30, 2005 decreased by
      $57,044 from the amount accrued during the three months ended September 30,
      2004
      due to the payment of approximately $2.0 million of interest bearing short
      term
      debt during the six months ended June 30, 2005. The remainder of the interest
      expense is for additional accrued interest on the NOWMCO debt, $42,741, and
      $13,817 of accrued interest for advances made by CRC for vendor obligations
      and
      VAT taxes payable.





Income
      Taxes





We
      account
      for income taxes under the liability method, which requires us to recognize
      deferred tax assets and liabilities for the expected future tax consequences
      of
      events that have been included in the financial statements or tax returns.
      As of
      September 30, 2005, the deferred tax assets related to our net operating loss
      carry-forwards are fully reserved. The Company has not provided an income tax
      provision for the three months ended September 30, 2005 due to the available
      federal tax loss carry forwards of $12,827,374 as of December 31, 2004, capital
      losses available to offset capital gains and because earnings will not be
      taxable by the Federal Government until the earnings are repatriated to North
      America





**Nine
      Months Ended September 30, 2005 Compared to the Nine Months Ended September
      30,
      2004**





The
      following tables set forth the percentage relationship to total revenues of
      items included in the Company’s Consolidated Statements of Operations for nine
      months ended September 30, 2005 and 2004.





**Revenues**





The
      Company did not have the ability to produce oil during the nine months ended
      September 30, 2005 as a result of not having a vessel to store production while
      awaiting the sale and off loading to a customer’s vessel. Revenues for the nine
      months ended September 30, 2004 are exclusively from oil production. We do
      not
      presently have the ability to derive production volumes from natural gas and,
      as
      a result, all gases are flared.


**For
                    the nine months ended September 30,**
              
              
              $
              
              
              $
              
              
              $
              
              
              %**2005**
              
              
              **2004**
              
              
              **Change**
              
              
              **Change****Income
                  from Oil and Gas Properties**
              
              **$**
              **-**
              
              **$**
              **3,069,747**
              
              **$**
              **(3,069,747**
              **)**
              
              **(100.0)**
              **%****Average
                  Prices -****Oil
                  sales price (per Bbl)**
              
              
              -
              
              **$**
              **31.67**
              
              
              **N/A**
              
              
              **N/A****Oil
                  produced (Bbl’s)**
              
              
              -
              
              
              **96,940**
              
              
              **N/A**
              
              
              **N/A**




Oil
      sold
      for the nine months ended September 30, 2004, amounting to 96,940 Bbls, ceased
      full operations on April 5, 2004, due to a mechanical malfunction in our largest
      producing well, CM-1. Additionally, on August 14, 2004, the vessel, into which
      the produced oil was to be stored, off loaded and brought to market, was handed
      over to the debt holder as partial payment for the loan secured by the vessel.
      The Company did not have a method to store produced oil production thereafter
      and, therefore, there was no further production throughout the year.





**Operating
      Costs and Expenses**





**Production
      Costs**




**For
                the nine months ended September 30,**
            
            
            **$**
            
            
            **$**
            
            
            **$**
            
            
            **%****2005**
            
            
            **2004**
            
            
            **Change**
            
            
            **Change****Production
                Costs**
            
            
            
            
            **$**
            **3,085,952**
            
            **$**
            **(3,085,952**
            **)**
            
            **(
                100.0**
            **)%**




34




During
      the nine months ended September 30, 2005 the production facilities were idle
      and, therefore, all cost incurred have been reported as Other Expense - Idle
      facilities.





The
      total
      production costs incurred in the nine months ended September 30, 2004 were
      $3,085,952 which consisted of direct costs of oil production of approximately
      $2,599,044 and vessel related costs of $486,908.





The
      direct
      costs of production of $2,599,044 consisted principally of -





·
            $1,252,000
                of capitalized crude oil included in yearend inventories as of December
                31, 2003.


·
            $689,000
                of rentals for supply charters and
                generators


·
            $142,000
                of production crew salaries


·
            $205,000
                for expenditures related to oil lifting
                costs


·
            $90,000
                of insurance costs


·
            $78,000
                of fuel costs


·
            $43,000
                of communication costs


·
            $25,000
                of food related costs for the production
                crew


·
            $25,000
                of storage and handling costs


·
            $50,000
                of other miscellaneous costs.





The
      vessel
      related cost of approximately $486,908, consisted principally of -


·
            $193,000
                of vessel crew costs


·
            $124,000
                of vessel related insurance costs


·
            $69,000
                of vessel maintenance and upkeep
                costs


·
            $47,000
                of vessel crew living quarters
                costs


·
            $54,000
                of other miscellaneous costs





We
      lost
      the use of the vessel on August 19, 2004 when the vessel was handed over to
      the
      debt holder of the vessel as partial payment on the loan.





**Depreciation
      and depletion of oil and gas properties**




**For
              the nine months ended September 30,**
            
            
            $
            
            
            $
            
            
            $
            
            
            %**2005**
            
            
            **2004**
            
            
            **Change**
            
            
            **Change****Depreciation
                and depletion**
            
            **$**
            **81,427**
            
            **$**
            **340,738**
            
            **$**
            **(
                259,311**
            **)**
            
            **(
                76.1**
            **%)****Percentage
                of Total Revenues**
            
            
            **N/A**
            
            
            **11.1**
            **%**





Depreciation
      costs incurred in the nine months ended September 30, 2005 have been classified
      as Idle Depreciation in Other Income and Expenses below. Comments included
      in
      this section relate to the explanation of the decrease in depreciation expense
      for the nine month periods ending September 30, 2005 and 2004.





Depreciation
      of oil equipment and depletion of oil properties decreased by 76.1% for the
      nine
      months ended September 30, 2005 from the nine months ended September 30, 2004.
      The principal reason for the decrease in depreciation expense was due to the
      loss of the vessel, which had a book value of $1,910,262 on August 19, 2004,
      the
      date the vessel was handed over to the debt holder due to non-payment of monthly
      debt payments.




35




On
      February 18, 2005 the Company purchased a buoy mooring system, which is required
      for vessel off loading of oil production, at a gross cost of $500,000 and
      commenced depreciation during the period.  Depreciation
      expense of $81,427 for the nine months ended September 30, 2005 was included
      in
      Other income (expense) - property and equipment maintenance costs in the
      Statement of Operations for the period then ended as the Company was not
      facilitated for production during the period principally due to the lost use
      of
      the vessel.





Depreciation
      of oil equipment and depletion of oil properties decreased by 76.1%, or
      $259,311, for the nine months ended September, 2005 from the nine months ended
      September 31, 2004. Depletion of the oil reserves was not charged to operations
      in the nine months ended September 30, 2005 because the oil production
      facilities had been idle since August 19, 2004 when the owner of the vessel
      foreclosed on the loan, due to non-payment, and took possession of the
      vessel.





**Selling,
      general and administrative costs**





**For
                the nine months ended September 30,**
            
            **$**
            
            **$**
            
            **$**
            
            **%****2005**
            
            **2004**
            
            **Change**
            
            **Change****Selling,
                General and Administrative Costs**
            
            **$**
            **2,860,030**
            
            **$**
            **2,010,739**
            
            **$**
            **849,291**
            
            
            **42.2**
            **%****Percentage
                of Total Revenues**
            
            
            **N/A**
            
            
            **65.5**
            **%**





Selling,
      general and administrative costs increased by $849,291or 42.2% due to
      -





·
            An
                increase of $181,533 incurred in relation to consulting fees associated
                with the VAT tax owed the Indonesian
                government


·
            An
                increase of $222,000 incurred in relation to accounting consulting
                fees.


·
            An
                increase of $158,000 incurred in relation to the employees who were
                laid
                off as a result of the 70% sale of our oil rights and CRC becoming
                the
                Operator of the oil field.


·
            An
                increase of $223,870 for compensation expense recorded in connection
                with
                the granting of options.


·
            An
                increase of $130,000 in legal expenses related to legal matters and
                lawsuits, the sale of the 70% interest in oil rights and general
                corporate
                matters.


·
            A
                decrease of $64,000 for salary of an
                expatriate.


·
            A
                net decrease of $2,112 for other matters.





**Other
      Income and Expense**





Other
      income and expense consisted of the following items:





**For
                the nine months ended September 30,**$
            
            $
            
            $
            
            %**2005**
            
            **2004**
            
            **Change****Gain
                on settlement of trade payables at less than recorded values**
            
            **$**
            **3,166,558**
            
            **$**
            **-**
            
            **$**
            **3,166,558**
            
            
            **100.0**
            **%****Foreign
                exchange gain (loss)**
            
            
            **(85,242**
            **)**
            
            **(20,875**
            **)**
            
            **64,367**
            
            
            **308.3**
            **%****Interest
                expense**
            
            
            **418,490**
            
            
            **725,806**
            
            
            **(307,316**
            **)**
            
            **(42.3**
            **)%****Gain
                on sale of oil rights**
            
            
            **9,712,950**
            
            
            **-**
            
            
            **9,712,950**
            
            
            **100.0**
            **%****Idle
                depreciation**
            
            
            **81,428**
            
            
            **-**
            
            
            **81,428**
            
            
            **100.0**
            **%****Legal
                settlement cost**
            
            
            **90,000**
            
            
            
            
            
            **(90,000**
            **)**
            
            **(100.0**
            **)%****Property
                and equipment maintenance costs**
            
            
            **554,398**
            
            
            **-**
            
            
            **554,398**
            
            
            **100.0**
            **%****Other
                income (expense)**
            
            
            
            
            
            **(765**
            **)**
            
            **765**
            
            
            **100.0**
            **%**





The
      gain
      on the settlement of trade payables at less than recorded values results from
      negotiations and payments with various unsecured creditors for the settlement
      of
      the amounts owed at amounts less than those recorded as a
      liability.




36




The
      net
      foreign exchange gain (loss) was due to gains realized from accounts payable
      recorded in foreign currencies and the related fluctuations of such currencies
      at the time of payment and unrealized gains or (losses) recorded for the change
      in the stated value of assets or liabilities as of the end of the quarter.





The
      gain
      on the sale of oil rights pertains to the November 26, 2004 agreement, which
      was
      effective on January 14, 2005 which we entered into with CRC for the sale of
      a
      70% interest in the Bawean Block Production Sharing Contract in exchange for
      $10,500,000. The net gain amounted to $9,712,950. The basis of the oil rights
      was $1,102,595 at December 31, 2004.





The
      legal
      settlement cost was a result of the settlement agreement reached in connection
      with the Glencore litigation.





Property
      and equipment maintenance costs during the nine months ended September 30,
      2005
      of $554,398, and idle depreciation expense of $81,427  relates
      to
      the fixed costs and continuing employee and related costs during the period
      in
      which the Company had no production and all facilities were idle.





Interest
      expense consists of interest on short term obligations, VAT taxes payable and
      withholding of corporate income taxes and personal income tax withholdings
      and
      the accrued interest related to the NOWMCO outstanding debt. The amount of
      interest expense for the nine month ended September 30, 2005 decreased by
      $307,316 from the amount accrued during the nine months ended September 30,
      2004
      due to the payment of approximately $2.0 million of interest bearing short
      term
      debt during the period. The majority of the interest expense,
      $165,580,  is
      additional accrued interest on the NOWMCO debt and $239,117 of additional
      accrued interest on unpaid VAT and withholding taxes due the Indonesian
      government and accrued interest of $13,817 for funds advanced by CRC in the
      payment of vendor debts and VAT taxes.





**Income
      Taxes**





We
      account
      for income taxes under the liability method, which requires us to recognize
      deferred tax assets and liabilities for the expected future tax consequences
      of
      events that have been included in the financial statements or tax returns.
      As of
      September 30, 2005, the deferred tax assets related to our net operating loss
      carry-forwards are fully reserved. The Company has not provided an income tax
      provision for the nine months ended September 30, 2005 and for the nine months
      ended September 30, 2004 due to the available federal tax loss carry forwards
      of
      $12,827,374 as of December 31, 2004, capital losses available to offset capital
      gains and because earnings will not be taxable by the Federal Government until
      the earnings are repatriated to North America.





**LIQUIDITY
      AND CAPITAL RESOURCES**





We
      have
      funded our business, to date, primarily from issuances of equity and debt
      securities as well as the sale of a 70% interest in the Bawean PSC dated
      February 12, 1981 rights in exchange for $10,500,000 which was effective as
      of
      January 14, 2005. Our sources of liquidity are cash flows which may be a result
      of the production and sale of oil through our joint venture with CRC. Since
      the
      completion of the Agreement, the joint venture has not produced and sold any
      oil. This is principally a result of the joint venture not having a vessel
      to
      off load the oil production. Although the joint venture continues to actively
      seek to contract for a vessel, there is not one in place to do so. Therefore,
      we
      are currently experiencing negative cash flow as a result of our requirement,
      by
      the Agreement, to fund 30% of the Operators expenses and our continuing
      obligations for general and administrative expenditures. We will attempt to
      sell
      the buoy mooring equipment to PT. Panji Adi Samudera (PAS) Maritime (“PAS”) the
      party to the vessel charter agreement in an attempt to provide positive cash
      flow to the Company. We believe that the Operator will be able to secure a
      vessel for off loading and to begin the production of oil before the end of
      the
      first quarter of 2006. Within six months after securing the vessel, we expect
      to
      be cash flow positive from operations.





**For
      the Three Months Ended September 30, 2005**





At
      September 30, 2005 our principal sources of liquidity consisted of
      $6,905  of
      cash
      compared to $8,122  at
      September 30, 2004. As of September 30, 2005, we were successful in reducing
      the
      trade debt balance by approximately $641,477.




37




Cash
      used
      in operating activities was $2,239,914 for the three months ended September
      30,
      2005 as compared to cash used in operating activities of $55,505 for the three
      months ended September 30, 2004. At September 30, 2005, we had a working capital
      deficit of $12,543,868. Operating cash flows for the three months ended
      September 30, 2005 reflect our net (loss) of $1,255,428.





Cash
      used
      by investing activities of $22,967  for
      the
      three months ended September 30, 2005 consisted primarily of payments for
      purchases of property and equipment. There was no cash used or provided in
      investing activities the three months ended September 30, 2004.





Cash
      provided by financing activities for the three months ended September 30, 2005
      was $2,264,739 due to the advances made by CRC to us for the payment of certain
      vendor liabilities and payments of certain taxes due the Indonesian government.




During
      the
      year ended December 31, 2004, our independent auditors have included an
      explanatory paragraph in their audit report issued in connection with our
      financial statements which states that our recurring operating losses raise
      substantial doubt about our ability to continue as a going concern.




Based
      on
      our current plans, which includes the future operation of the joint venture
      with
      CRC, we believe that our cash, cash equivalents, prepaid joint venture operating
      expenses and anticipated sale of our buoy mooring system will be sufficient
      to
      enable us to meet our planned operating needs for at least the next 12 months.
      As of September 30, 2005, we had cash of approximately $6,905 and restricted
      cash of $58,833, a prepaid joint operating balance of approximately
      $348,933  which
      is
      the equivalent of approximately $1.2  million
      of
      total operating expenses because our contractually required share is 30% of
      total expenses, and are anticipating to sell the mooring system in a
      sale/leaseback transaction in which the Operator (CRC) would lease it on behalf
      of the joint venture.





**For
      the Nine Months Ended September 30, 2005**





Cash
      used
      in operating activities was $8,568,632 for the nine months ended September
      30,
      2005 as compared to cash used in operating activities of $500,414  for
      the
      nine months ended September 30, 2004. At September 30, 2005 we had a working
      capital deficit of $12,543,868. Operating cash flows for the nine months ended
      September 30, 2005 reflect our net profit of $8,789,922. Additionally, cash
      payments of interest during the nine months ended September 30, 2005 amounted
      to
      $498,586.





Cash
      provided by investing activities of $8,468,638  for
      the
      nine months ended September 30, 2005 consisted primarily of the purchase of
      a
      buoy mooring system for $500,000 in anticipation of securing a vessel for oil
      off loading offset by the receipt of the final payment of $9,000,000 for the
      70%
      sale of oil rights.





Cash
      provided by financing activities for the nine months ended September 30, 2005
      was $97,893. This consisted principally of the payoff of short-term debt
      totaling $307,666  and
      the
      issuance of common shares in payment of Directors Fee which had a book value
      of
      $1,754,178. During the period the following debts were paid; Asian Companies,
      companies controlled by Company’s directors, ($188,220), RBM ($210,820),
      Alislair MacLeannar ($125,000), Maraman Ltd. ($579,056), Michael Hendri
      ($130,000) CIBC ($933,750) and an advance of $2,264,739 to CRC was incurred.





During
      the
      nine months ended September 30, 2005, we had a net profit of $8,789,922 of
      which
      $9,712,950 consisted of net profits from the sale of the 70% % interest in
      the
      Bawean Block Production Sharing Contract for a gross purchase price of
      $10,500,000 and $3,166,558  from
      the
      settlement of outstanding debt at less than values recorded in prior periods.
      Offsetting the gains were expenses for general and administrative expenses
      and
      continuing expenses for the maintenance of property and equipment, depreciation
      expense and interest expense.




During
      the
      year ended December 31, 2004, our independent auditors have included an
      explanatory paragraph in their audit report issued in connection with our
      financial statements which states that our recurring operating losses raise
      substantial doubt about our ability to continue as a going concern.




38




Based
      on
      our current plans, which includes the future operation of the joint venture
      with
      CRC, we believe that our cash, cash equivalents prepaid joint venture operating
      expenses and anticipated sale of our buoy mooring system September 30, 2005
      we
      had cash of approximately $6,905 and restricted cash of $58,833, a prepaid
      joint
      operating balance of approximately $348,933  which
      is
      the equivalent of approximately $1.2  million
      of
      total operating expenses because our contractually required share is 30% of
      total expenses, and are anticipating to sell the buoy mooring system in a
      sale/leaseback transaction in which the Operator (CRC) would lease it on behalf
      of the joint venture.





**Changes
      in Working Capital between September 30, 2005 and December 31,
      2004**





During
      the
      nine months ended September 30, 2005, the Company decreased its working capital
      deficit from $23,645,185 to $12,543,868, or an $11,101,317 decrease. The
      principal reasons for the decrease in negative working capital were as
      follows:





·
            Decrease
                in accounts payable and accrued expenses by $6,257,505. During the
                period
                the Company received the remainder of the funds from the $10.5 million
                sale of a 70% interest in oil rights, or $9,000,000, and used a portion
                of
                the funds received to pay down outstanding
                payables.


·
            Decrease
                in short term debt by $1,402,107. As noted above, the Company received
                the
                final payment on the sale of a 70% interest in its oil rights and
                used a
                portion of the funds received to pay down outstanding short term
                debt.


·
            Advances
                payable to related parties and accrued salaries and wages decreased
                by
                $243,750 and $287,302, respectively. As noted above, the Company
                received
                the final payment on the sale of a 70% interest in its oil rights
                and used
                a portion of the funds received to pay down outstanding these
                obligations.


·
            Decrease
                in Directors Fees by $1,604,000 which was paid by the issuance of
                17,491,784 shares of common stock.


·
            Other
                current assets increased by $360,529 as a part of the requirements
                of the
                Agreement for the sale of a 70% interest in its oil rights wherein
                we were
                required to deposit $1,000,000 in the Joint Operating Account. As
                of the
                end of September 30, 2005, there remained a prepaid balance, for
                future
                operations of the Operator, of approximately $348,933 as our 30%
                share of
                future expenditures.


·
            Decrease
                in taxes payable by $1,001,609 and increase of tax receivables of
                $456,842
                as a result of adjusted interest and payments made by CRC on behalf
                of the
                Company.


·
            Decrease
                in interest payable of $345,394, principally related to interest
                due the
                Indonesian government on tax related
                payables.


·
            Other,
                net $52,516.





**Off-Balance
      Sheet Arrangements**





On
      November 26, 2004, we entered into an Asset Purchase and Sale Agreement with
      Camar Resources Canada, Inc. (“CRC”) for the sale of a 70% interest in the
      Bawean Block Production Sharing Contract. The contract became effective on
      January 14, 2005. As a part of the sale of the 70% interest and us becoming
      a
      30% sharing partner, we also entered into a Joint Operating Agreement. The
      purpose of the Joint Operating Agreement was to establish the rights and
      obligations of the parties with regard to the joint operations of the joint
      venture. CRC is to act in the position of Operator of the project and shall
      be
      reimbursed for all expenses necessary to run the operations. Should either
      party
      default from paying its share of the joint expenses and the default is not
      cured
      within 30 days of a default notice, the non-defaulting party may require the
      defaulting party to cease the Agreement. If executed, the defaulting party’s
      interest shall be transferred to the non-defaulting party. Therefore, we may
      be
      exposed to a financing, liquidity, market or credit risk that could arise from
      the Joint Operating Agreement





**Certain
      Business Risks**





**Our
      Business Is Dependent Upon a Single Operating Asset; Our Operations are Not
      Diverse**




39




Our
      sole
      operating asset is our 30% interest in the Bawean Production Sharing Contract
      (“Bawean PSC”), issued by an entity controlled by the Indonesian government,
      which gives us and our joint venture partner, Camar Resources Canada, Inc.
      (“CRC”), the right to develop and produce oil and natural gas in two petroleum
      blocks in the Java Sea, off the coast of Indonesia, known as the Camar and
      Tuban
      blocks. CRC owns the other 70% of the interests in the Bawean PSC and operates
      the day-to-day oil production at the Camar field, which is currently the only
      operation under the Bawean PSC. Revenues from our 30% interest represent not
      less than 100% of the revenues of the Company. All of our operations are focused
      upon and dedicated to our interests in the Bawean PSC and our joint venture
      with
      CRC. Should we or CRC become unable to operate the Camar field under the Bawean
      PSC due to regulatory, equipment, human resource or legal or business reasons,
      or should the Camar and Tuban fields cease to be exploitable for any other
      reason, or if the Indonesian government were to suspend or revoke the Bawean
      PSC, or if for any other reason this asset should cease to produce revenues
      or
      become impaired for a substantial period of time, our business would be
      materially harmed and you could lose the entire value of your investment in
      our
      common stock.





**If
      the Bawean PSC Is Not Extended for Us in 2011, We May Have No Operations or
      Sources of Revenue At All**





The
      Bawean
      PSC by its terms will terminate in February 2011. While we will attempt to
      have
      it extended for an additional term there can be no assurance that it will be
      extended to us or on terms acceptable to us. We can make no assurances that
      the
      Bawean PSC will be extended. As part of any extension negotiation, we may need
      to substantiate to the Indonesian government our ability to continue oil
      operations at the Camar field, our plans to develop the natural gar resources
      at
      the Camar field, and our plans to develop the oil and natural gas resources
      at
      the Tuban field. We do not presently have plans to develop the untapped natural
      gas and oil resources at the Camar and Tuban fields and there is a risk that
      we
      would be unable to develop such plans timely, or in a manner satisfactory to
      the
      Indonesian government prior to the expiration of the Bawean PSC. The Indonesian
      government may seek to grant the Bawean PSC contract rights to another party,
      if
      the Indonesian government determines that such a party is better able to develop
      the fields from a financial and operating perspective. We anticipate that the
      extension negotiations concerning the Bawean PSC may commence as early as 2009.
      In the event the Bawean PSC is terminated in 2011, we may have no other
      operating assets or sources of revenue at that time. If the Bawean PSC is
      terminated and we have no other operating assets or sources of revenues, our
      business would be materially impaired and you could lose the entire value of
      your investment in our common stock.





**We
      are Dependant on the Services of Key Management and Employees**





We
      are
      highly dependent on the services of our Chief Executive Officer and President.
      The loss of either of Mr. James Wensveen or Mr. David Nunn, our sole executive
      officers, could have a material adverse effect on our operations. We believe
      that Mr. Wensveen and Mr. Nunn have a well-developed understanding of the unique
      social and business cultures in Indonesia and as such are able to negotiate,
      manage and operate the Company’s business activities within Indonesian,
      including working with regulatory authorities and Indonesian business
      enterprises. We do not believe that such skills and unique qualities could
      be
      easily replaced, if at all.  Mr.
      Wensveen and Mr. Nunn are currently our sole directors. We have entered into
      employment agreements with each of them, but we cannot assure their continued
      services to the Company. We do not maintain key-man life insurance with respect
      to any of our officers or employees. Our success will be dependent on our
      ability to continue to employ and retain skilled operational and executive
      personnel including Mr. Wensveen and Mr. Nunn, especially individuals that
      possess the proven ability to penetrate the Indonesian oil and gas industry.
      The
      loss of our executive management or any key employees could have a material
      and
      adverse effect on our business and could harm the value of your investment
      in
      our common stock.





**Our
      Arbitration Case Against Camar Resources Canada, Inc. Could Remain
      Unresolved**




40




On
      August
      26, 2005 we commenced an Arbitration case against our Joint Venture Partner,
      Camar Resources Canada, Inc. (“CRC”) alleging that CRC breached it duties and
      obligations under the Joint Operating Agreement concerning the operation of
      the
      Camar field. Since the filing of the Arbitration CRC has undertaken activities
      that will promptly lead to resuming oil production at the Camar field, including
      entering into the charter for a new oil storage tanker at the Camar field.
      While
      we are in active discussions with CRC concerning the operation of the field
      by
      them, and while we believe the Company and CRC will resolve all open items
      and
      matters in dispute, we can make no assurances that CRC will perform its
      obligations under the Joint Operating Agreement to our satisfaction, or that
      CRC
      will not present counter-claims in the Arbitration proceeding. CRC has filed
      a
      response to the Arbitration asserting claims and defenses. If the Arbitration
      proceeding is not resolved and we do not withdraw the Arbitration, our working
      relationship with CRC and Medco (CRC’s indirect owner and operator) could become
      strained. If that were to occur CRC might resign as operator and we would be
      forced to undertake operation of the Camar field independently. While we are
      able to operate the field independently, there can be no assurances that we
      can
      continue to operate the Camar field while the Arbitration is pending, or that
      the Arbitration will become too costly or distracting to maintain. In such
      event, the lack of operations at the field or the lack of clarity over the
      performance of the Joint Operating Agreement while the Arbitration is pending
      could have a material and adverse effect on our business and could harm of
      the
      value of your investment in our common stock.





**We
      Could be Harmed by Possible Terrorist Events in Indonesia and/or by the
      Instability of the Indonesian Political System**





The
      country of Indonesia is susceptible to terrorist attacks and organizations,
      due
      in part to its geographic location, its lack of strong central police and
      regulatory powers and the generally underdeveloped or “third world”
infrastructure and government organization. Should Indonesia, or any aspects
      of
      Indonesia’s commerce or government, become the target of terrorist actions, our
      operations could be adversely affected. Should the government of Indonesia
      destabilize due to political uncertainty, our operations could be adversely
      affected. Any adverse affect on our operations due to terrorist activities
      or
      the instability of the Indonesian government could harm the value of your
      investment in our common stock.





**There
      is Currently No Oil Production or Revenues from Operations; We May be Unable
      to
      Locate and Operate a Storage Tanker and Resume Oil Production and Generate
      Revenues in a Timely Manner**





The
      operation of the Camar oil field and the production of oil from the active
      wells
      at that field requires the use of a moored storage tanker to hold the processed
      oil pending sale. We, and our joint venture partner, currently do not own or
      charter such a storage tanker and as such, we have suspended oil production
      at
      the Camar field. We are currently not producing oil or natural gas at the Camar
      field or the Tuban field. We are currently in the process of locating a suitable
      storage tanker for lease at the Camar oil field to hold the processed oil
      pending sale. In connection with the chartering of an oil storage tanker we,
      or
      our joint venture partner, would need to contract with a ship management company
      to staff, operate and maintain the storage tanker. While we are actively
      pursuing a charter agreement for an oil storage tanker, we can make no
      assurances that an oil tanker will be available on terms acceptable to us,
      and
      our joint venture partner, if at all. Until we are able to obtain the use and
      management of an oil storage tanker we will not be able to resume operations
      at
      the Camar field and as such, we will have no revenues until the production
      is
      resumed. Our continued lack of oil production and revenues would have a material
      adverse effect on the value of your investment in our common stock.





**The
      Operation of the Camar and Tuban Oil and Gas Fields Requires Permits and
      Certifications of Our Equipment; We May Not be able to Maintain or Renew such
      Permits in the Future**





In
      connection with the production of oil at the Camar field, we must utilize and
      maintain numerous pieces of equipment. Many such items of equipment, including
      the oil processing platforms, are subject to periodic safety and compliance
      certifications by Indonesian government agencies. Currently, our joint venture
      partner has been able to apply for and maintain all necessary certifications
      and
      operating permits with respect to the equipment in use at the Camar field and
      we
      have been able to maintain the mooring buoy we own and use at the Camar field.
      However, we can make no assurances that such certifications and permits will
      be
      reissued timely, if at all, as our equipment ages and the certifications and
      permits become due for renewal. If we are unable to obtain all necessary
      certifications and permits on a timely basis, our operations could be
      interrupted, which would be harmful to your investment in our common stock.




41




**We
      are Reliant on our Joint Venture Partner for the Direct Field Operation of
      the
      Camar and Tuban Oil and Gas Fields**





Together
      with our joint venture partner, Camar Resources Canada, Inc. (“CRC”) we own 100%
      of the interests under a Bawean Production Sharing Contract, which gives us
      the
      right to operate the Camar and Tuban petroleum blocks in the Java Sea, off
      the
      shore of Indonesia. We originally owned 100% of the interests, but we sold
      70%
      of such interests to CRC in 2004. Under the terms of our agreements with CRC,
      CRC is the day-to-day operator of the Camar fields, and we have no direct
      operating responsibilities in the field. Accordingly, although we can operate
      the field independently, presently all of our revenues depend on the successful
      operation of the Camar field by CRC. While CRC operates the Camar field under
      our Joint Operating Agreement with them, we cannot exercise absolute control
      over CRC or the operations in the field. Should CRC fail to operate the Camar
      field in a profitable manner, or should CRC cause substantial liabilities to
      arise, or should CRC engage in criminal conduct, or should CRC terminate its
      commitments to us and cease its operations without prior notice, our business
      and operations would be adversely effected and the value of your investment
      could be harmed.





**Debt
      Settlement and Reduction in Percentage Ownership under the Bawean PSC**





Under
      our
      agreements with our joint venture partner, Camar Resources Canada, Inc., if
      we
      are unable to settle and resolve certain liabilities for $4,500,000 or less,
      and
      if Camar Resources Canada, Inc. pays such liabilities on our behalf, we may
      be
      forced to forfeit some of our ownership interests in the Bawean PSC. These
      liabilities arise from our acquisition of GFB Java Resources, Ltd. and our
      settlement with Canadian Imperial Bank of Commerce. For every $150,000 in
      liabilities that CRC pays, in excess of $4,500,000, our percentage ownership
      interest in the Bawean PSC will be reduced by 1% unless we repay CRC for their
      advance payments within 30 days. In no event would our interest in the Bawean
      PSC be lower than 5%. However, any reduction in our ownership interest would
      result in less revenues to us, and as a result, the value of your investment
      in
      our common stock would be harmed.





**Litigation
      Claims and Reduction in Percentage Ownership under the Bawean PSC**





We
      are
      subject to various litigation claims and disputes in the ordinary course of
      our
      business and operations. We are presently a party to several material
      litigations. While we intend to vigorously defend such litigations, we cannot
      assure that we will be victorious and we cannot determine what damages, if
      any,
      we may be responsible to pay. Should any or all of the litigation matters we
      are
      a party to be determined against the Company, our business may be harmed and
      as
      a result your investment in our common stock could be negatively effected.





In
      addition, under our agreements with our joint venture partner, Camar Resources
      Canada, Inc., if we are unable to resolve the NOWMCO litigation favorably,
      we
      may be forced to forfeit some of our ownership interests in the Bawean PSC.
      For
      every $150,000 in litigation judgments that we must pay in excess of $2,550,000,
      our percentage ownership interest in the Bawean PSC will be reduced by 1%.
      In no
      event would our interest in the Bawean PSC be lower than 5%. However, any
      reduction in our ownership interest would result in less revenues to us, and
      as
      a result, the value of your investment in our common stock would be harmed.
      A
      Settlement Agreement was reached January 11, 2006. See Part ll Item l Litigation





**Our
      Reserve Data and Future Estimates Are Based on Assumptions that May be
      Inaccurate and Are Based on Existing Economic and Operating Conditions that
      May
      Change in the Future.**





There
      are
      numerous uncertainties inherent in estimating oil and natural gas reserves
      and
      their estimated value, including many factors beyond the control of the
      operator. The reserve data set forth in this Registration Statement represents
      only estimates. Reservoir engineering is a subjective and inexact process of
      estimating underground accumulations of oil and natural gas that cannot be
      measured in an exact manner. The reserve data included in this Registration
      Statement represents estimates that depend on a number of factors and
      assumptions that may vary considerably from actual results, including:




42




-
      historical production from the area compared with production from other areas;





-
      the
      assumed effects of regulations by applicable governmental agencies;





-
      assumptions concerning future natural gas and oil prices;





-
      future
      operating costs;





-
      severance and other operating taxes;





-
      development costs; and





-
      remedial
      costs.





For
      these
      reasons, estimates of the economically recoverable quantities of natural gas
      and
      oil attributable to any particular petroleum block, classifications of those
      reserves based on risk of recovery and estimates of the future cash flows
      expected from them may vary substantially with actual results. Accordingly,
      reserve estimates may be subject to upward or downward adjustment, and actual
      production, revenue and expenditures with respect to our reserves likely will
      vary, possibly materially, from estimates.





Because
      most of our reserve estimates are calculated using volumetric analysis, those
      estimates are less reliable than estimates based on a lengthy production
      history. Volumetric analysis involves estimating the volume of a reservoir
      based
      on the net feet of pay of the structure and an estimation of the area covered
      by
      the structure based on seismic analysis. The actual amount of the reserves
      could
      differ materially from what our analysis shows. Should the reserves at the
      Camar
      field or the Tuban field be substantially less than our reports indicate, the
      long term operations of the Company could be harmed and the value of your
      investment could diminish over time.





**Lack
      of Current Development Plans For the Camar Field and the Tuban Field**





Historically,
      we have produced only oil from the Camar field. We believe, based on reserve
      data, that the Camar field also contains significant volumes of natural gas.
      We
      also believe, based on reserve data, that the Tuban field contains oil and
      natural gas. However, we have no current plans to develop and exploit the Camar
      field for natural gas production, or the Tuban field for oil or natural gas
      production. Accordingly, should the Camar oil production subside or cease,
      or
      should the oil reserves at Camar fall far short of our expectations, we would
      be
      forced to develop the Camar natural gas reserve and the oil and gas reserves
      at
      the Tuban field at substantial cost to our Company and the join venture with
      CRC. Because we have no current development plans, our ability to quickly
      exploit those resources in the event the Camar field ceased to be profitable,
      would be impaired. The capital required to develop and exploit the Tuban field
      for oil and gas, and the Camar field for gas, would be significant and above
      any
      amount the Company could presently afford without financing. There can be no
      assurances that the Company will ever develop the natural gas reserve at the
      Camar field, or the natural gas or oil reserve at the Tuban field. The lack
      of
      this planned development could harm your investment by not providing a strategy
      to continue operations in the event the Camar field oil production should
      terminate.





**We
      May Depend on Successful Exploration, Development and Acquisitions of New
      Petroleum Blocks to Access New Reserves and Revenues in the Future.**





In
      general, the volume of production from natural gas and oil properties declines
      as reserves are depleted, with the rate of decline depending on reservoir
      characteristics. Except to the extent we conduct successful exploration and
      development activities or acquire properties containing proved reserves, or
      both, our existing reserves will decline as reserves are produced. Our future
      natural gas and oil production is, therefore, highly dependent on our level
      of
      success in finding or acquiring additional reserves, even inside the Camar
      and
      Tuban fields. The business of exploring for, developing or acquiring reserves
      is
      capital intensive. Recovery of our reserves, particularly undeveloped reserves,
      will require significant additional capital expenditures and successful drilling
      operations. To the extent cash flow from operations is reduced and external
      sources of capital become limited or unavailable, our ability to make the
      necessary capital investment to maintain or expand our asset base of natural
      gas
      and oil reserves would be impaired. In addition, we may be dependent on finding
      partners for our exploratory activity. To the extent that others in the industry
      do not have the financial resources or choose not to participate in our
      exploration activities, we will be adversely affected.




43




**Oil
      and Natural Gas Prices are Volatile, and Lower Prices will Negatively Affect
      Our
      Financial Results.**





Our
      revenue, profitability, cash flow, future growth and ability to borrow funds
      or
      obtain additional capital, as well as the carrying value of our properties,
      are
      substantially dependent on prevailing prices of natural gas and oil.
      Historically, the markets for natural gas and oil prices have been volatile,
      and
      those markets are likely to continue to be volatile in the future. It is
      impossible to predict future natural gas and oil price movements with certainty.
      Prices for natural gas and oil are subject to wide fluctuation in response
      to
      relatively minor changes in the supply of and demand for natural gas and oil,
      market uncertainty and a variety of additional factors beyond our control.
      These
      factors include:





-
      the
      level of consumer product demand;





-
      overall
      economic conditions;





-
      weather
      conditions;





-
      domestic
      and foreign governmental relations;





-
      the
      price and availability of alternative fuels;





-
      political conditions;





-
      the
      level and price of foreign imports of oil and natural gas; and





-
      the
      ability of the members of the Organization of Petroleum Exporting Countries
      to
      agree upon and


maintain
      oil price controls.





Declines
      in natural gas and oil prices may materially adversely affect our financial
      condition, liquidity and ability to finance planned capital expenditures and
      results of operations.





**We
      Face Competition from Other Natural Gas and Oil Companies As We Seek to Acquire
      Rights to New Petroleum Blocks.**





We
      will
      encounter competition from other natural gas and oil companies in the
      acquisition of exploratory prospects and proven properties. Our competitors
      will
      include major integrated natural gas and oil companies and numerous independent
      natural gas and oil companies, individuals and drilling and income programs.
      Many of our competitors are large, well-established companies that have been
      engaged in the natural gas and oil business much longer than we have and possess
      substantially larger operating staffs and greater capital resources than we
      do.
      These companies may be able to pay more for exploratory projects and productive
      natural gas and oil properties and may be able to 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 be able to expend
      greater resources on the existing and changing technologies that we believe
      are
      and will be increasingly important to attaining success in the industry. We
      may
      not be able to conduct our operations, evaluate and select suitable properties
      and consummate transactions successfully in this highly competitive environment.





**We
      are Subject to Governmental Regulations and Environmental Risks.**




44




Our
      operations are subject to various Indonesian regulations that may change from
      time to time. Matters subject to regulation include certification of equipment,
      oil export, oil storage, discharge permits for drilling operations, plug and
      abandonment bonds, reports concerning operations, the spacing of wells,
      unitization and pooling of properties and taxation. We also operate under
      regulations relating primarily to the protection of human health and the
      environment and to the development, production, handling, storage,
      transportation and disposal of natural gas and oil, by-products thereof and
      other substances and materials produced or used in connection with natural
      gas
      and oil operations. As a result, we may incur substantial liabilities to third
      parties or governmental entities and may be required to incur substantial
      remediation costs for any environmental hazards we cause. We also are subject
      to
      changing and extensive tax laws in Indonesia, the effects of which cannot be
      predicted. Compliance with existing, new or modified laws and regulations could
      have a material adverse effect on our business, financial condition and results
      of operations.





**We
      are Subject to Various Operating and Other Casualty Risks that Could Result
      in
      Liability Exposure or the Loss of Production and Revenues.**





The
      natural gas and oil business involves operating hazards such as:





-
      well
      blowouts;





-
      damage
      to equipment due to marine and/or weather conditions;





-
      mechanical failures;





-
      explosions;





-
      uncontrollable flows of oil, natural gas or well fluids;





-
      fires;





-
      geologic
      formations with abnormal pressures;





-
      pipeline
      ruptures or spills;





-
      releases
      of toxic gases; and





-
      other
      environmental hazards and risks.





Any
      of
      these hazards and risks can result in the loss of hydrocarbons, environmental
      pollution, personal injury claims and other damage to our properties and the
      property of others. Under Indonesian law, we would be responsible for the
      remediation costs of any environmental hazards caused by us. If such
      environmental hazard were to arise, and if the remediation costs were
      substantial, our remediation expenditures could negatively impact our operations
      and harm the value of your investment in our common stock.





**We
      May Not Have Enough Insurance to Cover All the Risks That We and Our Joint
      Venture Partner Face.**





In
      accordance with customary industry practices, our joint venture partner (the
      operator of the Camar and Tuban fields) maintains insurance coverage against
      some, but not all, potential losses in order to protect against potential risks.
      We do not carry business interruption insurance. We and our joint venture
      partner may elect not to carry insurance if we believe that the cost of
      available insurance is excessive relative to the risks presented. In addition,
      we, and our joint venture partner cannot insure fully against pollution and
      environmental risks. The occurrence of an event not fully covered by insurance
      could have a material adverse effect on our financial condition and results
      of
      operations.





**We
      Have Substantial Capital Requirements That, if Not Met, May Hinder Operations.**




45




We
      and our
      joint venture partner have experienced and expect to continue to experience
      substantial capital needs as a result of our operations. We expect that
      additional external financing will be required in the future to fund our growth
      and our strategy to acquire new petroleum blocks for development, even if we
      resume oil production by the end of 2005. We, or our joint venture partner,
      may
      not be able to obtain additional financing on terms acceptable to us, if at
      all.
      Without additional capital resources, we may be forced to limit or defer our
      planned activities and development initiatives and thereby adversely affect
      the
      recoverability and ultimate value of our natural gas and oil properties, in
      turn
      negatively affecting our business, financial condition and results of
      operations. In addition, without adequate capital, we may not be able to pursue
      our growth strategy of acquiring new petroleum blocks or developing the Tuban
      field. Our failure to obtain adequate capital could harm the value of your
      investment in our common stock.





**ITEM
      3 - QUANTITATIVE AND QUALTATIVE DISCLOSURES ABOUT MARKETY
      RISK**





Our
      Indonesian operations and the operations of our Joint Operations Partner, CRC,
      are transacted, in part, in foreign currencies, which exposes us to financial
      market risk resulting from fluctuations in foreign currency exchange rates,
      particularly the Indonesian rupiah . In
      order
      to conserve cash,  we
      do not
      utilized hedging programs, currency forward contracts, currency options and/or
      other derivative financial instruments commonly used to reduce financial market
      risks. Should we decide to utilize hedging programs, currency forward contracts,
      currency options and/or other derivative financial instruments commonly used
      to
      reduce financial market risks, there can be no assurance that such actions
      will
      successfully reduce our exposure to financial market risks.





**ITEM
      4 - CONTROLS AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**





We
      carried
      out an evaluation, under the supervision and with the participation of our
      management, including our Chief Executive Officer, President and Chief
      Accounting Officer, of the effectiveness of our “disclosure controls and
      procedures” as of the end of the period covered by this report, pursuant to
      Rules 13a -15 (e) and 15d-15 (e) under the Securities Exchange Act of 1934,
      as
      amended. Based on that evaluation, our Chief Executive Officer, President and
      Chief Accounting Officer have concluded that, as of the end of the period
      covered by this report, these disclosure controls and procedures were effective
      to ensure that we are able to record, process, summarize and report the
      information we are required to disclose in the reports we file with the SEC
      within the required time periods and that information required to be disclosed
      in the reports we file or submit under the Securities Exchange Act is
      accumulated and communicated to our management, including the principal
      executive officer and principal financial officer or persons performing similar
      functions, as appropriate, to allow timely decisions regarding required
      disclosure.





**Changes
      in Internal Control Over Financial Reporting**





There
      has
      been no change in our internal control over financial reporting during our
      most
      recent fiscal quarter that has materially affected, or is reasonably likely
      to
      affect, our internal control over financial reporting.





We
      also
      clarify that our internal controls and procedures over financial reporting
      are
      in a current state of evaluation and as such we have not yet completed our
      assessment nor have we forwarded our findings to our Auditors or Audit
      Committee.





46





**PART
      II**





**OTHER
      INFORMATION**





**Item
      1 - Legal Proceedings**





***Indo-Pacific
      Resources (Java) Ltd . v. Camar Resources Canada
      Inc.*** ***(International Chamber of Commerce, International Court of Arbitration, Paris,
      France)***





On
      August
      26, 2005, the Company’s wholly owned subsidiary Indo-Pacific Resources (Java)
      Ltd. (“IPRJ”) filed a Request for Arbitration (the “Complaint”) against Camar
      Resources Canada Inc. (the Company’s joint venture partner and owner of the 70%
      working interest in the Bawean PSC) with the International Court of Arbitration
      (the “Court”) in Paris, France. No case number has been assigned to this matter.
      The Complaint alleges CRC breached the Joint Operating Agreement (the “JOA”)
      that the parties entered into on November 26, 2004 and also breached its
      fiduciary duty to IPRJ by failing to take all necessary acts to commence oil
      production in the Camar Field. Among other things, IPRJ alleges that CRC
      breached the JOA by failing to purchase, charter, or otherwise engage a sea
      vessel for the storage of oil produced from the Camar Field. IPRJ also alleges
      that an agreement, either express or implied, exists regarding the use of a
      mooring system at the Camar Field (the “Mooring System Agreement”) and for which
      CRC, as operator of the Camar Field, is obligated to pay a daily fixed-cost
      charge, which it has failed to do. IPRJ seeks a finding that such breaches
      constitute sufficient grounds for the removal of CRC as operator under the
      JOA
      and for the appointment of a new operator that IPRJ can choose without any
      input
      from CRC. IPRJ is seeking monetary damages including approximately $4,850,000
      for lost profits that will increase at a net rate of $550,000 every month (based
      on current crude prices) for every month the Camar field is not put into
      production, and also approximately $319,440 for the fixed charges related to
      the
      mooring system and which will also continue to accrue at an average monthly
      rate
      of $36,500.




On
      October
      7, 2005, CRC filed an Answer to IPRJ’s Request for Arbitration and also a
      Counterclaim against IPRJ. CRC denies the breaches of JOA alleged by IPRJ and
      also alleges that no agreement exists regarding the use of a mooring system
      at
      the Camar Field. Further, CRC claims that IPRJ’s claim for non-payment for the
      mooring system charge is not a claim subject to this arbitration because it
      is a
      collateral claim and does not arise under the JOA, and that a claim for unjust
      enrichment or quantum meruit is not a matter that falls under the jurisdiction
      of the arbitration proceedings. CRC’s Counterclaim alleges IPRJ has breached the
      Asset Purchase and Sale Agreement (“PSA”) that the parties entered into on
      November 26, 2004 because IPRJ has failed to settle all of IPRJ’s trade debts
      and value added tax principal obligations (including tax penalties and
      associated interest charges owed to Indonesia and hereinafter referred to as
      the
“Settlement Obligations”) under the PSA. As a result of IPRJ’s breach, CRC
      alleges that BPMIGAS, the Indonesian regulatory body that issues the
      work program and budget approvals in connection with production under the Bawean
      PSC, did not approve the 2004 and 2005 work programs and budgets for operation
      of the Camar Field. CRC is seeking monetary damages including $12,000,000
      representing lost production suffered by CRC because of IPRJ’s failure to settle
      the Settlement Obligations, $1,000,000 per month commencing on the date of
      the
      filing of the Complaint for each month production is not obtained from the
      properties subject to the Bawean PSC, and an award of costs and interest on
      the
      damage amounts stated above. The Company received notification for the approval
      of the 2004 work program from BPMIGAS dated July19, 2005. The Company intends
      to
      vigorously defend CRC’s allegations.





On
      October
      26, 2005 the Company received a Notice of Dilution claiming that the Company
      has
      not discharged its requirement to settle and pay all outstanding vendor and
      VAT
      tax obligations and that CRC has settled and paid $2,967,021of vendor
      obligations and $2,123,892 of VAT obligations. Under the terms of the PSA,
      the
      Company has 45 days to reimbursement CRC for the payment of such non-settled
      vendor obligations and, if CRC is not reimbursed is subject to a dilution in
      their ownership interest in the joint operations by a factor of one percentage
      point for each $150,000 paid by CRC except that the Company ownership position
      shall not be diluted beyond 5% of the joint operations.




47




On
      November 22, 2005, the Company filed a claim against CRC and its indirect
      parent, Medco International Ventures Ltd. (“Medco”) in the Court of Queen’s
      Bench of Alberta, Judicial District of Calgary; Action No. 0501-16525 (the
      “Claim”), challenging the Dilution Notice and seeking to enjoin Medco and CRC
      from acting under the Dilution Agreement and transferring any of IPR’s interests
      in the Bawean PSC. An interlocutory injunction application by IPR on the matter
      was heard on December 5, 2005.





On
      December 5, 2005, the Court adjourned IPR’s interlocutory injunction
      application, but as one of the conditions of the adjournment entered an order
      that CRC shall not transfer, encumber, sell or assign any of the Bawean PSC
      interests until after there is a full trial on the merits of the Claim,
      currently scheduled for May 1, 2006. In addition, the Court’s Order provides
      that assuming the Camar Oil Field resumes production prior to the final
      disposition of the Claim, all revenues attributable to IPR and the Company
      up to
      the amount of the interests in dispute (22.18%) are to be deposited with the
      Court. Such revenues are to be held and credited towards the final trial on
      the
      Claim. While the Company believes this matter will be fully resolved in a manner
      not adverse to the Company, the Company cannot control the outcome of the Claim
      and cannot determine presently what losses, if any, it may sustain.





***National
      Oil Well Maintenance Co. and Enterprise Trading Limited v. Fortune Oil &
Gas, Inc., Fortune Ship Management Ltd. and Indo-Pacific Resources (Java) Ltd.***





Fortune
        Oil & Gas, Inc. and its subsidiaries Fortune Ship Management Ltd. and
        Indo-Pacific Resources (JAVA) Ltd. are defendants and counterclaimants in
        an
        action pending in the United States District Court for the Southern District
        of
        New York captioned National
        Oil Well Maintenance Co. and Enterprise Trading Limited v. Fortune Oil and
        Gas,
        Inc., Fortune Ship Management Ltd. and Indo-Pacific Resources (JAVA) Ltd. ,
        Case No
        02 CV. 7666 (LBS), pending in the United States District Court for the Southern
        District of New York.  In this action, Plaintiffs seek to enforce
        promissory notes given by the Company in an approximate amount of $4.2 million
        dollars plus attorneys’ fees and interest.  On or about August 23, 2004,
        the Court granted Plaintiffs’ and Counter-defendants’ Motion for Summary
        Judgment on the promissory notes but did not fix an amount owed by the Company.
        The Company has asserted counterclaims against the Plaintiffs that greatly
        exceed the amount due under the promissory notes.





On
      January
      6, 2006 the parties to the litigation reached a settlement agreement (the
“Settlement Agreement”) which provides, among other things, that (i) the Company
      shall issue to Enterprise Trading Limited (“Enterprise”) a promissory note in
      the principal amount of $2,860,000 (the “Note”) with specified terms and
      conditions attached and (ii) NOWMCO shall be obligated to offer and perform
      certain remediation services valued at $7,000,000, where such services when
      performed shall be charged at a 20% discount to NOWMCO’s then retail price list
      for such services (the “Services”).





The
      payment terms of the Note include payment of interest beginning one year after
      the issuance of the Note, and payment of the principal in two equal installments
      on the second and third anniversaries of the issuance of the Note. The company
      may prepay the Note. Shares of the Company’s subsidiary, Indo-pacific Resources
      (JAVA) Ltd. (“IPR(J)L”) and the proceeds due to the Company under the Company’s
      interest in the Bawean Production Sharing Contract (“Bawean PSC”), shall be held
      in trust as security for payments under the Note. In the event of defaults,
      under the payment terms of the Note, Enterprise shall have certain rights with
      respect to the shares of IPR(J)L and IPR(J)L’s share of the proceeds from the
      Bawean PSC as set forth in the Settlement Agreement. The forgoing summary of
      the
      Settlement Agreement is qualified in its entirety by reference to the actual
      Settlement Agreement furnished as exhibit 99.1 of our Form 8-K submission on
      January 11, 2006. Accordingly, the Case was dismissed with prejudice and without
      costs to either side as is evidenced by the Order of Discontinuance furnished
      as
      exhibit 99.2 of our Form 8-K submission on January 11, 2006.





48





***Glencore
      International AG v. Indo-Pacific Resources (Java) Ltd.*** ****





On
      March
      5, 2003, the Company’s wholly owned subsidiary Indo-Pacific Resources (Java)
      Limited (“IPRJ”) entered into a sales contract with Glencore International AG
      (“Glencore”) whereby the Company committed to sell crude oil to Glencore in
      exchange for cash payments to IPRJ (the “Sales Contract”). However, due to
      unforeseen difficulties and as a claimed result of force majeure, IPRJ was
      unable to fulfill the required sales under the contract. On June 30, 2003,
      Glencore filed a claim before a London Arbitration Tribunal (the “Tribunal”)
      constituted under the rules of the London Maritime Arbitrators' Association
      in
      London, England against IPRJ for breach of the Sales Contract. No case number
      was assigned to the arbitration matter. Glencore seeks damages including the
      $91,300 for lost profit, and/or a declaration that IPRJ must indemnify Glencore
      for any claim brought by the third party Glencore had agreed to sell the oil
      it
      would have purchased from IPRJ, and/or $184,000 in indemnity damages caused
      by
      the breach to third parties, and also interest and the costs of suit and defense
      of the indemnity claims. IPRJ subsequently secured permission to file a
      Counterclaim against Glencore and has filed a Counterclaim before the Tribunal
      against Glencore for breach of the Sales Contract. IPRJ is seeking monetary
      damages against Glencore for such breach in the amount of $133,000. The
      Company’s subsidiary, IPRJ and Glencore have settled this matter and are
      finalizing the terms of a settlement agreement whereby IPRJ shall pay to
      Glencore the sum of $290,000 in one lump sum on or before November 1, 2005.
      The
      Company has guaranteed this payment. Upon payment in full of the settlement
      amount, the case will be formally dismissed. In this regard, the parties have
      rescheduled a hearing before the Arbitration Tribunal in London for February
      13,
      2006.





.





***P.T.
      Patra Drilling Contractor and Somaser, S.N.C. v. Indo-Pacific Resources (Java)
      Limited (formerly known as GFB Resources (Java) Limited) and related proceedings***





On
      October
      28, 2003, P.T. Patra Drilling Contractor (“Patra”) and Somaser, S.N.C.
      (“Somaser”) (collectively “Plaintiffs”) filed a Request for Arbitration (the
“Complaint”) against the Company’s wholly owned subsidiary Indo-Pacific
      Resources (Java) Limited (“IPRJ”) with the Indonesian National Board of
      Arbitration (“BANI”) in Jakarta, Indonesia, and the matter was assigned number
      184:X/ARB-BANI/2003. The Complaint alleges IPRJ breached the offshore oil and
      gas Jack-Up Drilling Rig services contract that the parties entered into on
      December 31, 1997 and a Joint Operating Agreement dated February 10, 1998 by
      failing to make required payments under the contracts. Plaintiffs are seeking
      damages including approximately $2,698,074, interest of approximately $772,038
      plus all arbitration costs and expenses including legal fees. On August 24,
      2004, BANI rendered an interim award based on an exception (motion) by IPRJ,
      holding that there was no arbitration agreement between IPRJ and Somaser and
      ordering Somaser excluded from further participation in the arbitration
      proceedings. On February 17, 2005, BANI rendered a final award against IPRJ,
      granting Patra's petition and ordering IPRJ to pay Patra US$ 2,682,073.99 and
      interest in the amount of US$ 772,037.26. BANI ordered IPRJ to comply with
      the
      final award within 30 days after the award was registered with the South Jakarta
      District Court (the “District Court”). On March 4, 2005, the clerk of BANI filed
      the final award with the District Court. On March 12, 2005, IPRJ filed a civil
      claim against Patra, Somaser and BANI in the District Court and the case was
      assigned Case No. 169/PDT/G/2004/PN.JKT.SEL. IPRJ alleged that Somaser and
      Patra
      violated Indonesian Laws by submitting the request for arbitration without
      a
      valid arbitration agreement made and signed by IPR, Somaser and Patra. On March
      14, 2005, the District Court’s panel of judges rendered a judgment, declaring
      that the District Court had no jurisdiction to try this case. IPRJ has filed
      an
      appeal contesting this judgment and it is currently pending. On March 14, 2005,
      IPRJ also filed a Petition for Cancellation of the final arbitration award
      and
      it was assigned Case No. 73/PDT.P/2005/PN.JAK.SEL. On July 21, 2005, the
      District Court rejected IPRJ’s Petition for Cancellation of the final
      arbitration award. IPRJ then lodged a cassation with the Supreme Court to appeal
      the District Court’s judgment that rejected IPRJ’s Petition for Cancellation.
      IPRJ has also lodged a memorandum of cassation to the Supreme Court, through
      the
      District Court, and IPRJ’s cassation is currently pending. The Company believes
      that BANI has no jurisdiction over this case and intends to vigorously defend
      against the alleged claim and appeal the final arbitration award. The Company,
      however, cannot control the outcome and cannot determine what losses may result
      from this, if any.




49




On
      October
      25, 2005, Patra Drilling Contractor was paid $2,250,000, in full payment of
      the
      amounts due, by CRC, the Company’s joint venture partner, on behalf of the
      Company.




***Singapore
      Technologies Marine Ltd., et al. v. Fortune Ship Management Ltd. and Fortune
      Oil
      and Gas, Inc***





On
      or
      about May 28, 2003, Singapore Technologies Marine Ltd. (“STM”) filed a claim in
      the High Court of the Republic of Singapore against the Company and its
      subsidiary Fortune Ship Management, Ltd. (“FSM”) (collectively the
“Defendants”), and the case was assigned Suit No. 604 of 2003/P **.** The
      Complaint alleged the Defendants breached a contract to perform
      conversion/repair work on a vessel to become a floating offshore storage vessel
      by failing to make the required payments under the contract. STM claimed damages
      of $1,099,449 (Singapore Dollars) and accrued interest and costs of suit. On
      August 14, 2004, the parties filed a Notice of Discontinuance of this case
      with
      the Court, with each party bearing their own costs in the actions, and there
      has
      no been activity since that filing.





**Item
      2 - Unregistered Sales of Equity Securities and Use of
      Proceeds**





None





**Item
      3 - Defaults Upon Senior Securities**





None








**Item
      5 - Other Information**





None




50




**Item
      6 - Exhibits and Reports on Form 8-K**




Exhibit
                  No
              
              Description
                  of Exhibit3.1*
              
              Charter
                  of Fortune Oil & Gas, Inc. as filed in the State of
                  Nevada3.2*
              
              Bylaws
                  of Fortune Oil & Gas, Inc.10.1#
              
              Bawean
                  Production Sharing Contract as amended dated February 12,
                  198110.2
                  #
              
              Asset
                  Purchase and Sale Agreement - Indo-Pacific Resources (Java) Ltd.
                  and Camar
                  Resources Canada Inc. as amended dated November 26, 200410.3
                  #
              
              Joint
                  Operating Agreement - Camar Resources Canada Inc. and Indo-Pacific
                  Resources (Java) Ltd. - Operating Agreement Covering: Bawean Production
                  Sharing Contract dated November 26, 200410.4
                  #
              
              Sale,
                  Purchase and Settlement Agreement between ProSafe Production Services
                  PTE
                  Ltd. and Indo-Pacific Resources (Java) Ltd. dated February 8,
                  200510.5
                  #
              
              Settlement
                  Agreement by and among Indo-Pacific Resource (Java) Ltd., Indo-Pacific
                  Oil
                  & Gas, Inc., Fortune Oil and Gas, Inc., GFB Resources Limited,
                  Canadian Imperial Bank of Commerce, and CIBC Capital Partners,
                  dated
                  November 29, 200410.6
                  #
              
              Lease
                  Agreement for British Columbia Offices dated September 27,
                  200010.7
                  #
              
              Lease
                  Agreement as amended for Indonesian Offices dated March 15,
                  200510.8
                  #
              
              Employment
                  Agreement with Mr. Wensveen dated January 1, 200510.9
                  #
              
              Employment
                  Agreement with Mr. Nunn dated January 1, 200510.10
                  #
              
              Fortune
                  Oil & Gas, Inc. 2005 Equity Incentive Plan10.11
                  #
              
              Guarantee
                  Agreement between Medco International Ventures Limited and Indo-Pacific
                  Resources (Java) Ltd. dated November 26, 200410.12*
              
              Employment
                  Agreement with Mr. Yanianto11
              
              Computation
                  of Per Share Earnings21
                  #
              
              Subsidiaries
                  of the Registrant as of August 1, 200531
              
              Rule
                  13a-14(a) Certification31.1
              
              Rule
                  13a-14(a) Certification of Chief Executive Officer31.2
              
              Rule
                  13a-14(a) Certification of Chief Accounting Officer32.1
              
              Certification
                  of the Chief Executive Officer and Chief Accounting Officer pursuant
                  to 18
                  U.S.C. Section 1350, as adopted puruant to Section 906 of the
                  Sarbanes-Oxley Act of 2002#
                -
                Exhibit Filed on August 8, 2005 with the initial filing of the
                Registrant’s Registration Statement on Form 10 and incorporated herein by
                reference.*
                  Exhibit Filed on October 18, 2005 with Amendment Number 1 to Registrant’s
                  Registration Statement on Form 10 and incorporated herein by
                  reference.




51





**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.








**FORTUNE
                OIL & GAS, INC.**Date: February
                8th,
                2006
            By:
            /s/ James
                B. WensveenName:    
                James B. WensveenTitle:      
                Chief Executive Officer, Secretary and
                Director




Date:
                February 8th,
                2006
            By:
            /s/ David
                A. NunnName:    
                David A. NunnTitle:      
                President and Director




Date:
                February 8th,
                2006
            By:
            /s/ Xin
                FengName:    
                Xin FengTitle:      
                Chief Accounting Officer




52