UNITED
STATES

SECURITIES
AND EXCHANGE COMMISSION

Washington,
D.C. 20549



FORM
10-QSB



[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF
THE SECURITIES EXCHANGE ACT OF 1934



For
the quarterly period ended: September 30, 2004



[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR

15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934



Commission
file number 000-30009



PETROL
OIL AND GAS, INC.

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



|Nevada                                | 90-0066187                  
|------------------------------------- | ----------------------------
|(State
      or other jurisdiction of | (I.R.S.
      Employer      
|incorporation
      or organization)  | Identification
      Number)



|3161
      E. Warm Springs Road               
|----------------------------------------------
|Suite
      300                               
|Las
      Vegas, Nevada                       
|(Address
      of Principal Executive Offices)



(702)
454-7318

(Issuer's
telephone number, including area code)



Check
mark whether the issuer (1) filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the last 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 ____



The
number of shares of Common Stock, $0.001 par value, outstanding on September 30,
2004, was 23,895,799 shares.



Transitional
Small Business Disclosure Format (check one):



Yes    
No X



---



PART
I -- FINANCIAL INFORMATION

Item 1.
Financial Statements.



Petrol
Oil and Gas, Inc.

(A
Development Stage Company)

Condensed
Balance Sheet



|                                                                   | September
      30,
      2004 | December
      31,
      2003
|------------------------------------------------------------------ | ------------------------------ | -----------------------------
|                                                                   | (Unaudited)                    | (Audited)                    
|Assets                                                             |                                |                              
|Current
      assets:                                              |                                |                              
|Cash                                                               | $
      6,132,144              | $
      1,059,838            
|Deposits on property acquisitions                                  | 250,000                        | -                            
|Investment                                                         | 15,823                         | 200,000                      
|Total current assets                                               | 6,397,967                      | 1,259,838                    
|                                                                   |                                |                              
|Equipment                                                          | 4,894                          | 2,134                        
|Vehicles                                                           | 28,009                         | 28,009                       
|Accumulated
      depreciation                                     | (6,867)                        | (2,107)                      
|                                                                   | 26,036                         | 28,036                       
|                                                                   |                                |                              
|Other
      assets:                                                |                                |                              
|Notes and interest receivable from stockholders                    | 32,000                         | -                            
|Oil and gas properties using full cost accounting:                 |                                |                              
|Properties not subject to amortization                             | 2,842,532                      | 1,289,573                    
|Total other assets                                                 | 2,874,532                      | 1,289,573                    
|                                                                   | $
      9,298,535              | $
      2,577,447            
|                                                                   |                                |                              
|Liabilities
      and stockholders' equity                         |                                |                              
|Current
      liabilities:                                         |                                |                              
|Current portion of long term debt                                  | $
      4,000                  | $
      4,000                
|Notes payable                                                      | 250,000                        | -                            
|Accounts payable                                                   | 561,309                        | 268,071                      
|Deposits received on joint ventures                                | 59,760                         | -                            
|Accrued liabilities                                                | 6,879                          | 31,316                       
|Due to officer                                                     | -                              | 47,500                       
|Total current liabilities                                          | 881,948                        | 350,887                      
|                                                                   |                                |                              
|Long-term
      debt, less current portion                         | 19,163                         | 22,923                       
|                                                                   |                                |                              
|Contingencies
      and commitments                                |                                |                              
|                                                                   |                                |                              
|Stockholders'
      equity:                                        |                                |                              
|Preferred stock, $.001 par, authorized 10,000,000                  |                                |                              
|shares; no shares issued                                           | -                              | -                            
|Common stock, $.001 par, authorized 100,000,000                    |                                |                              
|shares; 23,895,799 and 17,247,466 issued and outstanding at        |                                |                              
|September 30, 2004 and December 31, 2003                           | 23,896                         | 17,247                       
|Stock bought or for services not issued 467,502 and 160,000 shares | 468                            | 160                          
|at September 30, 2004 and December 31, 2003                        |                                |                              
|Unamortized cost of stock issued for services                      | (50)                           | (1,000)                      
|Additional paid-in capital                                         | 13,266,820                     | 4,630,713                    
|Deficit accumulated during the development stage                   | (4,893,710)                    | (2,443,483)                  
|Total stockholders' equity                                         | 8,397,424                      | 2,203,637                    
|                                                                   | $
      9,298,535              | $
      2,577,447            



See
notes to condensed financial statements.



---



Petrol
Oil and Gas, Inc.

(A
Development Stage Company)

Condensed
Statement of Operations

Unaudited



|                                           | Nine
      Months Ended
      September
      30, | Three
      Months Ended
      September
      30, | March
      3, 2000 (inception) to September 30,
|------------------------------------------ | ------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------
|                                           | 2004                                              | 2003                                               | 2004                                            
|Revenue:                                   | $        
      44,185                            | $                 
      -                         | $       
      44,185                           
|                                           |                                                   |                                                    |                                                 
|Professional
      and consulting fees     | 1,100,497                                         | 712,928                                            | 232,760                                         
|Office                                     | 184,722                                           | 45,438                                             | 74,002                                          
|Wages                                      | 292,016                                           | 105,417                                            | 100,279                                         
|Travel
      & Entertainment               | 89,596                                            | 53,192                                             | 35,369                                          
|Rent                                       | 32,775                                            | 2,700                                              | 6,825                                           
|Loan
      fee                             | 132,500                                           | -                                                  | -                                               
|Acquisition
      of CBM Energy Inc.       | 654,000                                           | -                                                  | -                                               
|Miscellaneous
      expense                | 25,962                                            | 30,435                                             | 4,967                                           
|                                           |                                                   |                                                    |                                                 
|Total
      expense                        | 2,512,067                                         | 950,110                                            | 454,201                                         
|                                           |                                                   |                                                    |                                                 
|Loss
      from operations                 | (2,467,882)                                       | (950,110)                                          | (410,016)                                       
|                                           |                                                   |                                                    |                                                 
|Other
      income (expense):              |                                                   |                                                    |                                                 
|Interest income                            | 5,839                                             | -                                                  | (1,742)                                         
|Earnings on investment                     | 15,823                                            | -                                                  | 736                                             
|Interest expense                           | (4,007)                                           | -                                                  | (2,292)                                         
|                                           |                                                   |                                                    |                                                 
|Other
      income (expense)               | 17,655                                            | -                                                  | (3,298)                                         
|                                           |                                                   |                                                    |                                                 
|Loss
      before income tax               | (2,450,227)                                       | (950,110)                                          | (413,314)                                       
|                                           |                                                   |                                                    |                                                 
|Provision
      for income tax             | -                                                 | -                                                  | -                                               
|                                           |                                                   |                                                    |                                                 
|Net
      loss                             | $ 
      (2,450,227)                              | $   
      (950,110)                               | $   
      (413,314)                            
|                                           |                                                   |                                                    |                                                 
|Basic
      and diluted earnings per share | $          
      (0.14)                          | $         
      (0.07)                            | $         
      (0.02)                         
|                                           |                                                   |                                                    |                                                 
|Weighted
      shares outstanding          | 16,959,057                                        | 13,569,363                                         | 16,959,057                                      





See
notes to condensed financial statements.



---



Petrol
Oil and Gas, Inc.

(A
Development Stage Company)

Condensed
Statement of Cash Flows

(Unaudited)



|                                                                  | Nine
      Months Ended
      September
      30, | March
      3, 2000 (inception) to September 30,
|----------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------------------
|                                                                  | 2004                                              | 2003                                            
|Operating
      activities:                                       |                                                   |                                                 
|Net loss                                                          | $            
      (2,450,227)                   | $               
      (950,110)                
|Adjustments
      to reconcile net loss to cash used in operating |                                                   |                                                 
|activities-                                                       |                                                   |                                                 
|Depreciation                                                      | 4,760                                             | 627                                             
|Stock and options issued for services                             | 1,020,313                                         | 483,000                                         
|Stock issued in acquisition of CBM Energy                         | 765,000                                           | -                                               
|Gain on investment net of fees                                    | (15,823)                                          | -                                               
|Change in assets and liabilities-                                 |                                                   |                                                 
|Deposits on property acquisitions                                 | (250,000)                                         | -                                               
|Accounts payable                                                  | 293,238                                           | 157,962                                         
|Deposits received on joint ventures                               | 59,760                                            | -                                               
|Accrued liabilities                                               | (24,437)                                          | -                                               
|Due to officer                                                    | (47,500)                                          | 22,500                                          
|Cash used in operating activities                                 | (644,917)                                         | (286,021)                                       
|                                                                  |                                                   |                                                 
|Investing
      activities:                                       |                                                   |                                                 
|Equipment purchased                                               | (2,760)                                           | (30,142)                                        
|Investment, net                                                   | 200,000                                           | -                                               
|Additions to oil & gas properties not subject to                  |                                                   |                                                 
|amortization                                                      | (1,552,957)                                       | (607,510)                                       
|Cash used in investing activities                                 | (1,355,717)                                       | (637,652)                                       
|                                                                  |                                                   |                                                 
|Financing
      activities:                                       |                                                   |                                                 
|Stock issued for debt paid by stockholder of Company              | -                                                 | -                                               
|Exercise of options                                               | 487,500                                           | -                                               
|Note receivable payments, net                                     | 318,000                                           | -                                               
|Stock paid for but not issued                                     | -                                                 | 1,025,447                                       
|Payments made on long-term debt                                   | (3,760)                                           | -                                               
|Notes payable                                                     | 250,000                                           | 438,175                                         
|Stock sold                                                        | 6,021,200                                         | 337,500                                         
|Cash provided from financing activities                           | 7,072,940                                         | 1,801,122                                       
|                                                                  |                                                   |                                                 
|Increase
      in cash                                            | 5,072,306                                         | 877,449                                         
|Beginning
      cash                                              | 1,059,838                                         | 161,836                                         
|                                                                  |                                                   |                                                 
|Ending
      cash                                                 | $               
      6,132,144                  | $               
      1,039,285                
|Supplemental
      cash flow information:                         |                                                   |                                                 
|Interest paid                                                     | $                      
      4,007               | $                              
      -         
|Income taxes paid                                                 | -                                                 | -                                               
|Non
      cash financing activities:                              |                                                   |                                                 
|Stock issued for assets acquired                                  | $                              
      -           | $                              
      -         
|Addition to oil & gas properties not                              |                                                   |                                                 
|subject to amortization and accounts payable                      |                                                   |                                                 
|assumed in asset purchase                                         | -                                                 | -                                               
|Stock contributed to paid in capital                              | -                                                 | -                                               
|Unamortized cost of stock issued for services                     | (950)                                             | 1,000                                           
|Stock for services not issued                                     | 469                                               | 30,000                                          
|Stock, warrants and options issued for services                   | 1,020,313                                         | 60,000                                          
|Stock issued on exercise of options for a note receivable         | 349,500                                           | -                                               





See
notes to condensed financial statements.



---



Petrol
Oil and Gas, Inc.

Notes
To Condensed Financial Statements



Note
1 - Basis of Presentation

The unaudited condensed 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 and reflect all
adjustments which, in the opinion of management, are necessary for a fair
presentation. All such adjustments are of a normal recurring nature. The results
of operations for the interim period are not necessarily indicative of the
results to be expected for a full year. Certain amounts in the prior year
statements have been reclassified to conform to the current year presentations.
These statements should be read in conjunction with the financial statements and
footnotes thereto included in the Form 10-KSB for the year ended December 31,
2003.



Note
2 - Going Concern

The accompanying condensed financial statements have been prepared using the
generally accepted accounting principles applicable to a going concern, which
contemplates the realization of assets and liquidation of liabilities in the
normal course of business. For us to continue as a going concern we must seek
additional sources of capital, and we must attain future profitable operations.
We are currently initiating our business plan and are in the process of raising
additional capital. The accompanying financial statements do not include any
adjustments that might be necessary should we be unable to continue as a going
concern.



Note
3 - Stock Transactions and Consulting Agreements

On July 2, 2003, we entered into a loan agreement with CPA Directed Investments
(CDI). As part of that agreement we were required to issue 1,000,000 shares of
Company stock in CDI's name. The par value of the shares of $1,000 was recorded
as common stock with an offsetting amount recorded as a reduction of equity in
the account-unamortized cost of stock issued for services. The loan was repaid
and the stock was returned and cancelled on January 26, 2004.



We entered into a geologist/technical advisor consulting agreement on December
1, 2002 with Mr. William Stoeckinger. The agreement was for a one year term
(amended to a thirteen month term) and among other items Mr. Stoeckinger
received 20,000 shares of our stock per month for thirteen (as amended in a
subsequent agreement) months. Mr. Stoeckinger received 20,000 shares of stock
for January 2004 and the value assigned to that stock was $20,000. The expense
was recorded as professional and consulting fees expense. Mr. Stoeckinger
received 160,000 shares of stock due to him that was recorded as stock for
services not issued at December 31, 2003.



On January 15, 2004, we entered into an agreement with Mr. John Haas, Mr. Mark
Haas and Mr. W.B. Mitchell whereas we would be allowed access to approximately
10,000 acres of leased mineral rights for the purpose of exploring, and
evaluating gas production for 6 months. Mr. John Haas agreed to join the Board
of Directors of the Company. Mr. Mark Haas agreed to be a project manager and
consultant for the Company. Mr. W.B. Mitchell agreed to provide consulting
support for lease/land acquisitions. Each of the three individuals received
600,000 stock warrants (1,800,000 total) to purchase shares at a price of $1.20
per share; 400,000 stock warrants (1,200,000 total) to purchase shares at a
price of $1.50 per share; and 300,000 stock warrants (900,000 total) to purchase
shares at a price of $2.00 per share. The warrants expire on July 15, 2006. The
value of the warrants, using the Black-Scholes pricing model, is $420,700 and
this was recorded in January 2004 as a professional and consulting fees expense.



---



Petrol
Oil and Gas, Inc.

Notes
To Condensed Financial Statements



Note
3 - Stock Transactions and Consulting Agreements (Continued)

On January 15, 2004, we agreed to exchange 765,000 shares of stock to Mr. John
Haas, Mr. Mark Haas and Mr. W.B. Mitchell, principals of CBM Energy, Inc. for
oil and gas mineral leases covering approximately 36,000 acres and title to
approximately 10 existing wells. The value of the transaction is $765,000.
$31,000 of value was assigned to capitalized mineral leases based on the
unamortized lease cost of each leased acre. $80,000 of value was assigned to
capitalized oil & gas costs based on the fair market value of the test wells
on the leased property. The remaining $654,000 was expensed in January 2004.



On February 9, 2004, we agreed to issue 10,000 shares of common stock to and
granted Joseph Blankenship an option to purchase 50,000 shares at $2.50 per
share for the first 25,000 shares and $4.00 for the remaining 25,000 shares. The
option was granted pursuant to the Research Agreement we entered into on
February 9, 2004. The term of the option is for two years. The value of the
stock of $10,000 and the value of the options, using the Black-Scholes pricing
model, of $200 were recorded as a professional and consulting fees expense. The
shares have not been issued to Mr. Blankenship at September 30, 2004 and the par
value of the stock ($10) is recorded as stock bought or for services not issued
in the equity section of the balance sheet.



On February 18, 2004, we granted to CSC Group LLC a stock warrant giving CSC the
right to purchase 200,000 shares of our common stock. The term and exercise
price of the warrant shares shall be: (i) 100,000 shares at $1.50 per share for
a term of two years; and (ii) 100,000 shares at $2.50 per share for a period of
two years. The value of the warrants, using the Black-Scholes pricing model, was
$7,400 and this was recorded in February 2004 as a professional fees expense.



On March 1, 2004, we issued 100,000 stock options with an exercise price of
$1.25 per share and 200,000 stock options with an exercise price of $1.50 per
share to Mr. William Burk. Mr. Burk has performed consulting services for the
Company. The options expire in three years. The value of the options, using the
Black-Scholes pricing model, is $38,500 and this was recorded in March 2004 as a
professional and consulting fees expense.



On March 19, 2004, Mr. Kehoe exercised 325,000 options at a price of $0.50 per
share, Mr. Felton exercised 325,000 options at a price of $0.50 per share and
Mr. Frierson exercised 50,000 options at a price of $0.50 per share. The options
were exercised with a note due the Company for the strike price. 50% of the
stock was issued and 50% of the stock was issued and held as collateral for the
notes. The notes are demand notes and bear interest at a rate of 6%, however all
interest was waived along with $500 of principal. The total still owed at
September 30, 2004 was $32,000.



On March 18, 2004, Mr. Branagan attempted to exercise 250,000 stock options at a
price of $0.50 per share, however, the shares were not issued and on September
27, 2004 Mr. Branagan decided not to exercise any of his options. The option
will remain available to Mr. Branagan on the same terms as originally granted in
his employment agreement dated December 19, 2002.



---



Petrol
Oil and Gas, Inc.

Notes
To Condensed Financial Statements



Note
3 - Stock Transactions and Consulting Agreements (Continued)

On April 13, 2004, Goran Blagojevic exercised 250,000 warrants at a price of
$0.75 per share. On August 1, 2004, Mr. Blagojevic exercised 400,000 warrants at
a price of $0.75 per share. At September 30, 2004, the shares were not issued
and the par value of the stock $400 is recorded in the stock bought or for
services not issued account. On October 27, 2004, the 400,000 shares were
issued.



On May 3, 2004, we issued 100,000 shares of our common stock to CPA Directed
Investments (CDI) pursuant to a secured promissory note agreement dated May 5,
2004. CDI will return 50,000 shares for cancellation at such time the loan and
interest are paid in full. The remaining 50,000 shares will be retained by CDI
as a loan fee. The loan fee expense was determined based on the market value of
our stock on the date of the agreement and totaled $132,500.



On June 17, 2004 we issued 120,000 shares of our common stock to XXR Consulting
Inc. pursuant to a consulting agreement we executed on June 4, 2004. The value
of the stock as determined by the market price of our stock on the day of the
agreement was $276,000 and this was recorded as professional and consulting fee
expense in June 2004.



On June 15, 2004 we agreed to a consulting agreement with ECON Investor
Relations, Inc. The monthly fee is $10,000 of which $6,000 is payable in stock
and the agreement is for one year with either party able to terminate the
agreement based on 30 days written notice. As of September 30, 2004, the fees to
be paid in shares totaled $18,000 and that equated to approximately 7,500
shares. The shares have not been issued and the par value of the stock $8 was
recorded as stock bought or for services not issued.



A supplier has agreed to be paid in stock for 10% of any invoice. Stock owed but
not issued to the supplier at September 30, 2004 was under 2,500 shares.



On May 19, 2004, we entered into a consulting agreement with Tom Bibiyan of
Florence Equity, LLC. The agreement was for 90 days and we paid a fee of
$50,000.



We sold 5,533,333 shares of our common stock during the third quarter. Each
share was sold for $1.20 and it included a warrant to purchase an additional
share of common stock for a price of $1.50 per share expiring on September 8,
2007. The proceeds raised totaled $6,640,000. We offset the proceeds by direct
costs relating to commissions paid totaling $480,000 (with an additional $8,400
paid in October 2004 for stock sales after September 30, 2004), legal fees of
$131,500 and other costs of $7,500 for a net capital amount of $6,021,200. We
also issued 845,000 warrants to Energy Capital Solutions in connection with the
stock sales. The warrants are for the purchase of common stock at a price of
$1.35 per share and the warrants expire October 1, 2009.



---



Petrol
Oil and Gas, Inc.

Notes
To Condensed Financial Statements



Note
3 - Stock Transactions and Consulting Agreements (Continued)

We entered into an agreement with Haas Oil Group whereby we agreed to issue
50,000 shares of common stock in exchange for 100% working interest in certain
leases that Haas owned. The shares were valued at $1.90 per share, which was the
trading price of our common stock on September 20, 2004, the date the agreement
was signed. At September 30, 2004, the shares were not issued and the par value
of the stock of $50 was recorded in the account stock bought or for services not
issued.



Note
4 - Deposit on property acquisition

We entered into an option to purchase assets from Savage Resources, LLC and
Savage Pipeline LLC on September 23, 2004 and paid a deposit of $250,000. An
additional $250,000 was paid in October 2004. See subsequent events note 6.



Note
5 - Related Party Transactions

We paid a loan fee of $132,500 in the quarter-ended June 30, 2004 to CPA
Directed Investments a stockholder of ours.



We paid a Company in which the principal was David Polay, a former Officer and a
current stockholder, $12,000 for consulting services in the quarter ended
September 30, 2004.



Note
6 - Subsequent Events

We sold 100,000 shares of our common stock in October 2004. Each share was sold
for $1.20 and it included a warrant to purchase an additional share of common
stock for a price of $1.50 per share expiring on September 8, 2007. The gross
proceeds raised totaled $120,000.



On October 28, 2004, we entered into agreements with Laurus Master Fund, Ltd., a
Cayman Islands corporation. Under the terms of the Laurus Funds agreements we
issued a Secured Convertible Term Note in the aggregate principal amount of $8.0
million and a five-year warrant to purchase 3,520,000 shares of our common stock
at $2.00 per share and 1,813,333 shares of our common stock at $3.00 per share.
The Note is convertible into shares of our common stock at a fixed conversion
price of $1.50 per share. The Note has a three-year term and bears an interest
rate equivalent to the "prime rate" published by the Wall Street
Journal from time to time plus 3%, subject to a floor of 7.5% per annum. Our net
proceeds from the financing, after payment of fees and expenses to Laurus Funds
and its affiliates, were $7,652,500. We utilized $7.0 million of the proceeds
for an acquisition. In addition, we paid finders' fees of: (i) $315,000 in cash;
(ii) 50,000 shares of restricted common stock; and (iii) issued a warrant to
purchase 100,000 shares at $2.00 per share for a period of three years.



On October 29, 2004, we filed an SB-2 registration statement registering
25,698,861 shares of our common stock for the resale by certain investors,
including all of the investors who purchased shares in our unit offering and to
cover the $8 million convertible term note and 5,333,333 warrants granted to
Laurus Funds.



---



Petrol
Oil and Gas, Inc.

Notes
To Condensed Financial Statements



Note
6 - Subsequent Events (Continued)

Effective November 4, 2004, we completed the acquisition of certain assets owned
by Savage Resources, LLC and Savage Pipeline, LLC for the purchase price of $10
million, all of which was paid in cash. We had previously paid a non-refundable
deposit of $500,000 toward the option to purchase. The remaining $9.5 million
was paid at closing through utilizing $7.0 million of funds received from the
Laurus Funds convertible term note and $2.5 million of funds received from our
recent unit offering.



Issuances
to Consultants



On October 27, 2004, we issued 8,861 shares of our common stock (valued at
$21,000) to ECON Investor Relations, Inc. pursuant to its consulting agreement
dated June 15, 2004.



Pursuant to William Stoeckinger's amended consulting agreement executed on
November 1, 2004 we extended the expiration date of his options to purchase
50,000 shares of our common stock at $0.50 per share and 50,000 shares of our
common stock at $1.00 per share to December 19, 2006.



On November 8, 2004, we amended ECON Investor Relations Inc.'s consulting
agreement dated June 15, 2004 to extend the term of the agreement until November
8, 2005.



---



FORWARD-LOOKING
STATEMENTS



This document contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. All statements other
than statements of historical fact are "forward-looking statements"
for purposes of federal and state securities laws, including, but not limited
to, any projections of earnings, revenue or other financial items; any
statements of the plans, strategies and objections of management for future
operations; any statements concerning proposed new services or developments; any
statements regarding future economic conditions or performance; any statements
or belief; and any statements of assumptions underlying any of the foregoing.



Forward-looking statements may include the words "may,"
"could," "estimate," "intend,"
"continue," "believe," "expect" or
"anticipate" or other similar words. These forward-looking statements
present our estimates and assumptions only as of the date of this report. Except
for our ongoing securities laws, we do not intend, and undertake no obligation,
to update any forward-looking statement.



Although we believe that the expectations reflected in any of our
forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed in any or our forward-looking
statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and inherent risks and
uncertainties. The factors impacting these risks and uncertainties include, but
are not limited to:

- increased
    competitive pressures from existing competitors and new entrants;
- increases
    in interest rates or our cost of borrowing or a default under any material
    debt agreements;
- deterioration
    in general or regional economic conditions;
- adverse
    state or federal legislation or regulation that increases the costs of
    compliance, or adverse findings by a regulator with respect to existing
    operations;
- loss
    of customers or sales weakness;
- inability
    to achieve future sales levels or other operating results;
- fluctuations
    of oil and gas prices;
- the
    unavailability of funds for capital expenditures; and
- operational
    inefficiencies in distribution or other systems.

For a detailed description of these and other factors that could cause actual
results to differ materially from those expressed in any forward-looking
statement, please see "Factors That May Affect Our Plan of Operation"
in this document and "Material Risks" in our Annual Report on Form
10-KSB for the year ended December 31, 2003.



---



Item
2. Plan of Operation.



Overview



Petrol Oil and Gas, Inc., formerly named Euro Technology Outfitters, was
incorporated in Nevada on March 3, 2000. We are an oil and gas exploration and
development company. Our primary business objective is to produce economic
quantities of natural gas from buried coal seams, denoted as coal-bed methane (CBM)
and other gas bearing formations, as well as the production of oil. Our long
term corporate strategy has been to consolidate a strong lease position in CBM
that contains quality gas reserves, position our leases near interstate pipeline
systems that would provide a ready sales market for our gas and ultimately
produce and develop these valuable resources.



We began to generate revenues ($44,185) in the third quarter of 2004 from one of
our exploratory wells in Woodson County Kansas. This well was drilled to assess
the CBM potential in this southern most area of our Coal Creek project. Pleased
with the CBM test results, we subsequently converted the well to an oil
producer. Nevertheless there is a substantial going concern issue as to whether
we will ever be able to commercialize our oil and natural gas production and
generate sufficient revenues to satisfy our working capital requirements. Since
inception, we have been dependent on the sale of our equity securities and loans
from affiliates and other outside parties to satisfy our working capital
requirements. We continue to have a working capital deficiency that raises
substantial concern regarding our ability to continue as a going concern.



On October 28, 2004, we entered into agreements with Laurus Master Fund, Ltd., a
Cayman Islands corporation ("Laurus Funds"), wherein we issued a
Secured Convertible Term Note (the "Note") in the aggregate principal
amount of $8.0 million and a five-year warrant (the "Warrant") to
purchase 3,520,000 shares of our common stock at $2.00 per share and 1,813,333
shares of our common stock at $3.00 per share. See Significant Events, under
Part II Other Information, below for a complete discussion of the terms of the
Laurus Funds transaction.



Effective November 4, 2004, we completed the acquisition of certain assets owned
by Savage Resources, LLC and Savage Pipeline, LLC for the purchase price of
approximately $10 million, all of which was paid in cash. The acquisition
includes leasehold rights to approximately 10,000 acres and 71 producing gas
wells in the Thayer Gas Field, in Southeast Kansas. Petrol-Neodesa (the
"Producing Property") is in a mature and highly producing area located
in Wilson and Neosho counties, Kansas and currently produces about 3,000 Mcf per
day of gas, based upon production from 71 wells. Based upon an average gas price
of $8.22 per Mcf, the Producing Property is expected to generate gross revenues
of about $9.6 million for the Company in 2005. Net cash flow from Petrol-Neodesa,
after production, operational interest and other expenses, is expected to be
roughly $3.5 Million in 2005.



We presently have a six (6) well pilot/exploration program located within our
leased acreage in Coffey County Kansas. Following drilling, logging and setting
steel casing these wells were perforated in some of the coal intervals that
contain gas. The perforated coal intervals were acidizied and subsequently
fractured using conventional hydraulic techniques in order to stimulate
production. We are now in the process of de-watering the coals and our cleats
using wellhead and downhole pumping systems. Daily water production ranges
between 50-350 barrels per day while CBM gas production is either flare tested
or shut in at the wellhead.



---



We continue to acquire new mineral leases in Missouri. We have an exploratory
well in Cass County, Missouri and have been acquiring leases in both Cass and
Bates counties, Missouri.



We plan to employ a simple conventional working interest (WI) model whereby our
WI partner(s) would provide all or the major share of the drilling and
completion costs for a given set of wells on a specific set of our leases for
which the WI partner(s) would receive a portion of the net production revenue.
This practice is intended to allow us to drill and complete additional wells
with reduced capital outlays.



Our field development program will include developing our mineral rights
together with either joint venture (JV) or WI partners. In July 2004, we
received a 20% membership interest in Petrol Oil, II LLC, a limited liability
company, in exchange for contributing certain producing wells, and other assets
received in the RWJ Oil acquisition to the LLC. Outside investors received the
remaining 80% in exchange for a contribution of $350,000. Pursuant to the terms
of the LLC operating agreement, we will manage the production of the wells and
the net revenues will be directed to Petrol Oil, II LLC for distribution. We
also expect to expand our well drilling operations program with our own drilling
and production funds derived from proceeds raised from equity financing, debt
financing, or other sources.



On July 7, 2004, we entered into a Gas Purchase and Sale Agreement with Big
Creek Field Services, LLC, a Kansas limited liability company, wherein we agreed
to sell and Big Creek agreed to purchase our available supply of gas. The term
of the agreement is for 10 years and shall continue year-to-year thereafter,
unless terminated by either party.



On July 26, 2004, we acquired oil property leases consisting of 640 acres within
25 well heads located in Franklin County, Kansas from RWJ Oil LC. In addition we
acquired related equipment. As stated above, the 25 well heads and related
equipment were transferred to Petrol Oil, LLC.



As of September 30, 2004, we had approximately 900 signed lease agreements
totaling approximately 165,000 acres. These leases are scattered throughout
Coffey County, Kansas and the adjacent counties of Anderson, Osage, Lyon,
Franklin, Woodson as well as Cass and Bates counties in western Missouri. In the
event that we are successful in the development phase of our plan and find
commercially producible gas or oil, we intend to lease additional available
mineral rights to the extent that we believe such land will further our
exploration and development activities and provide increased value to Petrol.



Plan
of Operation



During the next twelve months we plan to continue to focus our efforts on
beginning the sustained development and production of our CBM reserves on our
existing properties, pursuing strategic acquisitions of producing properties and
furthering our business plan. With the signing of a gas sales contract with a
local gas gathering system, Big Creek Field Services LLC, we are now able to
begin the continuous dewatering of some of our exploratory wells in the Coal
Creek project and begin selling the produced gas. In addition, in November we
completed the acquisition of certain assets owned by Savage Resources, LLC and
Savage Pipeline, LLC. The oil and gas leases cover lands in Neosho and Wilson
Counties, Kansas, along with a gas gathering system.



---



We intend to fund portions of our field operations and development program
through capital raised in our unit offering, funds reserved as a result of the
recent Laurus Funds Transaction and from revenues obtained from sales of our CBM
gas and oil production. To accelerate the development program we plan to take on
Joint Venture (JV) or Working Interest (WI) partners that will contribute to the
capital costs of drilling and completion and then share in revenues derived from
production. This economic strategy may allow us to utilize our own financial
assets toward the growth of our leased acreage holdings, pursue the acquisition
of strategic oil and gas producing properties or companies, and generally expand
our existing operations.



Because of our limited operating history we have only recently begun to generate
minimal revenues ($48,185) from the sale of oil or natural gas. However, the
recent Savage acquisition is anticipated to substantially increase our revenues.
Further, we have acquired several smaller producing gas and oil wells that will
also enhance our revenues.



Our future financial results will depend primarily on: (i) the ability to
continue to source and screen potential projects; (ii) the ability to
efficiently assimilate the assets acquired in the Savage acquisition into our
operations; (iii) the ability to discover commercial quantities of natural gas
and oil; (iv) the market price for oil and gas; and (v) the ability to fully
implement our exploration and development program, which is dependent on the
availability of capital resources. There can be no assurance that we will be
successful in any of these respects, that the prices of oil and gas prevailing
at the time of production will be at a level allowing for profitable production,
or that we will be able to obtain additional funding to increase our capital
resources.



Satisfaction
of our cash obligation for the next 12 months.



A critical component of our operating plan impacting our continued existence is
to efficiently manage the production from the Savage acquisition, our ability to
obtain additional capital through additional equity and/or debt financing, and
JV or WI partnerships will also be important to our expansion plans. We do not
anticipate enough positive internal operating cash flow until such time as we
begin receiving funds from the sale of gas acquired in the Savage transaction,
which may take the next few months to fully realize. In the event we experience
any significant problems assimilating the acquired assets into our operations or
cannot obtain the necessary capital to pursue our strategic plan, we may have to
cease or significantly curtail our operations. This would materially impact our
ability to continue operations.



Since inception, we have financed cash flow requirements through debt financing
and issuance of common stock for cash and services. As we expand operational
activities, we may continue to experience net negative cash flows from
operations, pending receipt of sales or development fees, and will be required
to obtain additional financing to fund operations through common stock offerings
and debt borrowings to the extent necessary to provide working capital.



As of October 7, 2004, we successfully raised $6,760,000, all of which was paid
in cash, from our unit offering (each unit consisting of 1 share of restricted
common stock and 1 warrant). In addition, pursuant to the Laurus Fund
transaction, $652,500 of the note proceeds along with $198,968.35 of our funds
(for a total of $851,468.35) have been deposited into a restricted cash account.
Funds held in the restricted cash account will be released to us for future
acquisitions or other corporate purposes approved by Laurus Funds.



---



We believe that with the proceeds of our unit offering, combined with the funds
remaining in the Laurus restricted account, we are able to proceed with the next
phase of our operations which is large field scale development. See Significant
Events, under Part II Other Information, below for a complete discussion of the
terms of the Laurus Funds transaction.



Over the next twelve months we believe that existing capital combined with cash
flow from operations will be sufficient to sustain operations and planned
expansion.



We may incur operating losses over the next twelve months. Our lack of operating
history makes predictions of future operating results difficult to ascertain.
Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in the oil and gas industry. Such risks
include, but are not limited to, an evolving and unpredictable business model
and the management of growth. To address these risks we must, among other
things, implement and successfully execute our business and marketing strategy,
continue to develop and upgrade technology and products, respond to competitive
developments, and attract, retain and motivate qualified personnel. There can be
no assurance that we will be successful in addressing such risks, and the
failure to do so can have a material adverse effect on our business prospects,
financial condition and results of operations.



Under our current plan of operation, we are required to make certain lease
payments to maintain our rights to develop and drill for oil and gas. These
lease payments are material obligations to us.



As of September 30, 2004, we had assets of $9,298,535, and $901,111 in
liabilities (total current liabilities of $881,948), resulting in a stockholders'
equity of $8,397,424.



Going
Concern



The financial statements included in this filing have been prepared in
conformity with generally accepted accounting principles that contemplate the
continuance of the Company as a going concern. The Company's cash position may
be inadequate to pay all of the costs associated with testing, production and
exploration activities. Management intends to use borrowings and security sales
to mitigate the effects of its cash position, however no assurance can be given
that debt or equity financing, if and when required will be available. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets and classification of
liabilities that might be necessary should the Company be unable to continue
existence.



Summary
of product and research and development that we will perform for the term of our
plan.



Field
Development



Our original plan of operation for field development started with identifying
the most promising and cost-effective drill sites on our current leased acres,
drilling and testing wells to prove reserves, completing the more promising test
wells, extracting the oil, gas and other hydrocarbons that we find, and
delivering them to market. We believe that we have leased enough land to move
forward with our field development and with the proceeds of our unit offering,
combined with the funds being held in a restricted account by Laurus, we are
proceeding with the next phase of our operations which is large field scale
development.



---



During our two year exploration and development phase of our plan of operation,
we have drilled and tested a total of 18 CBM wells on selected leases in our
Kansas and Missouri projects. These drilling and testing efforts provide our
geologists and engineers with data that support the quantitative determination
as to whether there are commercially producible hydrocarbons present, such as
oil, CBM or other types of natural gas. Twelve of these exploratory/test wells
are contained within our Coal Creek project in Coffey County, Kansas. Most are
in proximity to an existing interstate gas pipeline and one is already included
in our recent gas sales contract with Big Creek Field Services, LLC. The total
drilling depth for our Kansas project wells is approximately 1700 ft. One
additional exploratory well, located in Woodson county Kansas, was converted to
an oil producer following the acquisition of our CBM test data and in the third
quarter began producing modest revenues to the Company.



The remaining five exploratory/test wells were drilled on our Missouri Project
in Cass County Missouri. Again most were located in close proximity to an
interstate gas pipeline system. Since the Cherokee basin dips to the west the
CBM formations in Missouri are considerably shallower than in Kansas, with total
depths being about 700 ft.



Field exploration and development operations began in August 2002, with the
drilling and logging of three exploratory/test wells. Each exploratory/test well
is located on a separate mineral lease in the southwest portion of Coffey
County. These drill sites were selected based on a variety of factors, including
information gathered from historic records and drill logs (depth, and thickness
of coal seams and the results of electric gamma ray readings), proximity to
existing interstate distribution pipelines, ease of access for drilling
equipment, the presence of oil and natural gas in the immediate vicinity, and
consultations with our geologist and driller. Since these are considered to be
exploratory or test wells they have only been partially completed in order to
allow us to investigate the production capacity of selected coal intervals, and
to obtain important technical information related to stimulation activities that
are almost always required to make CBM wells commercially productive. Thus we do
not presently have any estimates of oil and gas reserves on these properties.
Consequently, we have not reported our reserve estimates to any state or federal
authority.



In the field development stages of our plan each new well will be drilled and
tested individually. If commercially producible amounts of gas are present, the
well will be fully completed and a local distribution pipeline installed.
Completed wells that are producing and connected to distribution pipelines will
begin generating revenues as soon as they begin pumping although these revenues
may be realized on a quarterly basis.



Once we have identified a proposed drilling site, we as a licensed operator in
the State of Kansas and Missouri, will be engaged in all aspects of well site
operations. As the operator we will be responsible for permitting the well,
which will include obtaining permission from the Kansas Oil and Gas commission
or Missouri relative to spacing requirements and any other state and federal
environmental clearances required at the time that the permitting process
commences. Additionally, we will formulate and deliver to all interest owners an
operating agreement establishing each participant's rights and obligations in
that particular well based on the location of the well and the ownership. In
addition to the permitting process, we as the operator will be responsible for
hiring the driller, geologist and land men to make final decisions relative to
the zones to be targeted, confirming that we have good title to each leased
parcel covered by the spacing permit and to actually drill the well to the
target zones. Should the well be successful, we will be responsible for
completing the well and connecting it to the most appropriate transmission
facility for the hydrocarbons produced.

---



As the operator we will be the caretaker of the well once production has
commenced. We have no formal experience in well operations and will have to hire
or retain professionals to assist us in our efforts. As the operator, we will be
responsible for paying bills related to the well, billing working interest
owners for their proportionate expenses in drilling and completing the well, and
selling the production from the well. Again, we have no experience in operating
an oil or gas production company; therefore, we will be forced to hire
experienced operation staff, when needed. Once the production has been sold, we
anticipate that the purchaser thereof will carry out its own research with
respect to ownership of that production and will send out a division order to
confirm the nature and amount of each interest owned by each interest owner.
Once a division order has been established and confirmed by the interest owners,
the production purchaser will issue the checks to each interest owner in
accordance with its appropriate interest. From that point forward, we as
operator will be responsible for maintaining the well and the wellhead site
during the entire term of the production or until such time as we have been
replaced or the site appropriately abandoned. We anticipate hiring professionals
to assist us in our operations until such time as our management has sufficient
knowledge and operations ability.



We amended our agreement with Mr. William Stoeckinger, a Certified Petroleum
Geologist, from Bartlesville, Oklahoma to extend the term of his agreement to
November 1, 2006. Mr. Stoeckinger provides geological services both in the
assessment process and in the development program. To date, Mr. Stoeckinger has
reported good gas shows in a number of the coal seams contained in the Cherokee
Group, the primary source of CBM production in the area.



On July 26, 2004 we acquired oil properties leases consisting of 640 acres with
25 well heads, including related equipment located in Franklin County, Kansas
from RWJ Oil LLC.



In September 2004, we acquired two additional small oil fields in Woodson and
Coffey Counties, Kansas. They include mineral leases on 800 acres with 10 oil
wells, a water disposal well, and storage equipment. Total oil production is
about 9-12 barrels per day and we agreed to pay $150,000 in cash and issue
50,000 shares of our restricted common stock as full consideration for the
acquisition.



On November 4, 2004, we acquired leasehold rights to approximately 10,000 acres
and 71 producing wells in the Thayer Gas Field, in Southeast Kansas, for a total
purchase price of approximately $10 million in cash.



Kansas Geologic Society (KGS) has joined us in our scientific effort designed to
assess the gas reserves from our CBM exploratory/test wells in eastern Kansas.
KGS took samples from coal beds from our wells in Coffey County, Kansas. Their
preliminary laboratory test results yielded similar gas content values to those
obtained by our geologist, Mr. William Stoeckinger, that were derived from
sampling of our other exploratory/test wells. We view these independent gas
content values quite favorably since they indicate quantitative similarities to
the CBM producing coal beds found in Woodson and other counties to the south.
Woodson county being adjacent to Coffey county.



---



Based on our first series of exploratory/test wells we anticipate that each well
in our targeted area will cost approximately $30,000 to locate, drill and test,
an additional $80,000 to complete, plus an additional $350 per month per well to
pay for electricity, pulling and repairs, pumping and other miscellaneous
charges. In support of these operations we have working agreements with local
third parties to monitor and maintain our wells and perform drilling and
work-over activities.



If any of our wells prove to hold commercially producible gas, we will continue
to add wells to our gas sales agreement with Big Creek Field Services or install
our own distribution infrastructure to transport our gas from the wellhead to
one of the major distribution pipelines. We have identified several major
interstate distribution pipelines that operate within and pass through the
counties in which we have lease holdings. These include pipelines owned and
operated by Southern Star, CMS Energy, Enbridge and Kinder Morgan. We have
initiated contact with two of these companies to ascertain the specific
locations of their pipelines, their requirements to purchase gas from us
(including volume of gas and quality of gas), and the costs to connect to their
pipelines. Traditionally, the major distribution of gas in the United States
have purchased production from anyone who can get sufficient quantities of
quality gas to their distribution pipeline. Because some of these companies have
purchased coal-bed methane from producing wells in the southern part of Kansas,
we believe that if the gas produced from wells drilled in our targeted area
meets their criteria in both quantity and quality, they will purchase our gas at
market prices. To date, we have entered into one purchase agreement with Big
Creek Field Services, LLC. We have not received assurances from anyone else that
they will enter into such agreements with us in the future.



Presently, we cannot accurately predict the costs of transporting our gas
products to these existing interstate pipelines. The cost of installing a
distribution infrastructure or local gathering system will vary depending upon
the distance the gas must travel from its wellhead to the compressor station and
high pressure pipeline tap, and whether the gas must be treated to meet the
purchasing company's quality standards. However, based on the close proximity of
several major distribution pipelines to our leased properties, plus our intent
to drill as close to these pipelines as practicable, we anticipate that the
total cost of installing a distribution infrastructure for a group of about 50
producing wells will be approximately $6,500 each plus a one-time expense of
$5,000 per well to tap into the high pressure interstate pipeline and support a
compressor and monitoring system.



The prices obtained for oil and gas are dependent on numerous factors beyond our
control, including domestic and foreign production rates of oil and gas, market
demand and the effect of governmental regulations and incentives. We do not have
any delivery commitments with respect to any oil or gas produced from any
properties that we acquire. However, due to the U.S. government's recent push
toward increased domestic production of energy sources, and the high demand for
natural gas, we do not anticipate any difficulties in selling any oil and gas we
produce, once it has been delivered to a distribution facility.



The success of this phase of our plan of operation is dependent upon our ability
to obtain additional capital to drill exploratory and test wells and also upon
our successfully finding commercially producible amounts of coal-bed methane gas
or other hydrocarbons in the wells that we drill. We cannot assure you that we
will obtain the necessary capital or that we will find commercially producible
amounts of gas if our drilling operations commence.



---



The timing of most of our capital expenditures is discretionary. We recently
incurred a direct $8.0 million financial obligation through execution of the
Laurus Funds Note. Consequently, we have a significant degree of flexibility to
adjust the level of such expenditures as circumstances warrant. The level of our
capital expenditures will vary in future periods depending on energy market
conditions and other related economic factors.



Expected
purchase or sale of plant and significant equipment.



Effective November 4, 2004, we completed the acquisition of certain assets owned
by Savage Resources, LLC and Savage Pipeline, LLC for the purchase price of $10
million, all of which was paid in cash. We had previously paid a non-refundable
deposit of $500,000 toward the option to purchase. The remaining $9.5 million
was paid at closing through utilizing $7.0 million of funds received from the
Laurus Funds convertible term note (described in Liquidity and Capital Resources
below) and $2.5 million of funds received from our recent unit offering.



The acquisition includes leasehold rights to approximately 10,000 acres and 71
producing gas wells in the Thayer Gas Field, in Southeast Kansas. Petrol-Neodesa
(the "Producing Property") is in a mature and highly producing area
located in Wilson and Neosho counties, Kansas and currently produces about 3,000
Mcf per day of gas, based upon production from 71 wells. Based upon an average
gas price of $8.22 per Mcf, the Producing Property is expected to generate gross
revenues of about $9.6 million for the Company in 2005. Net cash flow from
Petrol-Neodesa, after production, operational interest and other expenses, is
expected to be roughly $3.5 Million in 2005.



Significant
changes in the number of employees.



We currently have two full time employees and two part time employees. As
drilling production activities commence, we intend to hire additional technical,
operational and administrative personnel as appropriate. We expect a significant
change in the number of full time employees over the next 12 months. However, at
this time we are unable to quantify exactly how many. We intend to use the
services of independent consultants and contractors to perform various
professional services, particularly in the area of land services, drilling,
water hauling, pipeline construction, well design, well-site monitoring and
surveillance, permitting and environmental assessment. We believe that this use
of third-party service providers may enhance our ability to contain general and
administrative expenses.



Off-Balance
Sheet Arrangements



We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results or operations, liquidity,
capital expenditures or capital resources that is material to investors.



Liquidity
and Capital Resources



On October 28, 2004, we entered into agreements with Laurus Master Fund, Ltd., a
Cayman Islands corporation. Under the terms of the Laurus Funds agreements we
issued a Secured Convertible Term Note (the "Note") in the aggregate
principal amount of $8.0 million and a five-year warrant (the
"Warrant") to purchase 3,520,000 shares of our common stock at $2.00
per share and 1,813,333 shares of our common stock at $3.00 per share. The Note
is convertible into shares of our common stock at a fixed conversion price of
$1.50 per share. The Note has a three-year term and bears an interest rate
equivalent to the "prime rate" published by the Wall Street Journal
from time to time plus 3%, subject to a floor of 7.5% per annum.



---



Our net proceeds from the financing, after payment of fees and expenses to
Laurus Funds and its affiliates, were $7,652,500. We utilized $7.0 million of
the proceeds for the Savage acquisition described above. In addition, we paid
finders' fees of: (i) $315,000 in cash; (ii) 50,000 shares of restricted common
stock; and (iii) issued a warrant to purchase 100,000 shares at $2.00 per share
for a period of three years. See Significant Events under Part II Other
Information, below for a complete discussion of the terms of the Laurus Funds
transaction.



On October 29, 2004, we filed an SB-2 registration statement registering
25,698,861 shares of our common stock for the resale by certain investors,
including all of the investors who purchased shares in our unit offering and to
cover the $8 million convertible term note and 5,333,333 warrants granted to
Laurus Funds.



Additional
Steps to Increase Liquidity:



Over the last several years, we have funded portions of our operating cash flow
and growth from sales of equity securities and loans from officers and related
parties.



In our unit offering completed on October 7, 2004, we sold 5,633,333 units for a
total purchase price of $6,760,000, all of which was paid in cash. Each unit
consisted of 1 share of restricted common stock and 1 warrant.



FACTORS
THAT MAY AFFECT OUR PLAN OR OPERATION



We
are a development stage company, with a minimal operating history, which raises
substantial doubt as to our ability to successfully develop profitable business
operations.



We have a limited operating history. Our prospects must be considered in light
of the risks, expenses and difficulties frequently encountered in establishing a
business in the oil and natural gas industries. We have yet to generate any
meaningful revenues from operations and have been focused on organizational,
start-up, market analysis, exploratory drilling and fund raising activities.
However, our recent acquisition is anticipated to greatly increase our revenues.
There is nothing at this time on which to base an assumption that our business
operations will prove to be successful or that we will ever be able to operate
profitably. Our future operating results will depend on many factors, including:

- our
    ability to raise adequate working capital;
- success
    of our development and exploration;
- demand
    for natural gas and oil;
- the
    level of our competition;
- our
    ability to attract and maintain key management and employees; and
- our
    ability to efficiently explore, develop and produce sufficient quantities of
    marketable natural gas or oil in a highly competitive and speculative
    environment while maintaining quality and controlling costs.

---



To achieve profitable operations, we must, alone or with others, successfully
execute on the factors stated above, along with continually developing ways to
enhance our production efforts. Despite our best efforts, we may not be
successful in our development efforts or obtain required regulatory approvals.
There is a possibility that some, or all, of our wells may never produce natural
gas or oil. Since inception, we have incurred a net loss of $4,893,710 and at
September 30, 2004 our assets exceeded our liabilities by $8,397,424.



At
this stage of our business operations, even with our good faith efforts,
potential investors have a possibility of losing their investment.



Because the nature of our business is expected to change as a result of shifts
in the market price of oil and natural gas, competition, and the development of
new and improved technology, management forecasts are not necessarily indicative
of future operations and should not be relied upon as an indication of future
performance.



While Management believes its estimates of projected occurrences and events are
within the timetable of its business plan, our actual results may differ
substantially from those that are currently anticipated.



We
may need additional capital in the future to finance our planned growth, which
we may not be able to raise or it may only be available on terms unfavorable to
us or our stockholders, which may result in our inability to fund our working
capital requirements and harm our operational results.



We have and expect to continue to have substantial capital expenditure and
working capital needs. We believe that current cash on hand and the other
sources of liquidity are only sufficient enough to fund our operations through
fiscal 2005. After that time we will need to rely on cash flow operations or
raise additional cash to fund our operations, to fund our anticipated reserve
replacement needs and implement our growth strategy, or to respond to
competitive pressures and/or perceived opportunities, such as investment,
acquisition, exploration and development activities.



If low natural gas and oil prices, operating difficulties or other factors, many
of which are beyond our control, cause our revenues or cash flows from
operations to decrease, we may be limited in our ability to spend the capital
necessary to complete our development, exploitation and exploration programs. If
our resources or cash flows do not rapidly commence, we will require additional
financing, in addition to anticipated cash generated from our operations, to
fund our planned growth. Additional financing might not be available on terms
favorable to us, or at all. If adequate funds were not available or were not
available on acceptable terms, our ability to fund our operations, take
advantage of unanticipated opportunities, develop or enhance our business or
otherwise respond to competitive pressures would be significantly limited. In
such a capital restricted situation, we may curtail our acquisition, drilling,
development, and exploration activities or be forced to sell some of our assets
on an untimely or unfavorable basis.



If we raise additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders would be reduced, and
these newly issued securities might have rights, preferences or privileges
senior to those of existing stockholders.



---



Because
our common stock is deemed a low-priced "Penny" stock, an investment
in our common stock should be considered high risk and subject to marketability
restrictions.



Since our common stock is a penny stock, as defined in Rule 3a51-1 under the
Securities Exchange Act, it will be more difficult for investors to liquidate
their investment even if and when a market develops for the common stock. Until
the trading price of the common stock rises above $5.00 per share, if ever,
trading in the common stock is subject to the penny stock rules of the
Securities Exchange Act specified in rules 15g-1 through 15g-10. Those rules
require broker-dealers, before effecting transactions in any penny stock, to:

- Deliver
    to the customer, and obtain a written receipt for, a disclosure document;
- Disclose
    certain price information about the stock;
- Disclose
    the amount of compensation received by the broker-dealer or any associated
    person of the broker-dealer;
- Send
    monthly statements to customers with market and price information about the
    penny stock; and
- In
    some circumstances, approve the purchaser's account under certain standards
    and deliver written statements to the customer with information specified in
    the rules.

Consequently, the penny stock rules may restrict the ability or willingness of
broker-dealers to sell the common stock and may affect the ability of holders to
sell their common stock in the secondary market and the price at which such
holders can sell any such securities. These additional procedures could also
limit our ability to raise additional capital in the future.



We
may incur substantial write-downs of the carrying value of our gas and oil
properties, which would adversely impact our earnings.



We intend to periodically review the carrying value of our gas and oil
properties under the full cost accounting rules of the Securities and Exchange
Commission. Under these rules, capitalized costs of proved gas and oil
properties may not exceed the present value of estimated future net revenues
from proved reserves, discounted at an annual rate of 10%. Application of this
"ceiling" test requires pricing future revenue at the un-escalated
prices in effect as of the end of each fiscal quarter and requires a write-down
for accounting purposes if the ceiling is exceeded, even if prices were
depressed for only a short period of time. We may be required to write down the
carrying value of our gas and oil properties when natural gas and oil prices are
depressed or unusually volatile, which would result in a charge against our
earnings. Once incurred, a write-down of the carrying value of our natural gas
and oil properties is not reversible at a later date.



Competition
in our industry is intense. We are very small and have an extremely limited
operating history as compared to the vast majority of our competitors, and we
may not be able to compete effectively.



We intend to compete with major and independent natural gas and oil companies
for property acquisitions. We will also compete for the equipment and labor
required to operate and to develop natural gas and oil properties. The majority
of our anticipated competitors have substantially greater financial and other
resources than we do. In addition, larger competitors may be able to absorb the
burden of any changes in federal, state and local laws and regulations more
easily than we can, which would adversely affect our competitive position. These
competitors may be able to pay more for natural gas and oil



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properties
and may be able to define, evaluate, bid for and acquire a greater number of
properties than we can. Our ability to acquire additional properties and develop
new and existing properties in the future will depend on our ability to conduct
operations, to evaluate and select suitable properties and to consummate
transactions in this highly competitive environment. In addition, some of our
competitors have been operating in our core areas for a much longer time than we
have and have demonstrated the ability to operate through industry cycles.



We
are highly dependent on Paul Branagan, our CEO, president and chairman. The loss
of Mr. Branagan, whose knowledge, leadership and technical expertise upon which
we rely, would harm our ability to execute our business plan.



Our success depends heavily upon the continued contributions of Paul Branagan,
whose knowledge, leadership and technical expertise would be difficult to
replace, and on our ability to retain and attract experienced engineers,
geoscientists and other technical and professional staff. We have entered into
an employment agreement with Mr. Branagan; however, maintain no key person
insurance on Mr. Branagan. In addition, Mr. Branagan is an officer and director
of other public companies, which may impact the amount of his time spent on our
business matters. If we were to lose his services, our ability to execute our
business plan would be harmed and we may be forced to cease operations until
such time as we could hire a suitable replacement for Mr. Branagan.



Our
management, officers and directors have no previous oil and gas experience,
therefore investors should not rely on our management, officers or directors as
being experts in the area of oil and gas exploration and production, which is
our business focus.



Our management, officers and directors have no previous oil and gas experience.
All business decisions made by them regarding oil and gas exploration and
production will be in reliance on the advice of others due to this lack of
experience. We intend to use the services and advice of independent consultants
and contractors for various professional services, particularly in the area of
land services, drilling, water hauling, pipeline construction, well design,
well-site monitoring and surveillance, permitting and environmental assessment.
If reliable advice is not available, it is unlikely our business will succeed.



Gas
and Oil prices are volatile. This volatility may occur in the future, causing
negative change in cash flows which may result in our inability to cover our
capital expenditures.



Our future revenues, profitability, future growth and the carrying value of our
properties is anticipated to depend substantially on the prices we may realize
for our natural gas and oil production. Our realized prices may also affect the
amount of cash flow available for capital expenditures and our ability to borrow
and raise additional capital.



Natural gas and oil prices are subject to wide fluctuations in response to
relatively minor changes in or perceptions regarding supply and demand.
Historically, the markets for natural gas and oil have been volatile, and they
are likely to continue to be volatile in the future. For example, natural gas
and oil prices declined significantly in late 1998 and 1999 and, for an extended
period of time, remained substantially below prices obtained in previous years.
Among the factors that can cause this volatility are:



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- worldwide
    or regional demand for energy, which is affected by economic conditions;
- the
    domestic and foreign supply of natural gas and oil;
- weather
    conditions;
- domestic
    and foreign governmental regulations;
- political
    conditions in natural gas and oil producing regions;
- the
    ability of members of the Organization of Petroleum Exporting Countries to
    agree upon and maintain oil prices and production levels; and
- the
    price and availability of other fuels.

It is impossible to predict natural gas and oil price movements with certainty.
Lower natural gas and oil prices may not only decrease our future revenues on a
per unit basis but also may reduce the amount of natural gas and oil that we can
produce economically. A substantial or extended decline in natural gas and oil
prices may materially and adversely affect our future business enough to force
us to cease our business operations. In addition, our financial condition,
results of operations, liquidity and ability to finance planned capital
expenditures will also suffer in such a price decline. Further, natural gas and
oil prices do not necessarily move together.



Drilling
wells is speculative, often involving significant costs that may be more than
our estimates, and may not result in any addition to our production or reserves.
Any material inaccuracies in drilling costs, estimates or underlying assumptions
will materially affect our business.



Developing and exploring for natural gas and oil involves a high degree of
operational and financial risk, which precludes definitive statements as to the
time required and costs involved in reaching certain objectives. The budgeted
costs of drilling, completing and operating wells are often exceeded and can
increase significantly when drilling costs rise due to a tightening in the
supply of various types of oilfield equipment and related services. Drilling may
be unsuccessful for many reasons, including title problems, weather, cost
overruns, equipment shortages and mechanical difficulties. Moreover, the
successful drilling of a natural gas or oil well does not ensure a profit on
investment. Exploratory wells bear a much greater risk of loss than development
wells. A variety of factors, both geological and market-related, can cause a
well to become uneconomical or only marginally economic. Our initial drilling
and development sites, and any potential additional sites that may be developed,
require significant additional exploration and development, regulatory approval
and commitments of resources prior to commercial development. Any success that
we may have with these wells or any future drilling operations will most likely
not be indicative of our current or future drilling success rate, particularly,
because we intend to emphasize on exploratory drilling. If our actual drilling
and development costs are significantly more than our estimated costs, we may
not be able to continue our business operations as proposed and would be forced
to modify our plan of operation.



Development of our reserves, when established, may not occur as scheduled and
the actual results may not be as anticipated. Drilling activity may result in
downward adjustments in reserves or higher than anticipated costs. Our estimates
will be based on various assumptions, including assumptions required by the
Securities and Exchange Commission relating to natural gas and oil prices,
drilling and operating expenses, capital expenditures, taxes and availability of
funds. The process of estimating our natural gas and oil reserves is anticipated
to be extremely complex, and will require significant decisions and assumptions
in the



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evaluation
of available geological, geophysical, engineering and economic data for each
reservoir. Due to our inexperience in the oil and gas industry and development
stage operations, our estimates may not be reliable enough to allow us to be
successful in our intended business operations. Our actual production, revenues,
taxes, development expenditures and operating expenses will likely vary from
those anticipated. These variances may be material.



The
natural gas and oil business involves numerous uncertainties and operating risks
that can prevent us from realizing profits and can cause substantial losses.



Our development, exploitation and exploration activities may be unsuccessful for
many reasons, including weather, cost overruns, equipment shortages and
mechanical difficulties. Moreover, the successful drilling of a natural gas and
oil well does not ensure a profit on investment. A variety of factors, both
geological and market-related, can cause a well to become uneconomical or only
marginally economical. In addition to their cost, unsuccessful wells can hurt
our efforts to replace reserves.



The natural gas and oil business involves a variety of operating risks,
including:

- fires;
- explosions;
- blow-outs
    and surface cratering;
- uncontrollable
    flows of oil, natural gas, and formation water;
- natural
    disasters, such as hurricanes and other adverse weather conditions;
- pipe,
    cement, or pipeline failures;
- casing
    collapses;
- embedded
    oil field drilling and service tools;
- abnormally
    pressured formations; and
- environmental
    hazards, such as natural gas leaks, oil spills, pipeline ruptures and
    discharges of toxic gases.

If we experience any of these problems, it could affect well bores, gathering
systems and processing facilities, which could adversely affect our ability to
conduct operations. We could also incur substantial losses as a result of:

- injury
    or loss of life;
- severe
    damage to and destruction of property, natural resources and equipment;
- pollution
    and other environmental damage;
- clean-up
    responsibilities;
- regulatory
    investigation and penalties;
- suspension
    of our operations; and
- repairs
    to resume operations.

Because we intend to use third-party drilling contractors to drill our wells, we
may not realize the full benefit of worker compensation laws in dealing with
their employees. Our insurance does not protect us against all operational
risks. We do not carry business interruption insurance at levels that would
provide enough funds for us to continue operating without access to other funds.
For some risks, we may not obtain insurance if we believe the cost of available
insurance is excessive relative to the risks presented. In addition, pollution
and environmental risks generally are not fully insurable. If a significant
accident or other event occurs and is not fully covered by insurance, it could
impact our operations enough to force us to cease our operations.



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The
unavailability or high cost of drilling rigs, equipment, supplies, personnel and
other services could adversely affect our ability to execute on a timely basis
our development, exploitation and exploration plans within our budget.



Shortages or an increase in cost of drilling rigs, equipment, supplies or
personnel could delay or interrupt our operations, which could impact our
financial condition and results of operations. Drilling activity in the
geographic areas in which we conduct drilling activities may increase, which
would lead to increases in associated costs, including those related to drilling
rigs, equipment, supplies and personnel and the services and products of other
vendors to the industry. Increased drilling activity in these areas may also
decrease the availability of rigs. We do not have any contracts with providers
of drilling rigs and we cannot assure you that drilling rigs will be readily
available when we need them. Drilling and other costs may increase further and
necessary equipment and services may not be available to us at economical
prices.



We
are subject to complex laws and regulations, including environmental
regulations, which can adversely affect the cost, manner or feasibility of doing
business.



Development, production and sale of natural gas and oil in the United States are
subject to extensive laws and regulations, including environmental laws and
regulations. We may be required to make large expenditures to comply with
environmental and other governmental regulations. Matters subject to regulation
include:

- location
    and density of wells;
- the
    handling of drilling fluids and obtaining discharge permits for drilling
    operations;
- accounting
    for and payment of royalties on production from state, federal and Indian
    lands;
- bonds
    for ownership, development and production of natural gas and oil properties;
- transportation
    of natural gas and oil by pipelines;
- operation
    of wells and reports concerning operations; and
- taxation.

Under these laws and regulations, we could be liable for personal injuries,
property damage, oil spills, discharge of hazardous materials, remediation and
clean-up costs and other environmental damages. Failure to comply with these
laws and regulations also may result in the suspension or termination of our
operations and subject us to administrative, civil and criminal penalties.
Moreover, these laws and regulations could change in ways that substantially
increase our costs. Accordingly, any of these liabilities, penalties,
suspensions, terminations or regulatory changes could materially adversely
affect our financial condition and results of operations enough to possibly
force us to cease our business operations.



Our
oil and gas operations may expose us to environmental liabilities.



Any leakage of crude oil and/or gas from the subsurface portions of our wells,
our gathering system or our storage facilities could cause degradation of fresh
groundwater resources, as well as surface damage, potentially resulting in
suspension of operation of the wells, fines and penalties from governmental
agencies, expenditures for remediation of the affected resource,



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and
liabilities to third parties for property damages and personal injuries. In
addition, any sale of residual crude oil collected as part of the drilling and
recovery process could impose liability on us if the entity to which the oil was
transferred fails to manage the material in accordance with applicable
environmental health and safety laws.



Our
lease ownership may be diluted due to financing strategies we may employ in the
future due to our lack of capital.



To accelerate our development efforts we plan to take on working interest
partners that will contribute to the costs of drilling and completion and then
share in revenues derived from production. In addition, we may in the future,
due to a lack of capital or other strategic reasons, establish joint venture
partnerships or farm out all or part of our development efforts. These economic
strategies may have a dilutive effect on our lease ownership and will more than
likely reduce our operating revenues.



Risks
Associated with Laurus Funds Financing



We
have substantial indebtedness to Laurus Master Fund, Ltd. which is secured by
certain assets acquired from Savage Resources, LLC and Savage Pipeline, LLC. If
an event of default occurs under the secured note issued to Laurus Funds, Laurus
Funds may foreclose on these assets and we may be forced to curtail our
operations or sell some of these assets to repay the note.



On October 28, 2004, we entered into an $8 million credit facility with Laurus
Master Fund, Ltd. pursuant to a secured convertible term note and related
agreements. Subject to certain grace periods, the notes and agreements provide
for the following events of default (among others):

- Failure
    to pay interest and principal when due;
- An
    uncured breach by us of any material covenant, term or condition in any of
    the notes or related agreements;
- A
    breach by us of any material representation or warranty made in any of the
    notes or in any related agreement;
- Any
    money judgment or similar final process is filed against us for more than
    $50,000;
- Any
    form of bankruptcy or insolvency proceeding is instituted by or against us;
    and
- Suspension
    of our common stock from our principal trading market for five consecutive
    days or five days during any ten consecutive days.

In the event of a future default under our agreements with Laurus Funds, Laurus
Funds may enforce its rights as a secured party and we may lose all or a portion
of the acquired assets or be forced to materially reduce our business
activities.



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There
can be no assurance that we will satisfy all of the conditions of the agreements
executed in the private placement with Laurus Funds.



Pursuant to the terms of certain agreements, we are subject to a condition
subsequent to obtain an effective registration statement permitting the resale
of common stock issued upon the exercise of the conversion rights of the
purchaser and the exercise of the warrants by the purchaser on or before one
hundred days. Although we believe that we will meet the deadline for obtaining
an effective registration statement, there can be no assurance that such a
statement will be declared effective within the time required. Failure to
satisfy this condition subsequent would constitute a default. In connection with
the transaction, we have granted to Laurus Funds a security interest in the
assets purchased.



The
issuance of shares to Laurus Funds upon conversion of the convertible term note
and exercise of its warrants may cause immediate and substantial dilution to our
existing stockholders.



The issuance of shares upon conversion of the convertible term note and exercise
of warrants may result in substantial dilution to the interests of other
stockholders. Laurus Funds may ultimately convert and sell the full amount
issuable on conversion. Although Laurus Funds in some cases may not, subject to
certain exceptions, convert their term note and/or exercise their warrants if
such conversion or exercise would cause them to own more than 4.99% of our
outstanding common stock, this restriction does not prevent Laurus Funds from
converting and/or exercising some of their holdings and then converting the rest
of their holdings. In this way, Laurus Funds could sell more than this limit
while never holding more than this limit, which will have the effect of further
diluting the proportionate equity interest and voting power of holders of our
common stock.



It is likely at the time shares of common stock are issued to Laurus Funds, the
conversion price of such securities will be less than the market price of the
securities. The issuance of common stock under the terms of our agreements with
Laurus Funds will result in dilution of the interests of the existing holders of
common stock at the time of the conversion. Furthermore, the sale of common
stock owned by Laurus Funds as a result of the conversion of the convertible
term note may result in lower prices for the common stock if there is
insufficient buying interest in the markets at the time of conversion.



Laurus
Funds has no obligation to convert shares if the market price is less than the
conversion price.



Laurus Funds has no obligation to cause us to issue common stock if the market
price is less than the applicable conversion price. On October 28, 2004, the
closing price of our stock was $1.69. The convertible note has a conversion
price of $1.50. Thus the conversion rights granted to Laurus Funds was at a
discount to the recent closing price of the common stock. Laurus Funds has no
obligation to convert the securities or to accept common stock as payment for
interest if the market price of the securities for five trading days prior to a
conversion date is less than 115% the conversion price. The amount of common
stock that may be issued to Laurus Funds is subject to certain limitations based
on price, volume and/or the inventory of our common stock held by Laurus Funds.



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Item
3. Controls and Procedures.



We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the specified time periods. As of the end of the period covered
by this report, our officers and directors evaluated the effectiveness of our
disclosure controls and procedures. Based on the evaluation, which disclosed no
significant deficiencies or material weaknesses, our officers and directors
concluded that our disclosure controls and procedures are effective. There were
no changes in our internal control over financial reporting that occurred during
our most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.



PART
II--OTHER INFORMATION

Significant
Events



Acquisition
of Producing Coal Bed Methane Gas Property



Effective November 4, 2004, we completed the acquisition of certain assets owned
by Savage Resources, LLC and Savage Pipeline, LLC for the purchase price of $10
million, all of which was paid in cash. We had previously paid a non-refundable
deposit of $500,000 toward the option to purchase. The remaining $9.5 million
was paid at closing through utilizing $7.0 million of funds received from the
Laurus Funds convertible term note (described above under Laurus Funds Finance
Transaction) and $2.5 million of funds received from our recent unit offering.



The acquisition includes leasehold rights to approximately 10,000 acres and 71
producing gas wells in the Thayer Gas Field, in Southeast Kansas. Petrol-Neodesa
(the "Producing Property") is in a mature and highly producing area
located in Wilson and Neosho counties, Kansas and currently produces about 3,000
Mcf per day of gas, based upon production from 71 wells. Based upon an average
gas price of $8.22 per Mcf, the Producing Property is expected to generate gross
revenues of about $9.6 million for the Company in 2005. Net cash flow from
Petrol-Neodesa, after production, operational interest and other expenses, is
expected to be roughly $3.5 Million in 2005.



Laurus
Funds Financing Transaction



On October 28, 2004, we entered into agreements with Laurus Master Fund, Ltd., a
Cayman Islands corporation ("Laurus Funds"). Under the terms of the
Laurus Funds agreements we issued a Secured Convertible Term Note (the
"Note") in the aggregate principal amount of $8.0 million and a
five-year warrant (the "Warrant") to purchase 3,520,000 shares of our
common stock at $2.00 per share and 1,813,333 shares of our common stock at
$3.00 per share. The Note is convertible into shares of our common stock at a
fixed conversion price of $1.50 per share. The Note has a three-year term and a
bears an interest rate equivalent to the "prime rate" published by the
Wall Street Journal from time to time plus 3%, subject to a floor of 7.5% per
annum.



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Our net proceeds from the financing, after payment of fees and expenses to
Laurus Funds and its affiliates, were $7,652,500. We utilized $7.0 million of
the proceeds for the Savage acquisition described below. In addition, we paid
finders' fees of: (i) $315,000 in cash; (ii) 50,000 shares of restricted common
stock; and (iii) issued a warrant to purchase 100,000 shares at $2.00 per share
for a period of three years.



The following describes certain material terms of the financing transaction with
Laurus Funds. The description below is not a complete description of all terms
of the financing transaction and is qualified in its entirely by reference to
the agreements entered into in connection with the financing, which were
attached as exhibits to the SB-2 registration statement filed on October 29,
2004.



Note Maturity Date and Interest Rate. The Note matures on October 28,
2007 absent earlier redemption by us or conversion by Laurus Funds, as described
below. As mentioned above, annual interest on the Note is equal to the
"prime rate" published in the Wall Street Journal from time to time,
plus three percent (3%), provided, that, such annual rate of interest may not be
less than seven and one-half percent (7.5%), subject to certain downward
adjustments resulting from certain increases in the market price of our common
stock.



Payment of Interest and Principal. Interest on the Note is payable
monthly in arrears on the first day of each month during the term of the Note,
commencing November 1, 2004. In addition, the principal amount of $8.0 million
will be amortized over the term of the loan. Commencing December 1, 2004, we are
required to make monthly principal payments of $200,000 per month (together,
with monthly interest payments, the "Monthly Payment Amount"). Funds
released from the restricted cash account will be added to the monthly payment
amount by amortizing such amount over the remaining number of monthly principal
payments due under the Note.



Note Conversion Rights. All or a portion of the outstanding principal
and interest due under the Note may be converted into shares of our common stock
upon satisfaction of certain conditions. The initial fixed conversion price
under the Note is $1.50 per share. The fixed conversion price is subject to
anti-dilution protection adjustments, upon our issuance of additional shares of
common stock at a price that is less than the then current fixed conversion
price (the fixed conversion price, together with any adjustments, is referred to
hereunder as the "Fixed Conversion Price").



Laurus Funds may, at any time, convert the outstanding indebtedness of the Note
into shares of our common stock at the then applicable Fixed Conversion Price.



Subject to the restrictions on conversion described below, Laurus Funds shall be
required to convert the monthly payment into shares of our common stock in the
event that (i) the average closing price of our common stock for the five
trading days preceding the due date of a Monthly Payment Amount is greater than
115% of the Fixed Conversion Price ($1.725 per share), and (ii) the amount of
such conversion does not exceed 25% of the aggregate dollar trading volume of
our common stock for the 22 trading days preceding the payment date.



In the event we do not meet the conversion criteria, payments will be made in
cash at an amount equal to 102% of the principal amount of the cash portion of
the Monthly Payment Amount being paid.



Release from Restricted Cash Account $652,500 of the note proceeds along
with $198,968.35 of our funds (for a total of $851,468.35) have been deposited
into a restricted cash account. Funds held in the restricted cash account will
be released to us for future acquisitions or other corporate purposes approved
by Laurus Funds.



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Warrant Terms. The Warrant grants Laurus Funds the right to purchase
3,520,000 shares of our common stock at $2.00 per share and 1,813,333 shares of
our common stock at $3.00 per share. The Warrant expires on October 28, 2009.



Restrictions on Conversion of Note and Exercise of Warrant.
Notwithstanding anything to the contrary set forth above, we may pay amounts due
under the Note in shares of its common stock only so long as there is an
effective registration statement on file covering the resale of such shares or
an exemption from such registration is available under Rule 144 of the
Securities Act. In addition, Laurus Funds is not entitled to receive shares upon
exercise of the Warrant, upon payment of principal and interest on the Note, or
upon conversion of the Note if such receipt would cause Laurus Funds to be
deemed to beneficially own in excess of 4.99% of the outstanding shares of our
common stock on the date of issuance of such shares. Such provision may be
waived by Laurus Funds upon 75 days prior written notice to us.



Right to Redeem Note. We have the option of prepaying the outstanding
Amortizing Principal Amount in whole or in part by paying an amount equal to
130% of the principal amount being redeemed by giving at least seven (7)
business days prior written notice of redemption to Laurus Funds. In addition,
we have the option of prepaying the outstanding Non-Amortizing Principal Amount
in whole or in part by paying an amount equal to 130% of the Non-Amortizing
Principal Amount to be redeemed by giving at least seven (7) business days prior
written notice of redemption.



Security of Note. The Note is secured by a blanket lien on substantially
all of the assets we acquired in the Savage transaction, including the
restricted cash account, pursuant to the terms of the security agreement we
executed. In the event we default under the agreements with Laurus Funds, Laurus
Funds may enforce its rights as a secured party and accelerate payments under
the Note and we may lose all or a portion of the assets we acquired from Savage.



Registration Rights. Pursuant to the terms of the Registration Rights
Agreement with Laurus Funds, we are obligated to file a registration statement
registering 12,488,333 shares of our common stock issuable upon conversion of
the Note and exercise of the Warrant. We are required to file a registration
statement on or before December 12, 2004 and we must have the registration
statement declared effective on or before February 5, 2005. On October 29, 2004,
we filed a registration statement on Form SB-2 which included the Laurus Funds
shares. If the registration statement is not declared effective within the
timeframe described, or if the registration is suspended other than as permitted
in the registration rights agreement, we will be obligated to pay Laurus Funds a
fee equal to 2.0% of the aggregate original principal amount of the Note for
each 30 day period (pro rated for partial periods) that such registration
conditions are not satisfied.



Right of First Refusal. Subject to certain exceptions, we granted Laurus
Funds a right of first refusal to provide us additional financing in the event
that we propose additional debt financing or to sell any of our equity
securities.



Additional Restrictions. The financing documents contain certain
restrictions regarding our operations while 25% of the principal amount of the
Note is outstanding. Such restrictions include our agreement that, except with
Laurus Funds prior written consent (such consent not to be unreasonably
withheld), we will not issue any (i) debt securities with a continuously



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variable/floating
conversion feature which are or could be (by conversion or registration)
free-trading securities, or (ii) any equity securities with a continuously
variable/floating conversion feature which are or could be (by conversion or
registration) free-trading securities, provided that no consent shall be
necessary on the issuance of equity securities having such a variable/floating
conversion feature where the conversion price is subject to a specified minimum
"floor" price per share.



In addition, the financing documents, among other things, (i) prohibit us from
paying dividends, issuing any preferred stock that is manditorily redeemable, or
redeem any of our preferred stock or other equity interests, (ii) prohibits us
from incurring additional debt other than (1) trade debt and debt incurred to
finance the purchase of equipment, (2) any indebtedness incurred in connection
with the purchase of assets in the ordinary course of business, (3) cancel any
indebtedness owing to us in excess of $50,000 in the aggregate during any 12
month period, or (4) assume, guarantee, endorse or otherwise become liable in
connection with any obligations of any other Person, except the endorsement of
negotiable instruments by us for deposit or collection or similar transactions
in the ordinary course of business.



Amended
Geologist/Technical Advisor Consulting Agreement



On November 1, 2004, we amended William Stoeckinger's Geologist/Technical
Advisor Consulting Agreement entered into on December 19, 2002 to extend the
term of his agreement to November 1, 2006 and to extend the expiration date of
his option to purchase 100,000 shares of our common stock (50,000 shares at
$0.50 per share and 50,000 shares at $1.00 per share) until December 19, 2006.



Amended
Consulting Agreement of ECON



On November 8, 2004, we amended ECON Investor Relations Inc.'s consulting
agreement dated June 15, 2004 to extend the term of the agreement until November
8, 2005.



Item 1.
Legal Proceedings.



None.



Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.



On March 19, 2004, Larry Kehoe exercised 325,000 options at a price of $0.50 per
share, Cody Felton exercised 325,000 options at a price of $0.50 per share and
Russell Frierson exercised 50,000 options at a price of $0.50 per share. The
options were exercised with a note due to us for the exercise price. We issued
50% of the stock and the other 50% of the stock was issued and held as
collateral for the notes. As of September 30, 2004, $317,500 of the notes had
been paid and subsequent to the quarter end $32,000 was paid. We waived all
interest due along with $500 of principal. We believe that the issuance of the
shares and grant of the options were exempt from the registration and prospectus
delivery requirements of the Securities Act of 1933 by virtue of Section 4(2).



Goran Blagojevic exercised 250,000 of his warrants at $0.75 per share on April
13, 2004. On July 14, 2004 we issued the 250,000 shares without restriction as
setforth in the S-8 registration statement filed with the SEC on April 1, 2004.
On August 1, 2004, Mr. Blagojevic exercised 400,000 warrants at a price of $0.75
per share. The 400,000 shares were issued on October 27, 2004 and were included
in our SB-2 registration statement filed on October 29, 2004. We believe that
the issuance of the warrant was exempt from the registration and prospectus
delivery requirements of the Securities Act of 1933 by virtue of Section 4(2).



---



In September 2004, we sold and issued 5,533,333 units, each unit consisting of 1
share of common stock and 1 warrant, to 15 accredited investors for a total
purchase price of $6,640,000, all of which was paid in cash. Each warrant
entitles the investor the right to purchase 1 share of our common stock at $1.50
per share at any time through 5:00 P.M. on September 8, 2007. We believe that
the issuance and sale of the shares was exempt from the registration and
prospectus delivery requirements of the Securities Act of 1933 by virtue of
Section 4(2) and Regulation D Rule 506. The shares were issued directly by us
and did not involve a public offering or general solicitation. The recipients of
the shares were afforded an opportunity for effective access to files and
records of the Company that contained the relevant information needed to make
their investment decision, including the financial statements and Exchange Act
reports. We reasonably believe that the recipients, immediately prior to issuing
the shares, had such knowledge and experience in financial and business matters
that they were capable of evaluating the merits and risks of their investment.
The recipients had the opportunity to speak with our management on several
occasions prior to their investment decision.



On September 27, 2004, we arranged with Mr. Branagan to rescind the exercise of
250,000 of Mr. Branagan's options, which he attempted to exercise on March 18,
2004, no shares were ever issued to Mr. Branagan. The options will remain
available to Mr. Branagan on the same terms as originally granted in his
employment agreement dated December 19, 2002.



Subsequent
Issuances



In October, 2004, we completed the unit offering by issuing an additional
100,000 units, each unit consisting of 1 share of common stock and 1 warrant, to
1 accredited investor for a total purchase price of $120,000, all of which was
paid in cash. Each warrant entitles the investor the right to purchase 1 share
of our common stock at $1.50 per share at any time through 5:00 P.M. on
September 8, 2007. We believe that the issuance and sale of the shares was
exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933 by virtue of Section 4(2) and Regulation D Rule 506. The
shares were issued directly by us and did not involve a public offering or
general solicitation. The recipient of the shares was afforded an opportunity
for effective access to files and records of the Company that contained the
relevant information needed to make his investment decision, including the
financial statements and Exchange Act reports. We reasonably believe that the
recipient, immediately prior to issuing the shares, had such knowledge and
experience in financial and business matters that he was capable of evaluating
the merits and risks of his investment. The recipient had the opportunity to
speak with our management on several occasions prior to his investment decision.



Energy Capital Solutions ("ECS"), with support from Pritchard Capital
Partners, LLC ("PCP"), acted as placement agents for the offering, ECS
was paid a 7% commission on all funds raised, of which 4% was paid to PCP for
investors identified solely by PCP. In addition, ECS received 845,000 warrants
to purchase our common stock at $1.35 per share. The warrants expire in 5 years
from the closing date of October 27, 2004. We believe the issuance of the
warrants was exempt from the registration and prospectus delivery requirements
of the Securities Act of 1933 by virtue of Section 4(2). The shares were issued
directly by us and did not involve a public offering or general solicitation.
The recipients of the shares were afforded an opportunity for effective access
to files and records of the Company that contained the relevant information
needed to make



---



their
investment decision, including the Company's financial statements and 34 Act
reports. We reasonably believe that the recipients, immediately prior to issuing
the shares, had such knowledge and experience in its financial and business
matters that they were capable of evaluating the merits and risks of their
investment. The recipients had the opportunity to speak with our president and
directors on several occasions prior to their investment decision.



Pursuant to the Laurus Funds transaction entered into on October 28, 2004, we
executed an $8.0 million convertible term note and granted Laurus Funds a
warrant to purchase 3,520,000 shares of our common stock at $2.00 per share and
1,813,333 shares of its common stock at $3.00 per share. The Warrant is
exercisable at any time or from time to time before 5:00 p.m., New York time,
through the close of business October 28, 2009. The Note is convertible into
shares of our common stock based on certain conditions. We believe that the sale
of the Note and issuance and sale of the Warrant was exempt from the
registration and prospectus delivery requirements of the Securities Act of 1933
by virtue of Section 4(2) and Regulation D Rule 506. The shares were issued
directly by us and did not involve a public offering or general solicitation.
Laurus Funds is an "Accredited Investor" as defined in Rule 501 of
Regulation D promulgated under the Securities Act. The recipient of the shares
was afforded an opportunity for effective access to files and records of the
Company that contained the relevant information needed to make its investment
decision, including the financial statements and Exchange Act reports. We
reasonably believe that the recipient, immediately prior to issuing the shares,
had such knowledge and experience in financial and business matters that they
were capable of evaluating the merits and risks of their investment. The
recipient had the opportunity to speak with our management on several occasions
prior to its investment decision.



In connection with the Laurus Funds financing, we paid Laurus Funds a management
fee of $280,000, plus $65,000 for due diligence and legal fees, and $2,500
in escrow fees. Further, we paid cash finders' fees totaling
$315,000, issued 50,000 shares of our common stock and issued a warrant to
purchase 100,000 shares of common stock at $2.00 per share for a period of three
years.



We believe the issuance of the 50,000 shares and the issuance of the warrant to
purchase 100,000 shares was exempt from the registration and prospectus delivery
requirements of the Securities Act of 1933 by virtue of Section 4(2). The shares
were issued directly by us and did not involve a public offering or general
solicitation. The recipients of the shares were afforded an opportunity for
effective access to files and records of the Company that contained the relevant
information needed to make their investment decision, including the Company's
financial statements and 34 Act reports. We reasonably believe that the
recipients, immediately prior to issuing the shares, had such knowledge and
experience in its financial and business matters that they were capable of
evaluating the merits and risks of their investment. The recipients had the
opportunity to speak with our president and directors on several occasions prior
to their investment decision.



Issuances
to Consultants



On October 27, 2004, we issued 8,861 shares of our common stock (valued at
$21,000) to ECON Investor Relations, Inc. pursuant to its consulting agreement
dated June 15, 2004. We believe that the issuance of the shares and grant of the
options were exempt from the registration and prospectus delivery requirements
of the Securities Act of 1933 by virtue of Section 4(2).



---



Pursuant to William Stoeckinger's amended consulting agreement executed on
November 1, 2004 we extended the expiration date of his options to purchase
50,000 shares of our common at $0.50 per share and 50,000 shares of our common
stock at $1.00 per share to December 19, 2006.



Item
3. Defaults Upon Senior Securities.



None.



Item 4.
Submission of Matters to a Vote of Security Holders.



None.



Item 5.
Other Information.



None.



Item 6.
Exhibits.



|4.1   | Securities
      Purchase Agreement for Laurus Funds (Incorporated by reference to Exhibit
      10.21 to Form SB-2 dated November 1, 2004)                  
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.2   | Registration
      Rights Agreement for Laurus Funds (Incorporated by reference to Exhibit
      10.22 to Form SB-2 dated November 1, 2004)                  
|10.1  | Subscription
      and Registration Rights Agreement for Unit Offering (Incorporated by
      reference to Exhibit 10.23 to Form SB-2 dated November 1, 2004)
|10.2  | Warrant
      Agreement for Unit Offering (Incorporated by reference to Exhibit 10.24 to
      Form SB-2 dated November 1, 2004)                             
|31.1* | Certification
      of Paul Branagan, CEO pursuant to Section 302 of the Sarbanes-Oxley Act                                                                  
|31.2* | Certification
      of John C. Garrison, CFO pursuant to Section 302 of the Sarbanes-Oxley Act                                                               
|32.1* | Certification
      of Paul Branagan, CEO pursuant to Section 906 of the Sarbanes-Oxley Act                                                                  
|32.2* | Certification
      of John C. Garrison, CFO pursuant to Section 906 of the Sarbanes-Oxley Act                                                               

*
Filed herewith



SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



PETROL
OIL AND GAS, INC.

(Registrant)



By: /S/John
C. Garrison

John C. Garrison, Chief Financial Officer

(On behalf of the registrant and as

principal accounting officer)



Date:
November 15, 2004