**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


___________________




**FORM
      10-KSB**





x
            ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934




**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2006**




**OR**





o
            TRANSACTION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934




**FOR
      THE TRANSITION PERIOD FROM __________ TO __________.**




**Commission
      File Number 0-24269**


___________________




**SURGE
      GLOBAL ENERGY, INC.**


(Name
      of
      small business issuer in its charter)





**DELAWARE**
            **34-1454529**(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification No.)**12220
                El Camino Real, Suite 410, San Diego, California**
            **92130**(Address
                of principal executive offices)
            (Zip
                Code)




Issuer’s
      telephone number: **(858) 704-5010**





Securities
      registered pursuant to Section 12(b) of the Act: **NONE**





Securities
      registered pursuant to Section 12(g) of the Act:




Title
                of each class
            Name
                of each exchange on which registered**Common
                Stock**
            **None**




___________________





Check
      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 past 12 months (or
      for
      such shorter period that the registrant was required to file such reports),
      and
      (2) has been subject to filing requirements for the past 90 days.  Yes þ No  ̈








Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB  þ





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).  Yes  ̈ No þ




The
      issuer had no revenues for its most recent fiscal year.




The
      aggregate market value of the registrant’s common stock held by non-affiliates
      computed by reference to the average bid and asked price of such common equity
      on April 13, 2007 was
      $7,113,784.




The
      number of shares outstanding of the
      registrant’s common stock at April 13, 2007
      was
      30,970,430.






**DOCUMENTS
      INCORPORATED BY REFERENCE**




Portions
      of the registrant’s definitive proxy statement for its Annual Meeting of
      Stockholders to be filed with the Commission within 120 days after the close
      of
      its fiscal year are incorporated by reference into Part III.




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





**INDEX**




PageNumberCAUTIONARY
                STATEMENT REGARDING FORWARD-LOOKING INFORMATION
            2PART
                I
            2ITEM
                1. DESCRIPTION OF BUSINESS
            2ITEM
                2. DESCRIPTION OF PROPERTY
            18ITEM
                3. LEGAL PROCEEDINGS
            19ITEM
                4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
            20PART
                II
            20ITEM
                5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS
            20ITEM
                6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONOR
                PLAN OF OPERATION
            21ITEM
                7. FINANCIAL STATEMENTS
            27ITEM
                8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE
            27ITEM
                8A. CONTROLS AND PROCEDURES
            27ITEM
                8B. OTHER INFORMATION
            27PART
                IIIITEM
                9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
                COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
            28ITEM
                10. EXECUTIVE COMPENSATION
            28ITEM
                11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                AND
                RELATED STOCKHOLDER MATTERS
            28ITEM
                12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
                INDEPENDENCE
            28ITEM
                13. EXHIBITS
            28ITEM
                14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
            33SIGNATURES
            34


1


**CAUTIONARY
      STATEMENT REGARDING FORWARD-LOOKING INFORMATION**




This
      Annual Report on Form 10-KSB, including exhibits thereto , contains
      forward-looking statements within the meaning of Section 27A of the Securities
      Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
      1934,
      as amended. These forward-looking statements are typically identified by the
      words “anticipates,” “believes,” “expects,” “intends,” forecasts,” estimates,”
“plans,” “future,” “strategy,” or words of similar meaning. In particular, the
      following types of statements are forward-looking:




·
            statements
                regarding our potential growth opportunities;·
            statements
                regarding our ability to generate revenues from our
                operations;·
            statements
                regarding the estimated petroleum reserves at any of our properties
                or
                projects, including the Sawn Lake andPeace
                Oil project;·
            statements
                regarding our anticipated exploration work;·
            statements
                regarding our ability to extract, refine, sell oil or sell oil
                properties;·
            statements
                regarding our ability to comply or continue to comply with governmental
                regulations; and·
            statements
                regarding our estimated future costs and
                expenses.




Various
      factors could cause actual results to differ materially from those expressed
      in
      the forward-looking statements, including those described in “Risk Factors” in
      this Form 10-KSB. The company assumes no obligations to update these
      forward-looking statements to reflect actual results, changes in assumptions,
      or
      changes in other factors, except as required by law.






**PART
      I**




As
      used
      in this Annual
      Report on Form 10-KSB, “we,” “us,” “our,” “Surge “ and our “company” refer to
      Surge Global Energy, Inc. (“Surge”), and our subsidiaries , including Signet Energy, Inc. formerly known as Surge Global Energy (Canada)
      Ltd. (“Signet”), Cold
      Flow ULC and Peace Oil Corp., unless the context otherwise requires.




**ITEM
      1. DESCRIPTION OF BUSINESS**




**General
      Overview**




Surge
      Global Energy, Inc. is a Delaware corporation dually traded on the
      OTC Bulletin
      Board and the Pink Sheets under the symbol SRGG. Our principal executive offices
      are located at 12220 El Camino Real, Suite 410, San Diego, CA 92130. Our
      telephone number is (858) 704-5010. Our fax number is (858) 704-5011. We
      maintain a website at www.SurgeGlobalEnergy.com.




We
      are an
      oil and gas exploration and development company. Our primary objective is to
      identify, acquire and develop working interests in underdeveloped oil and gas
      projects. We intend to develop oil and gas properties and explore for oil and
      gas on a worldwide basis, focusing mainly in Canada, the United States and
      Argentina. We seek production and oil field development as our quickest way
      to
      establish and increase shareholder value.


2




Our
        strategic objective is to aggregate and exploit over one billion barrels
        in
        Canadian Oil Sands (net equity and working interest) of net recoverable oil
        in
        large size properties in the Peace River and Athabasca regions of Alberta,
        Canada as well as Argentina. Our strategic initiative is to pursue low-risk
        high-return projects over the next three years to execute our business strategy
        in four steps as follows:





(1)
      Initial Land/Lease Acquisition of oil properties. Over the next 3 years we
      plan
      to acquire sufficient land sales to increase oil in place to 10 billion gross
      barrels or 1 billion net barrels.





(2)
      Resource validation of acquired properties through stratigraphic ("strat")
      well
      drilling and seismic studies to confirm reservoir thickness and quality and
      the
      character of the oil.





(3)
      Converting the certified Resources into Probable Reserves by casing and testing
      strat wells on each property along with limited drilling of horizontal wells
      to
      conduct pilot tests to determine well productivity and possible cold flow or
      thermal production.





(4)
      Converting a sufficient number of the Probable Reserves into Proven Reserves
      to
      comprehensively prove commercial viability.




**Change
      in Corporate Name**




On
      October 13, 2004, Surge's name was changed from The Havana Group, Inc to Surge
      Global Energy, Inc. and the symbol was changed to SRGG.OB.




**Corporate
      History**




We
      were
      incorporated as The Havana Group, Inc. on November 25, 1997 under the laws
      of
      the state of Delaware. Our initial business was the sale of pipes and tobacco
      products and we completed our initial public offering in May 1998.




In
      July
      2002, we acquired 100% of the common stock of Bible Resources, Inc. (“Bible”) in
      exchange for 10.9 million shares of our restricted common stock. Bible, at
      the
      time, was a newly formed Nevada corporation organized for the purpose of
      exploring, developing and/or investing in oil and gas resources on a worldwide
      basis. Bible no longer has any operations or assets.




As
      of
      December 31, 2003, our pipe and tobacco inventory was liquidated and the
      tangible and intangible assets related to that business were sold off In
      December 2004, we completed the restructuring of our balance sheet and the
      cancellation of our outstanding Preferred A and Preferred B shares and
      indebtedness related to the discontinued tobacco and pipe business.




In
        February 2005, we formed a wholly owned Canadian subsidiary Surge Global
        Energy
        (Canada) Ltd, which entity’s name was later changed to Signet Energy, Inc. In
        July 2006, Signet completed a private placement transaction, and as a result
        of
        the financing and our election to not participate, our voting interest in
        Signet
        was reduced to 47.15% (fully diluted voting interest of 35.14% which assumes
        the
        exercise of all outstanding warrants, conversion of all convertible debt
        and
        options are issued and exercised). Per the terms of the November 15, 2005
        Voting
        Trust Agreement, voting control of 7.550 million Deep Well Oil & Gas
        (Alberta), Ltd. terminated which reduced Surge voting control to 29.31%.
        as of
        February 25, 2007 (fully diluted voting interest of 21.84%). As of the date
        of
        this Annual Report on Form 10-KSB, Surge owns a 27.3% equity interest in
        Signet
        (on a fully diluted our equity interest is approximately 20.35%


3


In
      April
      2006, we
      formed
      Cold Flow Energy ULC ("Cold Flow") as a new wholly-owned subsidiary based in
      Alberta, Canada to exploit oil and gas opportunities. Cold Flow currently has
      minimal assets and liabilities and incurred $46,198 of office related expenses
      in the year ended December 31, 2006.




On March
      2,
      2007, our Canadian subsidiary, Cold Flow Energy ULC, completed its acquisition
      of  Peace
      Oil
      Corp., a corporation incorporated under the laws of Alberta, Canada
      pursuant to the November 30, 2006 Stock Purchase Agreement, as amended, we
      entered into with Cold Flow, Peace Oil and  the
      shareholders of Peace Oil. Cold
      Flow
      is owned entirely by 1294697 Alberta Ltd. (an entity we formed to consummate
      the
      acquisition of Peace Oil at the advice of Canadian tax counsel), which in turn,
      is owned entirely by us. As
      a result of the acquisition, Peace Oil has become a wholly-owned subsidiary
      of
      Cold Flow.




**Business
      Operations**




**Signet
      Projects**




**Sawn
      Lake Project, Alberta, Canada**




Surge
      was
      the former operator of the Sawn Lake Oil Sands Development in Alberta, Canada,
      pursuant to a farmout agreement dated February 2005
      with
      Deep Well Oil & Gas Inc. (“Deep Well”) and Northern Alberta Oil Ltd.
      (“Northern Alberta”), which was subsequently assigned to Signet in connection
      with the financing Signet completed in November 2005. The Sawn Lake Oil Sands
      Development has been estimated by two respected third-party
      petroleum-engineering firms to contain a total of 820 million to 1.2 billion
      barrels of oil resource in place, of which 10-13% is recoverable. Signet had
      a
      right to earn a 40% working interest in 44,480 acres after drilling a total
      of
      ten wells. The development consists of 69.5 contiguous sections covering 44,480
      acres in the Sawn Lake area of Alberta, Canada.




In
      December 2006, beyond working interests earned to date, the right to earn
      additional working interests in the Sawn Lake property acreage effectively
      ended. These rights expired as the drilling results and lack of cold flow to
      date on the property did not justify further horizontal development wells as
      required by the farmout agreement. Accordingly, an amendment to the farmout
      agreement to drill vertical delineation wells to earn additional working
      interests in the property was sought but not granted by Deep Well. In addition,
      in December 2006 Deep Well notified Signet that it was questioning Signet’s
      earnings on 12 of the total 18 sections claiming Signet failed to properly
      complete the well by not conducting the production testing as reasonably
      required under the Farmout Agreement.  As a result of these factors, management
      recorded an impairment charge of $6,296,016. For the year ended December 31,
      2006, Surge charged operations for $1,043,085 representing Surge's 27.3% share
      of Signet's loss. Both the impairment charge and share of Signet’s loss were
      reflected as a reduction to the Signet investment.  The net investment in
      Signet at December 31, 2006 was $4,597,217 representing the Company’s 27.3%
      share of Signet’s December 31, 2006 net equity. As Signet obtains additional
      financing in the future, additional dilution to the Company’s equity interest
      may also result in further impairment.


4


**Surge
      Global Energy Projects**




**Granite
      Wash, Alberta, Canada**




In
      December 2006 we terminated the Kelso Energy, Inc. (now known as COSTA Energy
      Inc.) February 27, 2006 farmout agreement, reducing our current capital
      obligation by $750,000 for 2007. Our Board of Directors has elected to focus
      exclusively on exploitation opportunities in the Canadian Heavy Oil Sands and
      in
      Argentina. We had entered into the farmout agreement with Kelso Energy in March
      2006 for oil and gas exploration of two and a half sections (1,600 acres) in
      the
      Keg River Formation, also known as the “Granite Wash,” in the Kitty area of
      North Central Alberta, Canada with the option to acquire a 60%-100% working
      interest in the oil and gas produced from the farmout lands. Pursuant to the
      farmout agreement, we exercised
      our option on April 12, 2006
      to
      elect to drill a test well at an estimated cost of $750,000 during
      2007.




**Santa
      Rosa Dome Project, Mendoza Province, Argentina**




We
      hold a
      17.52% working interest in the Santa Rosa Dome project in the Mendoza province
      of Argentina. We, along with our joint operating partners, Oromin Explorations
      Ltd. (“Oromin”) and Ottoman Energy Ltd. (“Ottoman”), anticipate the exploration
      work to include the drilling of up to three exploration wells to around 1,250
      meters each. The Santa Rosa Project is a 7,694 square kilometer exploration
      block located in the eastern part of the prolific Cuyana Basin in Argentina’s
      Mendoza Province. The Cuyana Basin has already produced about 970 million
      barrels of oil from fields located in the western half of the basin. The eastern
      part of the basin is under-explored due to the presumed absence of structures
      capable of trapping significant hydrocarbons. The Santa Rosa concession,
      however, contains a domal structure of over 220 square kilometers that may
      lie
      on a likely hydrocarbon migration fairway. The dome has not yet been tested
      by
      drilling. Seismic work carried out by Oromin indicates the likely presence
      of
      reservoir quality rocks over the structure with a regional seal covering the
      entire area. The exploration work comprises some further seismic modeling and
      the drilling of two or three wells on or near the crest of the dome. Oromin
      and
      Ottoman anticipate that the drilling program will take place towards the end
      of
      2007, depending on the timing of the final award of the concession and on rig
      availability. Oromin currently owns 82.48% of the concession and we hold a
      17.52% working interest in the project.




In
      November 2005 Ottoman Energy Ltd. agreed to acquire a 32.48% working interest
      in
      the Santa Rosa Project from Oromin whereby Ottoman will spend US$1,400,000
      on
      exploration to fully earn their working interest in the project. Thereafter,
      Ottoman can acquire an additional 8.76% interest from Oromin to increase its
      interest to 41.24% (the equivalent of Oromin’s interest) by incurring a further
      expenditure of US$897,381. Oromin and Ottoman expect the exploration work to
      include the drilling of up to three exploration wells to around 1,250 meters
      each. Oromin currently owns 82.48% of the concession and we hold a 17.52%
      working interest in the project.




If
      we
      make all capital contributions to the Santa Rosa Property, we would be obligated
      to make additional payments over a
      twelve
      month period, payable monthly, of $297,381 in an initial cash call to preserve
      our interest in the Santa Rosa Property, and $190,617 in a secondary cash call
      to fund expected Santa Rosa exploration costs.  In
      view
      of the delays in drilling this well, the Company wrote off its capitalized
      costs
      in the Mirasol Oil and Gas Leases during the year ended December 31,
      2005.


5


**Recent
      Developments**




Effective
      on October 11, 2006, Stephen Sharpe resigned from our Board of Directors and
      on
      the same day Thomas A. Page, Richard Collato, and John Stiska were appointed
      to
      our Board of Directors. On March 26, 2007, Daniel Schreiber resigned from our
      Board of Directors and on the same day Robert B. Fields was appointed to our
      Board of Directors. New committee chairs and members are as follows:





CommitteesBoard
                Member:
            Audit
            Compensation
            Nominating
                and
              GovernanceJohn
                Stiska
            Chair
            Member
            -Thomas
                Page
            Member
            Chair
            -Richard
                Collato
            -
            Member
            ChairRobert
                B. Fields
            -
            -
            MemberDr.
                Kenneth Druck
            -
            Member
            Member




On
      October 23, 2006, our Board of Directors approved and adopted the Amended and
      Restated Bylaws of Surge Global Energy, Inc. The Amended and Restated Bylaws
      include, among other things, revisions that: (i) update our Bylaws to conform
      to
      the provisions of the Delaware General Corporation Law, including the giving
      of
      notice by means of electronic transmission and the holding of meetings by means
      of remote communication; (ii) update the descriptions, manner of appointment
      and
      related corporate indemnification obligations for various categories of
      officers; (iii) provide that special meetings of the stockholders may be called
      only by our Chairman of the Board, our President, or our Board of Directors;
      and
      (iv) make other technical changes to more closely conform our Bylaws to the
      language of the Delaware General Corporation Law.





On
      November 2, 2006, Dynamo Energy filed a complaint for October 2004 compensation
      claims related to overriding royalty claims for projects in North America.
      We
      intend to vigorously defend this lawsuit. Although it is impossible to predict
      with certainty the outcome of this proceeding, or the outcome of any litigation,
      we are confident in the merits of our defense and do not anticipate an
      unfavorable outcome.





Effective
      on February 22, 2007, we increased our authorized shares of capital stock to
      an
      aggregate of 210,000,000 shares, consisting of 200,000,000 shares of common
      stock and 10,000,000 shares of preferred stock pursuant to an amendment to
      our
      Certificate of Incorporation. The amendment and the related increase in
      authorized shares was approved by our Board of Directors and also by our
      stockholders at our Special Meeting of Stockholders held on February 19, 2007.
      We increased our authorized shares to, among other things, provide sufficient
      shares of our common stock that will be issuable in connection with our
      acquisition of Peace Oil as described below.


Per
        the
        terms of the November 15, 2005 Voting Trust Agreement, Surge’s voting control of
        7.550 million Deep Well Oil & Gas (Alberta), Ltd. terminated which reduced
        Surge voting control to 29.31% as of February 25, 2007 (fully diluted voting
        interest of 21.84%).





On
      March
      2, 2007, our Canadian subsidiary, Cold Flow Energy ULC, completed its
      acquisition of Peace Oil Corp., a corporation incorporated under the laws of
      Alberta, Canada pursuant to the November 30, 2006 Stock Purchase Agreement,
      as
      amended, we entered into with Cold Flow, Peace Oil and the shareholders of
      Peace
      Oil. Cold Flow is owned entirely by 1294697 Alberta Ltd. (an entity we formed
      to
      consummate the acquisition of Peace Oil at the advice of our Canadian tax
      counsel), which, in turn, is owned entirely by us. Cold Flow purchased all
      of
      the issued and outstanding capital stock of Peace Oil for a total purchase
      price
      of CDN$16,350,000, which consist of CDN$6,350,000 payable in cash and promissory
      notes and as aggregate of 8,965,390 exchangeable shares of preferred stock
      of
      Cold Flow.  Each Cold Flow exchangeable share is exchangeable into two
      shares of our common stock at any time for a period of five years from the
      closing of the acquisition. As a result of the acquisition, Peace Oil has become
      a wholly owned subsidiary of Cold Flow. If we are unable to raise
      sufficient capital to pay in full the secured promissory notes on or before
      their respective due dates, the assets of Peace Oil will be transferred
      automatically to an affiliate controlled by the former stockholders of Peace
      Oil
      pursuant to the provisors of the agreements executed in connection with the
      acquisition of Peace Oil Corp. Additionally,Surge
      will forfeit all cash monies advanced through that date.


6


**Sales
      and Marketing**




We
      remain
      in the development stage and have not had any oil and gas production or
      generated any revenues, nor do we have any customers.





Our
      primary objective is to identify, acquire and develop working interests in
      underdeveloped oil and gas projects. We intend to develop oil and gas properties
      and explore for oil and gas on a worldwide basis, focusing mainly in Canada,
      the
      United States and Argentina. We currently hold the right to purchase interests
      in several foreign oil and gas prospects. We seek production and oil field
      development as our quickest way to establish and increase shareholder value.




Should
      we
      be successful in achieving production, the principal target customers for our
      crude oil and gas production are expected to be refiners, remarketers and other
      companies, some of which are expected to have pipeline facilities near the
      producing properties we acquire. In the event pipeline facilities are not
      conveniently available, we intend to truck oil and gas to storage, refining
      or
      pipeline facilities.




We
      intend
      to sell our oil and gas production under both short-term (less than one year)
      and long-term (one year or more) agreements at prices negotiated with third
      parties. Under both short-term and long-term contracts, typically either the
      entire contract (in the case of short-term contracts) or the price provisions
      of
      the contract (in the case of long-term contracts) are renegotiated from
      intervals ranging in frequency from daily to annual.




We
      have
      not yet adopted any specific sales and marketing plans. However, as production
      levels increase, the need to hire sales and marketing personnel will be
      addressed.




**Competition**




The
      oil
      and gas business is highly competitive. We will compete with private, public
      and
      state-owned companies in all facets of the oil business, including suppliers
      of
      energy and fuel to industrial, commercial and individual customers. Numerous
      independent oil and gas companies, oil and gas syndicates and major oil and
      gas
      companies actively seek out and bid for oil and gas prospects and properties
      as
      well as for the services of third-party providers, such as drilling companies,
      upon which we rely. Many of these companies not only explore for, produce and
      market oil and natural gas, but also carry out refining operations and market
      the resultant products on a worldwide basis. A substantial number of our
      competitors have longer operating histories and substantially greater financial
      and personnel resources than we do.




Competitive
      conditions may be substantially affected by various forms of energy legislation
      and/or regulation considered from time to time by the government of the United
      States and other countries, as well as factors that we cannot control, including
      international political conditions, overall levels of supply and demand for
      oil
      and gas, and the markets for synthetic fuels and alternative energy sources.




**Government
      And Environmental Regulation**




Foreign
      and domestic development, production and sale of oil are extensively regulated
      in Canada at both the federal and state levels. Legislation affecting the oil
      and gas industry is under constant review for amendment or expansion, frequently
      increasing the regulatory burden. Also, numerous departments and agencies,
      in
      Canada and at federal and state levels, have issued rules and regulations
      binding on the oil and gas industry and its individual members, compliance
      with
      which is often difficult and costly and some of which carry substantial
      penalties for failure to comply. Canada and multiple state statutes and
      regulations where we intend to conduct operations require permits for drilling
      operations, drilling bonds and reports concerning wells. Such jurisdictions
      also
      have statutes and regulations governing conservation matters, including the
      unitization or pooling of oil and gas properties and establishment of maximum
      rates of production from oil and gas wells.


7


Our
      operations will be subject to extensive and developing federal, state and local
      laws and regulations in the US and Canada relating to environmental, health
      and
      safety matters; petroleum; chemical products and materials; and waste
      management. Permits, registrations or other authorizations are required for
      the
      operation of certain of our facilities and for our oil and gas exploration
      and
      production activities. These permits, registrations or authorizations are
      subject to revocation, modification and renewal. Governmental authorities have
      the power to enforce compliance with these regulatory requirements, the
      provisions of required permits, registrations or other
      authorizations, lease conditions, and violators are subject to civil and
      criminal penalties, including fines, injunctions or both. Failure to obtain
      or
      maintain a required permit may also result in the imposition of civil and
      criminal penalties. Third parties may have the right to sue to enforce
      compliance.




Some
      risk
      of costs and liabilities related to environmental, health and safety matters
      is
      inherent in our operations, as it is with other companies engaged in similar
      businesses, and there can be no assurance that material costs or liabilities
      will not be incurred. In addition, it is possible that future developments,
      such
      as stricter requirements of environmental or health and safety laws and
      regulations affecting our business or more stringent interpretations of, or
      enforcement policies with respect to, such laws and regulations, could adversely
      affect us. To meet changing permitting and operational standards, we may be
      required, over time, to make site or operational modifications at our
      facilities, some of which might be significant and could involve substantial
      expenditures. There can be no assurance that material costs or liabilities
      will
      not arise from these or additional environmental matters that may be discovered
      or otherwise may arise from future requirements of laws in the US and
      Canada.






**Number
      of Total Employees and Number of Full-time Employees**




From
      our
      inception through the period ended December 31, 2006, we have relied on the
      services of outside consultants for services and have four (4) full - time
      employees. In order for us to attract and retain quality personnel, we
      anticipate we will have to offer competitive salaries to future employees.
      As of
      March 31, 2007, we have four (4) full-time employees and we anticipate an
      employment base of seven (7) full-time employees during the next 12 months.





As
      we
      continue to expand, we will incur additional cost for personnel. This projected
      increase in personnel is dependent upon our generating revenues and obtaining
      sources of financing. There is no guarantee that we will be successful in
      raising the funds required or generating revenues sufficient to fund the
      projected increase in the number of employees.


None
        of our employees are covered by collective bargaining agreements, and we
        believe
        our relations with our employees are favorable.




**RISK
      FACTORS**




*An
      investment in our common stock is speculative and involves a high degree of
      risk
      and uncertainty. You should carefully consider the risks described below,
      together with the other information contained in our reports filed with the
      SEC,
      including the consolidated financial statements and notes thereto of our
      company, before deciding to invest in our common stock. The risks described
      below are not the only ones facing our company. Additional risks not presently
      known to us or that we presently consider immaterial may also adversely affect
      our company. If any of the following risks occur, our business, financial
      condition and results of operations and the value of our common stock could
      be
      materially and adversely affected*


8


**RISKS
      RELATED TO OUR COMPANY**




**We
      have a history of net operating losses.**




We
      have a
      history of net operating losses and we will need to generate substantial revenue
      from production to achieve profitability. We may not be able to do so Even
      if we
      do achieve profitability, we cannot assure you that we will be able to sustain
      or increase profitability on a quarterly or annual basis in the future. There
      can be no assurance that future operations will be profitable. Revenues and
      profits, if any, will depend upon various factors, including whether we will
      be
      able to continue expansion of our operations. We may not achieve our business
      objectives and the failure to achieve such goals would have an adverse impact
      on
      us.




**Expansion
      of our operations will require significant capital expenditures and dilution
      to
      existing shareholders for which we may be unable to** **provide
      sufficient financing.**




Our
      business model contemplates expansion of our business by drilling on our
      existing properties and identifying and acquiring additional oil and gas
      properties. We intend to rely on external sources of financing to meet the
      capital requirements associated with the exploration and expansion of our oil
      and gas operations. We plan to obtain the future funding that we will need
      through debt and equity markets, but we cannot assure that we will be able
      to
      obtain additional funding when it is required or that it will be available
      to us
      on commercially acceptable terms. To fund the oil development cost effort we
      anticipate raising a significant amount of capital which will result in
      substantial future dilution to existing shareholders.




We
      also
      intend to make offers to acquire oil properties in the ordinary course of our
      business. If these offers are accepted, our capital needs will increase
      substantially. If we fail to obtain the funding that we need when it is
      required, we may have to forego or delay potentially valuable opportunities
      to
      acquire new oil and gas properties or default on existing funding commitments
      to
      third parties and forfeit or dilute our rights in existing oil property
      interests.


**Our
      company’s independent auditors have expressed a reservation that our company can
      continue as a going concern.**





Our
      company’s independent auditors’ report on the December 31, 2006 financial
      statements included in this Annual Report states that our recurring losses
      raise
      substantial doubts about our ability to continue as a going concern. Our
      company's ability to continue as a going concern is dependent on our ability
      to
      raise additional capital to fund future operations and ultimately to attain
      profitable operations. Our dependence on equity and debt financing raises
      substantial doubt about our ability to continue as a going concern.




**We
      expect our operating expenses to increase substantially in the future and may
      need to raise additional** **funds.**




We
      have a
      history of net losses and expect that our operating expenses will increase
      substantially over the next twelve months as we continue to implement our
      business plan. In addition, we may experience a material decrease in liquidity
      due to unforeseen capital requirements or other events and uncertainties. As
      a
      result, we may need to raise additional funds, and such funds may not be
      available on favorable terms, if at all. If we cannot raise funds on acceptable
      terms, we may not be able to execute on our business plan, take advantage of
      future opportunities or respond to competitive pressures or unanticipated
      requirements. This may seriously harm our business, financial condition and
      results of operations.


On
        March
        2, 2007, we acquired, through our indirect wholly-owned Canadian Subsidiary,
        Cold Flow Energy ULC, all of the issued and outstanding capital stock of
        Peace
        Oil Corp. In connection with that acquisition, Cold Flow issued four promissory
        notes consisting of (i) a promissory note in the principal amount of
        Cdn$1,500,000 with a maturity date of June 30, 2007, (ii) a promissory note
        in
        the principal amount of Cdn$1,000,000 with a maturity date of July 30, 2007,
        (iii) a promissory note in the principal amount of Cdn$1,500,000 with a maturity
        date of August 30, 2007, and (iv) a promissory note in the principal amount
        of
        Cdn$1,600,000 with a maturity date of December 31, 2007. The first three
        promissory notes listed above accrue interest at a rate of 7% per annum and
        are
        secured by various security interests in all of the assets and capital stock
        of
        Peace Oil Corp. The fourth promissory note does not accrue any interest and
        is
        unsecured. Currently, we must raise approximately Cdn$5.6 million to pay
        in full
        all of the promissory notes and approximately Cdn$4 million to pay in full
        the
        secured promissory notes. If we are unable to raise sufficient capital to
        pay in
        full the secured notes on or before their respective due dates, the assets
        of
        Peace Oil Corp. will be transferred automatically to an affiliate of the
        selling
        stockholders pursuant to the provisions of the agreements executed in connection
        with our acquisition of Peace Oil Corp. Such a transfer will result in the
        loss
        of our most significant asset, an undivided 30% working interest in 135 square
        miles or 86,400 acres (net 40.5 sections or 25,920 acres) of oil sands leases
        in
        the Red Earth area of Alberta, which will have a material adverse effect
        on our
        operations, business and financial condition.
 
 Additionally,
        Surge will forfeit all cash advances made to Peace Oil as a result of a breach
        of the interest-bearing promissory notes as of the date of such
        breach.


9


**Our
      future performance is dependent upon our ability to identify, acquire and
      implement the strategy to develop oil properties for production or resale to
      larger oil field companies which may delay shareholder return on investment
      for
      years.**




Our
      future performance depends upon our ability to find, develop and acquire oil
      and
      gas reserves that are economically recoverable. Without successful exploration,
      exploitation or acquisition activities, we will not be able to develop reserves,
      generate revenues or find suitable acquirors of our properties. No assurance
      can
      be given that we will be able to find and develop or acquire reserves on
      acceptable terms, or that commercial quantities of oil and gas deposits will
      be
      discovered sufficient to enable us to recover our exploration and development
      costs or sustain our business, or find suitable acquirors of our properties.
      Implementing the strategy to develop oil properties may delay shareholder return
      on investment for years due to the cost of infrastructure development and
      environmental impact study capital expenditure outlays.




The
      successful acquisition and development of oil and gas properties requires an
      assessment of recoverable reserves, future oil prices and operating costs,
      potential environmental and other liabilities and other factors. Such
      assessments are necessarily inexact and their accuracy inherently uncertain.
      In
      addition, no assurances can be given that our exploitation and development
      activities will result in the discovery of any reserves. Our operations may
      be
      curtailed, delayed or canceled as a result of lack of adequate capital and
      other
      factors, such as title problems, weather, compliance with governmental
      regulations or price controls, mechanical difficulties, or unusual or unexpected
      formations, pressures and/or work interruptions. In addition, the costs of
      exploitation and development may materially exceed initial
      estimates.




We
      can
      provide no assurance that oil and gas will be discovered in commercial
      quantities in any of the properties we currently hold interests in or properties
      in which we may acquire interests in the future. Our success will depend upon
      our ability to acquire working and revenue interests in properties upon which
      oil reserves are ultimately discovered in commercial quantities for production
      capability or to attract the interest of larger oil field companies. We do
      not
      have an established history of locating and developing properties that have
      oil
      and gas reserves.




**We
      are a development stage company implementing a new business
      plan.**




In
      January 2005, as a result of the disposal of our tobacco wholesale business
      in
      December 2004, and the restructuring of our management and ownership, we began
      implementing plans to establish an oil and gas development business. As a
      result, we are a development stage enterprise, as defined by Statement of
      Financial Accounting Standards No. 7 (“SFAS7”). We are a development stage
      company with only a limited operating history upon which to base an evaluation
      of our current business and future prospects, and we have just begun to
      implement our business plan. Since our inception and the inception of our
      development stage on January 1, 2005, we have suffered recurring losses from
      operations and have been dependent on new investment to sustain our operations.
      During the years ended December 31, 2006
      and
      2005, we reported net losses of $15,926,093 and $8,731,209, respectively, and
      we
      cannot give any assurances that we can achieve profits from operations. For
      the
      period from inception of development stage through December 31, 2006, the
      Company has accumulated losses of $24,657,302. In
      addition, our consolidated financial statements for the year ended December
      31,
      2006, contained a going concern qualification and we cannot give any assurances
      that we can achieve profits from operations.




**We
      do not control all of our operations.**




We
      do not
      operate all of our properties and we therefore have limited influence over
      the
      testing, drilling and production operations of our properties. Our lack of
      control could result in the following:




·
            the
                operator might initiate exploration or development on a faster or
                slower
                pace than we prefer;·
            the
                operator might propose to drill more wells or build more facilities
                on a
                project than we have funds for or that we deem appropriate, which
                could
                mean that we are unable to participate in the project or share in
                the
                revenues generated by the project even though we paid our share of
                exploration costs;


10





·
            we
                could have our working interest ownership in the related lands and
                petroleum reserves reduced as a result of our failure to participate
                in
                development expenditures; and·
            the
                operator might not earn sufficient working interest based on required
                drilling activity which could impair the carrying value of the asset;·
            the
                operator might obtain additional financing which may further dilute
                our
                interest in the property as well as trigger additional asset impairment;
                and·
            if
                an operator refuses to initiate a project, we might be unable to
                pursue
                the project.




Any
      of
      these events could materially reduce the value of our properties.




**Information
      in this** **report
      regarding our future exploitation and development projects reflects
      our** **current intent and is subject to change.**




Our
      current exploitation and development plans are described in our reports filed
      with the SEC. Whether we ultimately undertake an exploitation or development
      project will depend on the following factors:





·
            availability
                and cost of capital both by the company and our planned majority
                partners;·
            receipt
                of additional seismic data or the reprocessing of existing
                data;·
            current
                and projected oil or natural gas prices;·
            reserve
                results could be less than our anticipated recovery rate
                range;·
            the
                costs and availability of drilling rigs and other equipment, supplies
                and
                personnel necessary to conduct these operations;·
            success
                or failure of activities in similar areas;·
            changes
                in the estimates of the costs to complete the projects;·
            changes
                in the estimates of potential production levels;·
            our
                ability to attract other industry partners to acquire a portion of
                the
                working interest to reduce costs and exposure to risks;·
            decisions
                of our joint working interest owners and partners; and·
            market
                prices for our oil field assets could change and could vary when
                the
                development efforts and subsequent oil field values
                accrue.




We
      will
      continue to gather data about our projects and it is possible that additional
      information will cause us to alter our schedule or determine that a project
      should not be pursued at all. You should understand that our plans regarding
      our
      projects might change.


11


**We
      rely heavily upon reserve, geological and engineering data when determining
      whether or not to invest** **in a particular oil and gas property.**




The
      reserve, geological and engineering data information that we use in evaluating
      oil and gas prospects is based on estimates involving a great deal of
      uncertainty. Different engineers may make different estimates of reserves and
      cash flows based on the same available data. Reserve estimates depend in large
      part upon the reliability of available geologic and engineering data, which
      is
      inherently imprecise. Geologic and engineering data are used to determine the
      probability that a reservoir of oil and gas exists at a particular location,
      and
      whether oil and/or gas and natural gas are recoverable from a reservoir.
      Recoverability is ultimately subject to the accuracy of data including, but
      not
      limited to, geological characteristics of the reservoir, structure, reservoir
      fluid properties, the size and boundaries of the drainage area, reservoir
      pressure, and the anticipated rate of pressure depletion. The evaluation of
      these and other factors is based upon available seismic data, computer modeling,
      well tests and information obtained from production of oil and gas from adjacent
      or similar properties, but the probability of the existence and recoverability
      of reserves is less than 100% and actual recoveries of proved reserves can
      differ from estimates.




Reserve
      estimates also require numerous assumptions relating to operating conditions
      and
      economic factors, including the price at which recovered oil and gas can be
      sold, the costs of recovery, assumptions concerning future operating costs,
      severance and excise taxes, development costs and workover and remedial costs,
      prevailing environmental conditions associated with drilling and production
      sites, availability of enhanced recovery techniques, ability to transport oil
      and gas to markets and governmental and other regulatory factors, such as taxes
      and environmental laws. A negative change in any one or more of these factors
      could result in quantities of oil and gas previously estimated as proved
      reserves becoming uneconomic. For example, a decline in the market price of
      oil
      or gas to an amount that is less than the cost of recovery of such oil or gas
      in
      a particular location could make production commercially impracticable. The
      risk
      that a decline in price could have that effect is magnified in the case of
      reserves requiring sophisticated or expensive production enhancement technology
      and equipment, such as some types of heavy oil. Each of these factors, by having
      an impact on the cost of recovery and the rate of production, will also affect
      the present value of future net cash flows from estimated reserves.




**Our
      ability to produce sufficient quantities of oil and gas from our properties
      may
      be adversely affected by** **a number of factors outside of our control.**




The
      business of exploring for and producing gas involves a substantial risk of
      investment loss. Drilling wells involves the risk that the wells may be
      unproductive or that, although productive, that the wells may not produce oil
      in
      economic quantities. Other hazards, such as unusual or unexpected geological
      formations, pressures, fires, blowouts, loss of circulation of drilling fluids
      or other conditions may substantially delay or prevent completion of any well.
      Adverse weather conditions can also hinder drilling operations. A productive
      well may become uneconomic due to pressure depletion, water encroachment,
      mechanical difficulties, etc, which impair or prevent the production of oil
      and
      gas from the well.




There
      can
      be no assurance that oil and gas will be produced from the properties in which
      we have interests. In addition, the marketability of any oil and gas that we
      acquire or discover may be influenced by numerous factors beyond our control.
      These factors include the proximity and capacity of oil and gas pipelines and
      processing equipment, market fluctuations of prices, taxes, royalties, land
      tenure, allowable production and environmental protection. We cannot predict
      how
      these factors may affect our business.




In
      addition, the success of our business is dependent upon the efforts of various
      third parties that we do not control. We rely upon various companies to assist
      us in identifying desirable oil prospects to acquire and to provide us with
      technical assistance and services. We also rely upon the services of geologists,
      geophysicists, chemists, engineers and other scientists to explore and analyze
      oil prospects to determine a method in which the oil prospects may be developed
      in a cost-effective manner. In addition, we rely upon the owners and operators
      of oil drilling equipment to drill and develop our prospects to production
      or to
      attract the interest of larger oil field companies. Although we have developed
      relationships with a number of third-party service providers, we cannot assure
      that we will be able to continue to rely on such persons. If any of these
      relationships with third-party service providers are terminated or are
      unavailable on commercially acceptable terms, we may not be able to execute
      our
      business plan.


12


**Aboriginal
      peoples may make claims regarding the lands on which our operations are
      conducted.**




Aboriginal
      peoples have claimed aboriginal title and rights to a substantial portion of
      western Canada. If any aboriginal peoples file a claim asserting aboriginal
      title or rights to the lands on which any of our properties are located, and
      if
      any such claim is successful, it could have a material adverse effect on our
      operations.




The
      Energy Utilities Board (EUB) that governs our operations in Alberta, Canada
      has
      implemented a new directive (Directive 056) that the Alberta Government issued
      in its First Nations Consultation Policy on Land Management and Resource
      Development on May 16, 2005. The EUB expects that all industry applicants must
      adhere to this policy and the consultation guidelines. These requirements and
      expectations apply to the licensing of all new energy developments and all
      modifications to existing energy developments, as covered in Directive 056.
      In
      the policy, the Alberta Government has developed consultation guidelines to
      address specific questions about how consultation for land management and
      resource development should occur in relation to specific activities. Prior
      to
      filing an application, the applicant must address all questions, objections,
      and
      concerns regarding the proposed development and attempt to resolve them. This
      includes concerns and objections raised by members of the public, industry,
      government representatives, First Nations, Métis, and other interested parties.
      If there are no outstanding concerns/objections, a confirmation of non-objection
      has been obtained if required. This process can cause significant delays in
      obtaining a drilling permit for exploration and/or a production well license
      for
      both oil and gas.




**If
      we are unable to access our properties or conduct our operations due to surface
      conditions, our** **business
      will be adversely affected.**




Our
      exploitation and development of oil and gas reserves depends upon access to
      the
      areas where our operations are to be conducted. We conduct a portion of our
      operations in regions where we are only able to do so on a seasonal basis.
      Unless the surface is sufficiently frozen, we are unable to access our
      properties, drill or otherwise conduct our operations as planned. In addition,
      if the surface thaws earlier than expected, we must cease our operations for
      the
      season earlier than planned. Our operations are affected by road bans imposed
      from time to time during the break-up and thaw period in the spring. Road bans
      are also imposed due to snow, mud and rock slides and periods of high water,
      which can restrict access to our well sites and production facility sites.
      Our
      inability to access our properties or to conduct our operations as planned
      will
      result in a shutdown or slow down of our operations, which will adversely affect
      our business.




**Essential
      equipment might not be available.**




Oil
      and
      gas exploitation and development activities depend upon the availability of
      drilling and related equipment in the particular areas where those activities
      will be conducted. Demand for that equipment or access restrictions may affect
      the availability of that equipment to us and delay our exploitation and
      development activities.




**Pipeline
      capacity may be inadequate.**




There
      may
      be periods of time when pipeline capacity is inadequate to meet our gas
      transportation needs. It is often the case that as new development comes on
      line, pipelines are close to or at capacity. During periods when pipeline
      capacity is inadequate, we may be forced to reduce production or incur
      additional expense as existing production is compressed to fit into existing
      pipelines.


13


**Our
      reliance on third parties for gathering and distribution could curtail future
      exploration and** **production
      activities.**




The
      marketability of our production will depend on the proximity of our reserves
      to
      and the capacity of, third party facilities and services, including oil and
      natural gas gathering systems, pipelines, trucking or terminal facilities,
      and
      processing facilities. The unavailability or insufficient capacity of these
      facilities and services could force us to shut-in producing wells, delay the
      commencement of production, or discontinue development plans for some of our
      properties, which would adversely affect our financial condition and
      performance.




**We
      may not have good and marketable title to our properties.**




It
      is
      customary in the oil and gas industry that upon acquiring an interest in a
      non-producing property, only a preliminary title investigation be done at that
      time and that a drilling title opinion be done prior to the initiation of
      drilling, neither of which can substitute for a complete title investigation.
      We
      have followed this custom and intend to continue to follow this custom in the
      future. Furthermore, title insurance is not available for mineral leases, and
      we
      will not obtain title insurance or other guaranty or warranty of good title.
      If
      the title to our prospects should prove to be defective, we could lose the
      costs
      that we have incurred in their acquisition, or incur substantial costs for
      curative title work.




**Complying
      with environmental and other government regulations could be costly and could
      negatively** **impact
      our production.**




Our
      business is governed by numerous laws and regulations at various levels of
      government. These laws and regulations govern the operation and maintenance
      of
      our facilities, the discharge of materials into the environment and other
      environmental protection issues. The laws and regulations may, among other
      potential consequences, require that we acquire permits before commencing
      drilling, restrict the substances that can be released into the environment
      with
      drilling and production activities, limit or prohibit drilling activities on
      protected areas such as wetlands or wilderness areas, require that reclamation
      measures be taken to prevent pollution from former operations, require remedial
      measures to mitigate pollution from former operations, such as plugging
      abandoned wells and remediating contaminated soil and groundwater, and require
      remedial measures to be taken with respect to property designated as a
      contaminated site.




Under
      these laws and regulations, we could be liable for personal injury, clean-up
      costs and other environmental and property damages, as well as administrative,
      civil and criminal penalties. We are currently evaluating insurance coverage
      for
      sudden and accidental environmental damages as well as environmental damage
      that
      occurs over time. However, we do not believe that insurance coverage for the
      full potential liability of environmental damages is available at a reasonable
      cost. Accordingly, we could be liable, or could be required to cease production
      on properties, if environmental damage occurs.




The
      costs
      of complying with environmental laws and regulations in the future may harm
      our
      business. Furthermore, future changes in environmental laws and regulations
      could occur that result in stricter standards and enforcement, larger fines
      and
      liability, and increased capital expenditures and operating costs, any of which
      could have a material adverse effect on our financial condition or results
      of
      operations.




**Our
      compliance with the Sarbanes-Oxley Act and SEC rules concerning internal
      controls may be time** **consuming,
      difficult and costly for us.**




It
      may be
      time consuming, difficult and costly for us to develop and implement provisions
      of the Sarbanes-Oxley Act applicable to us, including the internal controls
      and
      reporting procedures required to be implemented for the first fiscal year ending
      on or after December 15, 2007. We may need to hire additional financial
      reporting, internal controls and other finance staff in order to develop and
      implement appropriate internal controls and reporting procedures. If we are
      unable to comply with the internal controls and other requirements of the
      Sarbanes-Oxley Act, we may not be able to obtain the independent accountant
      certifications that the Sarbanes-Oxley Act requires publicly-traded companies
      to
      obtain.


14


**The
      loss of key employees would materially adversely affect our ability to operate
      our business and** **implement our business plan.**




Our
      business operations are managed by two key employees, David Perez, our Chief
      Executive Officer, and William Greene, our Chief Financial Officer. The loss
      of
      the services of such employees could seriously impair our business operations.
      We do not have key man life insurance on any of our executives. On April 22,
      2006, Fred W. Kelly, our former Chief Executive Officer and the Chief Operating
      Officer of Signet, passed away. Mr. Kelly was a key operations executive and
      his
      death could have a negative effect on Signet’s operations and relationships with
      its vendors.




**We
      are and may continue to be involved in litigation and other
      disputes.**




Our
      business and operations may subject us to claims, litigation and other
      proceedings brought by private parties and governmental authorities. We are
      currently involved in a contract dispute with Dynamo Energy Corporation, a
      Canadian corporation ("Dynamo"), in connection with an alleged breach of
      contract. Our Board of Directors previously determined that the proposed
      agreement with Dynamo had not been authorized by the Board and made an offer
      of
      settlement, which was not accepted. Dynamo notified our company that it believes
      that agreement is valid, and on November 15, 2006, Dynamo filed a First Amended
      Complaint claim in San Diego County state court against the Company, Frederick
      Berndt, our former V.P. and Director and E. Jamie Schloss, our former CFO and
      Director. Litigation can involve complex factual and legal questions and its
      outcome is uncertain. Although it is not possible at this early stage to predict
      the likely outcome of this action, an adverse result could have a material
      adverse effect on us. Any claim that is successfully asserted against us could
      result in significant damage claims and other losses. Even if we were to
      prevail, any litigation could be costly and time-consuming and would divert
      the
      attention of our management and key personnel from our business operations,
      which adversely affect our financial condition, results of operations or cash
      flows. See the discussion in the section under "Legal Proceedings" for a
      discussion of the Dynamo dispute.





**RISKS
      RELATED TO OUR INDUSTRY**




**The
      successful implementation of our business plan is subject to risks inherent
      in
      the oil and gas business.**




Our
      oil
      and gas operations are subject to the economic risks typically associated with
      exploration, development production activities and locating suitable acquirors
      of our properties, including the necessity of significant expenditures to locate
      and acquire properties and to drill exploratory wells. In addition, the cost
      and
      timing of drilling, completing and operating wells is often uncertain In
      conducting exploration and development activities, the presence of unanticipated
      pressure or irregularities in formations, miscalculations or accidents may
      cause
      our exploration, development and production activities to be unsuccessful.
      This
      could result in a total loss of our investment in a particular property. If
      exploration efforts are unsuccessful in establishing proved reserves and
      exploration activities cease, the amounts accumulated as unproved costs will
      be
      charged against earnings as impairments.




**The
      oil and gas industry is highly competitive.**




The
      oil
      and gas industry is highly competitive. We compete with oil and gas companies
      and other individual producers and operators, many of which have longer
      operating histories and substantially greater financial and other resources
      than
      we do, as well as companies in other industries supplying energy, fuel and
      other
      needs to consumers. Many of these companies not only explore for and produce
      crude oil and gas, but also carry on refining operations and market petroleum
      and other products on a worldwide basis. In addition, we compete with other
      oil
      development firms in marketing their properties to other larger oil field
      operators. Our larger competitors, by reason of their size and relative
      financial strength, can more easily access capital markets than we can and
      may
      enjoy a competitive advantage in the recruitment of qualified personnel. They
      may be able to absorb the burden of any changes in laws and regulation in the
      jurisdictions in which we do business and handle longer periods of reduced
      prices of gas and oil more easily than we can. Our competitors may be able
      to
      pay more for productive oil and gas properties and may be able to define,
      evaluate, bid for and purchase a greater number of properties and prospects
      than
      we can. Our ability to acquire additional properties in the future will depend
      upon our ability to conduct efficient operations, evaluate and select suitable
      properties, implement advanced technologies and consummate transactions in
      a
      highly competitive environment.


15


**Oil
      and gas operations involve various risks.**




The
      oil
      and gas business involves operating hazards such as well blowouts, craterings,
      explosions, uncontrollable flows of crude oil, natural gas or well fluids,
      fires, formations with abnormal pressures, pipeline ruptures or spills,
      pollution, releases of toxic gas and other environmental hazards and risks.
      Personal injuries, damage to property and equipment, reservoir damage, or loss
      of reserves may occur if such a catastrophe occurs, any one of which could
      cause
      us to experience substantial losses. In addition, we may be liable for
      environmental damage caused by previous owners of properties purchased or leased
      by us.




**Market
      fluctuations in the prices of oil and gas could adversely affect our
      business.**




Prices
      for oil and gas tend to fluctuate significantly in response to factors beyond
      our control. These factors include, but are not limited to, the continued threat
      of war in the Middle East and actions of the Organization of Petroleum Exporting
      Countries and its maintenance of production constraints, the U.S. economic
      environment, weather conditions, the availability of alternate fuel sources,
      transportation interruption, the impact of drilling levels on crude oil and
      gas
      supply, and the environmental and access issues that could limit future drilling
      activities for the industry.




Changes
      in commodity prices may significantly affect our capital resources, liquidity
      and expected operating results. Price changes directly affect revenues and
      can
      indirectly impact expected production by changing the amount of funds available
      to reinvest in exploration and development activities. Reductions in oil and
      gas
      prices not only reduce revenues and profits, but could also reduce the
      quantities of reserves that are commercially recoverable. Significant declines
      in prices could result in non-cash charges to earnings due to
      impairment.




Changes
      in commodity prices may also significantly affect our ability to estimate the
      value of producing properties for acquisition and divestiture and often cause
      disruption in the market for oil and gas producing properties, as buyers and
      sellers have difficulty agreeing on the value of the properties. Price
      volatility also makes it difficult to budget for and project the return on
      acquisitions and development and exploitation of projects. We expect that
      commodity prices will continue to fluctuate significantly in the
      future.


**Changes
        in legislation and governmental regulations to which our business is subject
        are
        beyond our control and may adversely impact our business.**
 
 Our
        business is subject to various federal, state, provincial and local laws
        and
        governmental regulations that may be changed from time to time in response
        to
        economic or political conditions. **** Changes
        in regulations or shifts in political attitudes are beyond our control and
        may
        adversely impact our business. Operations may be affected in varying degrees
        by
        governmental regulations with respect to restrictions on production, price
        controls, export controls, income taxes and environmental legislations.
        Legislation affecting the oil and gas industry is under constant review for
        amendment or expansion, frequently increasing the regulatory
        burden.
 
 **Our
        foreign operations involve substantial costs and are subject to certain risks
        because the oil and gas industries in the countries in which we operate are
        less
        developed.**
  The
        oil
        and gas industry in South America is not as developed as the oil and gas
        industry in North America. As a result, our exploration and development
        activities may take longer to complete and may be more expensive than similar
        operations in North America. The availability of technical expertise, specific
        equipment and supplies may be more limited than in North America. We expect
        that
        such factors will subject our international operations to economic and operating
        risks that may not be experienced in North American operations.
  16
 **Our
        business is subject to local legal, political and economic factors which
        are
        beyond our control, which could impair our ability to expand our operations
        or
        operate profitably.**
  We
        expect
        to operate our business in Canada and Argentina, and to expand our operations
        into other countries in the world. Exploration and production operations
        in
        foreign countries are subject to legal, political and economic uncertainties,
        including terrorism, military repression, interference with private contract
        rights (such as privatization), extreme fluctuations in currency exchange
        rates,
        high rates of inflation, exchange controls and other laws or policies affecting
        environmental issues (including land use and water use), workplace safety,
        foreign investment, foreign trade, investment or taxation, as well as
        restrictions imposed on the oil and natural gas industry, such as restrictions
        on production, price controls and export controls. Central and South America
        have a history of political and economic instability. This instability could
        result in new governments or the adoption of new policies, laws or regulations
        that might assume a substantially more hostile attitude toward foreign
        investment. In an extreme case, such a change could result in termination
        of
        contract rights and expropriation of foreign-owned assets. Any changes in
        oil
        and gas or investment regulations and policies or a shift in political attitudes
        in Argentina or other countries in which we intend to operate are beyond
        our
        control and may significantly hamper our ability to expand our operations
        or
        operate our business at a profit.
 
 For
        instance, changes in laws in the jurisdiction in which we operate or expand
        into
        with the effect of favoring local enterprises, changes in political views
        regarding the exploitation of natural resources and economic pressures may
        make
        it more difficult for us to negotiate agreements on favorable terms, obtain
        required licenses, comply with regulations or effectively adapt to adverse
        economic changes, such as increased taxes, higher costs, inflationary pressure
        and currency fluctuations.
  **Local
        legal and regulatory systems in which we operate may create uncertainty
        regarding our rights and operating activities, which may harm our ability
        to do
        business.**
  We
        are a
        company organized under the laws of the State of Delaware and are subject
        to
        United States laws and regulations. The jurisdictions in which we intend
        to
        operate our exploration, development and production activities may have
        different or less developed legal systems than the United States, which may
        result in risks such as:
 ·
                effective
                    legal redress in the courts of such jurisdictions, whether in
                    respect of a
                    breach of law or regulation, or, in an ownership dispute, being
                    more
                    difficult to obtain;
 
 ·
                a
                    higher degree of discretion on the part of governmental authorities;
 
 ·
                the
                    lack of judicial or administrative guidance on interpreting applicable
                    rules and regulations;
 
 ·
                inconsistencies
                    or conflicts between and within various laws, regulations, decrees,
                    orders
                    and resolutions; and
 
 ·
                relative
                    inexperience of the judiciary and courts in such
                    matters.
  In
        certain jurisdictions the commitment of local business people, government
        officials and agencies and the judicial system to abide by legal requirements
        and negotiated agreements may be more uncertain, creating particular concerns
        with respect to licenses and agreements for business. These licenses and
        agreements may be susceptible to revision or cancellation and legal redress
        may
        be uncertain or delayed. Property right transfers, joint ventures, licenses,
        license applications or other legal arrangements pursuant to which we operate
        may be adversely affected by the actions of government authorities and the
        effectiveness of and enforcement of our rights under such arrangements in
        these
        jurisdictions may be impaired.
  17




**RISKS
      RELATED TO OUR STOCK**




**Insiders
      have substantial control over us, and they could delay or prevent a change
      in
      our corporate** **control
      even if our other stockholders wanted it to occur.**




Our
      executive officers, directors, and principal stockholders who hold 5% or more
      of
      the outstanding common stock and their affiliates beneficially owned as of
      April
      13, 2007, in the aggregate, approximately 37.92% of our outstanding common
      stock. These stockholders will be able to exercise significant control over
      all
      matters requiring stockholder approval, including the election of directors
      and
      approval of significant corporate transactions. This could delay or prevent
      an
      outside party from acquiring or merging with us even if our other stockholders
      wanted it to occur.




**Future
      sales of our common stock may cause our stock price to
      decline.**




Our
      stock
      price may decline by future sales of our shares or the perception that such
      sales may occur. If we issue additional shares of common stock in private
      financings under an exemption from the registration laws, then those shares
      will
      constitute “restricted shares” as defined in Rule 144 under the Securities Act.
      The restricted shares may only be sold if they are registered under the
      Securities Act, or sold under Rule 144, or another exemption from registration
      under the Securities Act.


Some
      of
      our outstanding restricted shares of common stock are either eligible for sale
      pursuant to Rule 144 or are required to be registered under the Securities
      Act
      for resale by the holders. We are unable to estimate the amount, timing, or
      nature of future sales of outstanding common stock. Sales of substantial amounts
      of our common stock in the public market may cause the stock’s market price to
      decline.




**Our
      stock price can be extremely volatile.**




Our
      common stock is traded dually on the OTC Bulletin Board and the Pink Sheets.
      There can be no assurance that an active public market will continue for the
      common stock, or that the market price for the common stock will not decline
      below its current price. Such price may be influenced by many factors,
      including, but not limited to, investor perception of us and our industry and
      general economic and market conditions. The trading price of the common stock
      could be subject to wide fluctuations in response to announcements of our
      business developments or our competitors, quarterly variations in operating
      results, and other events or factors. In addition, stock markets have
      experienced extreme price volatility in recent years. This volatility has had
      a
      substantial effect on the market prices of companies, at times for reasons
      unrelated to their operating performance. Such broad market fluctuations may
      adversely affect the price of our common stock.


**Possibility
        of wide price swings and inaccurate pricing information could create a risk
        that
        stockholders will not be able to accurately assess the market value of our
        common stock.**
 
 While
        our
        stock trades over-the-counter and is quoted on the OTC Bulletin Board, a
        relative lack of liquidity or volume and the participation of only a few
        market
        makers makes it more likely that wide fluctuations in the quoted price of
        our
        common stock could occur. As a result, there is a risk that stockholders
        will
        not be able to obtain accurate price quotes or be able to correctly assess
        the
        market price of our stock. Increases in the volatility could also make it
        more
        difficult to pledge the common stock as collateral, if stockholders sought
        to do
        so, because a lender might also be unable to accurately value the common
        stock.




**We
      do not expect to pay dividends.**




We
      have
      not paid dividends since inception on our common stock, and we do not
      contemplate paying dividends in the foreseeable future on our common stock
      in
      order to use all of our earnings, if any, to finance expansion of our business
      plans.




**If
      we fail to remain current on our reporting requirements, we could be removed
      from the OTC Bulletin** **Board,
      we could be investigated by the SEC or we could incur liability to our
      shareholders.**




Companies
      trading on the OTC Bulletin Board, such as us, must be reporting issuers under
      Section 12 of the Securities Exchange Act of 1934, as amended, and must be
      current in their reports under Section 13, in order to maintain price quotation
      privileges on the OTC Bulletin Board. If we fail to remain current on our
      reporting requirements, we could be removed from the OTC Bulletin Board. As
      a
      result, the market liquidity for our securities could be severely adversely
      affected by limiting the ability of broker-dealers to sell our securities and
      the ability of stockholders to sell their securities in the secondary market.
      Failure to remain current in our reporting obligations might also subject us
      to
      SEC investigation or private rights of action by our shareholders.




**Our
      common stock is subject to the “penny stock” rules off the SEC and the trading
      market in our** **securities
      is limited, which makes transactions in our stock cumbersome and may reduce
      the
      value of an investment in our stock.**




The
      Securities and Exchange Commission has adopted Rule 15g-9 which establishes
      the
      definition of a “penny stock,” for the purposes relevant to us, as any equity
      security that has a market price of less than $5.00 per share or with an
      exercise price of less than $5.00 per share, subject to certain exceptions.
      For
      any transaction involving a penny stock, unless exempt, the rules
      require:





·
            that
                a broker or dealer approve a person’s account for transactions in penny
                stocks; and·
            the
                broker or dealer receive from the investor a written agreement to
                the
                transaction, setting forth the identity and quantity of the penny
                stock to
                be purchased.


18


In
      order
      to approve a person’s account for transactions in penny stocks, the broker or
      dealer must:




·
            obtain
                financial information and investment experience objectives of the
                person;
                and·
            make
                a reasonable determination that the transactions in penny stocks
                are
                suitable for that person and the person has sufficient knowledge
                and
                experience in financial matters to be capable of evaluating the risks
                of
                transactions in penny stocks.




The
      broker or dealer must also deliver, prior to any transaction in a penny stock,
      a
      disclosure schedule prescribed by the Commission relating to the penny stock
      market, which, in highlight form:




·
            sets
                forth the basis on which the broker or dealer made the suitability
                determination; and·
            that
                the broker or dealer received a signed, written agreement from the
                investor prior to the transaction.




Generally,
      brokers may be less willing to execute transactions in securities subject to
      the
“penny stock” rules. This may make it more difficult for investors to dispose of
      our common stock and cause a decline in the market value of our
      stock.




Disclosure
      also has to be made about the risks of investing in penny stocks in both public
      offerings and in secondary trading and about the commissions payable to both
      the
      broker-dealer and the registered representative, current quotations for the
      securities and the rights and remedies available to an investor in cases of
      fraud in penny stock transactions. Finally, monthly statements have to be sent
      disclosing recent price information for the penny stock held in the account
      and
      information on the limited market in penny stocks.




**ITEM
      2. DESCRIPTION OF PROPERTY**




Operating
      Leases




Our
      principal executive offices are located at 12220 El Camino Real, Suite 410,
      San
      Diego, California 92130. Commencing in November 2004 and continuing in 2006,
      we
      subleased office space in San Diego, California from a company owned by a
      previous director of the Company at a rent of $1,800 per month. In January
      2006,
      we entered into a one year sublease agreement at this location. The monthly
      rent
      under this sublease is $4,094. Total rent and related expenses of $46,024 and
      $25,172 were charged to operating expenses for the years ended December 31,
      2006
      and 2005, respectively. Our Cold Flow subsidiary entered into a one year
      lease on July 18, 2006 which terminates on July 31, 2007 with
      a monthly base rent of $293 per month. Our facilities are in good
      condition for their intended use as an office.


We
        believe that our current office space and facilities are sufficient to meet
        our
        present needs and do not anticipate any difficulty securing alternative or
        additional space, as needed, on terms acceptable to us.





We
      commenced oil and gas exploration activities in February 2005. Accordingly,
      (1)
      we did not engage in any production activities during the fiscal years ended
      December 31, 2006
      and
      2005, nor did we have any proved reserves at the end of such periods, and thus,
      were not required to provide any of the production data required by Statement
      of
      Financial Accounting Standards No. 69 (“SFAS 69”), and (2) we did not engage in
      any drilling activities during the fiscal years ended December 31, 2006
      and
      2005 applicable to SFAS 69. We do not have any obligations under existing
      contracts or agreements calling for the provision of fixed and determinable
      quantities of oil and gas over the next three years, and have therefore not
      filed any information or reports with any federal authority or agency,
      containing estimates of total, proved developed or undeveloped net oil or gas
      reserves.


19


Our
      oil
      and gas properties consist primarily of oil wells and a working interest in
      leasehold acreage, both developed and undeveloped. The following table
      summarizes our gross and net developed and undeveloped oil and gas acreage
      under
      lease or option as of December 31, 2006.




Gross
            
            Net
              Earned
              Acres
            
            Net
              Effective
              Surge
              Equity
              Interest**Developed
                Acreage**Sawn
                Lake, Canada
            
            
            None
            
            
            None
            
            
            NoneTotal
            
            
            None
            
            
            None
            
            
            None**Undeveloped
                Acreage**Sawn
                Lake, Canada
            
            
            44,480
            
            
            11,520
            
            
            3,145**Total**
            
            
            44,480
            
            
            11,520
            
            
            3,145




A
      developed acre is considered to mean those acres spaced or assignable to
      productive wells. A gross acre is an acre in which a working interest is owned;
      a net acre is the result that is obtained when fractional ownership working
      interest is multiplied by gross acres. The number of net acres is the sum of
      the
      fractional working interests owned in gross acres expressed as whole numbers
      and
      fractions thereof. The net effective Surge equity interest of 3,145 acres is
      net
      of Signet's 40% working interest in the Sawn Lake property and net of Surge's
      27.3% equity interest in Signet.




Undeveloped
      acreage is considered to be those lease acres on which wells have not been
      drilled or completed to a point that would permit the production of commercial
      quantities of oil or natural gas, regardless of whether or not that acreage
      contains proved reserves, but does not include undrilled acreage held by
      production under the terms of a lease. As is customary in the oil and gas
      industry, we can generally retain our interest in undeveloped acreage by
      drilling activity that establishes commercial production sufficient to maintain
      the leases or by paying delay rentals during the remaining primary term of
      such
      a lease. The oil and natural gas leases in which we have an interest are for
      varying primary terms, and if production continues from our developed lease
      acreage beyond the primary term, we are entitled to hold the lease for as long
      as oil or natural gas is produced.





As
      Signet
      obtains financing in the future, the Company may sustain additional dilution
      to
      it’s equity interest in Signet which may also result in an
      impairment.





More
      information about our oil and gas leases and interest in drilling rights are
      set
      forth in Item 1, Description of Business, above, incorporated herein by
      reference.




**ITEM
      3. LEGAL PROCEEDINGS**




Our
      previously disclosed expression of intent to enter an agreement with Dynamo
      Energy Corporation, a Canadian corporation (“Dynamo”), to obtain a right of
      first refusal on Dynamo’s prospects was never formalized by a signed agreement.
      On September 16, 2005 our Board determined that the proposed agreement with
      Dynamo had not been authorized by the Board and made an offer of settlement
      to
      Mr. Vandergrift, which was not accepted. Mr. Vandergrift has since resigned
      as a
      member of our Board of Directors.




On
      November 15, 2006, plaintiff Dynamo Energy Corporation filed a First Amended
      Complaint against Surge Global Energy Inc., Signet Energy Inc., Frederick C.
      Berndt and E. Jamie Schloss in the Superior Court of the State of California,
      County of San Diego, Case No. GIC 874973. Dynamo has alleged causes of action
      for Breach of Contract, Restitution, Declaratory Relief and Fraud. Dynamo's
      claims arise from an alleged agreement/contract in which Dynamo claims to be
      entitled to a finder's fee for certain acquisitions of oil and gas development
      opportunities in Canada that Surge was evaluating. In addition, Dynamo claims
      a
      5% gross overriding royalty on all the petroleum and natural gas rights acquired
      in certain oil and gas transactions by Surge. Dynamo's complaint does not
      specify the amount of money they are seeking in this case. Surge is challenging
      the Complaint on jurisdictional grounds. The Superior Court has not yet made
      any
      ruling on the jurisdictional challenges to the Complaint.


20


As
      previously disclosed, our Board had determined that the proposed agreement
      with
      Dynamo had not been authorized by the Board. We intend to vigorously defend
      this
      lawsuit. Although it is impossible to predict with certainty the outcome of
      this
      proceeding, or the outcome of any litigation, we are confident in the merits
      of
      our defense and do not anticipate an unfavorable outcome.




From
      time
      to time, we receive claims of and become subject to commercial litigation
      related to the conduct of our business. Such litigation could be costly and
      time
      consuming and could divert our management and key personnel from our business
      operations. The uncertainty of litigation increases these risks. In connection
      with such litigation, we may be subject to significant damages or equitable
      remedies relating to the operation of our business. Any such litigation may
      materially harm our business, results of operations and financial
      condition.




**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**




There
      was
      no matter submitted during the fourth quarter of the fiscal year covered by
      this
      report to a vote of security holders, through the solicitation of proxies or
      otherwise.






**PART
      II**




**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**




**Market
      for Common Stock**




Our
      common stock is quoted dually on the OTC Bulletin Board and the Pink Sheets
      under the trading symbol “SRGG.” The following table sets forth the high and low
      bid prices for our common stock for the periods indicated . Such
      quotations are taken from information provided by “Yahoo! Finance” and reflect
      inter-dealer prices, without retail mark-up, mark-down or commissions, and
      may
      not necessarily represent actual transactions.





**Quarter
                Ended**
            **High**
            **Low**December
                31, 2006
            $0.87
            $0.34September
                30, 2006
            $2.15
            $0.41June
                30, 2006
            $4.18
            $1.60March
                31, 2006
            $4.15
            $1.30December
                31, 2005
            $1.90
            $1.22September
                30, 2005
            $1.85
            $1.08June
                30, 2005
            $3.12
            $1.00March
                31, 2005
            $3.84
            $2.00




American
      Stock Transfer (38 Maiden Lane, New York, NY 10038) is the registrar and
      transfer agent for our common shares.




As
      of
      April 13, 2007, we had 30,970,430 shares of common stock outstanding and
      approximately 1,200 stockholders of record.




**Dividend
      Policy**




We
      have
      never declared or paid dividends on our common stock, and we do not anticipate
      that we will do so in the foreseeable future. We intend to retain future
      earnings, if any, for use in our operations and the expansion of our
      business.


21


**ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS** **OR PLAN OF OPERATION**




The
      following discussion of our financial condition, changes in financial condition
      and results of operations for the fiscal years ended December 31, 2006 and
      December 31, 2005, should be read in conjunction with the audited annual
      financial statements and the notes thereto. In January 2005, as a result of
      the
      Company disposing of its tobacco wholesale business in December 2004, and
      restructuring its management and ownership, the Company began implementing
      plans
      to establish an oil and gas development business. As a result, the Company
      has
      not generated any revenues and has incurred significant operating expenses.





Our
      consolidated financial statements are stated in United States Dollars and are
      prepared in accordance with United States Generally Accepted Accounting
      Principles, including Signet operations from February 2005 until July 6, 2006
      on
      a consolidated basis. As
      previously reported and as of July 7, 2006, we deconsolidated Signet Energy,
      Inc. (formerly Surge Surge Global Energy (Canada) Ltd.) from our consolidated
      financial statements (See Financial Statements- Note C Investment in Signet
      for
      further discussion).





In
      July
      2006, Signet increased its outstanding shares following the completion of a
      CDN$18.990 million financing. As of July 6, 2006, Signet and various other
      investors owned 52.85% of Signet’s common stock to reduce Surge’s outstanding
      voting security interest to less than 50%. Based upon this reduction in
      ownership, Surge has determined that it no longer has the legal power to control
      the operating policies and procedures of Signet and deconsolidated Signet from
      its consolidated financial statements during the fiscal quarter ending
      September 30, 2006. Due to the change in influence on Signet’s operations,
      Surge will reflect its Signet operations as an equity investment using the
      27.30% equity interest effective for the year ended December 31,
      2006.


Effective
        July 6, 2006, the Company has recorded the investment in Signet using the
        equity
        method of accounting.  Upon deconsolidation, the Company valued the Signet
        investment at $11.936 million which resulted in a gain of $4.148 million
        which
        was recorded to the investment account with a corresponding credit to additional
        paid in capital.




**Results
      of Operations**




The
      Company had no revenues in the twelve months ended December 31, 2006 or 2005.


Total
        operating expenses as well as loss from operations for the twelve months
        ended
        December 31, 2006 compared to 2005 increased by $5.044 million to $14.452
        million from $9.408 million in the prior period. Included within the $5.044
        million increase is ($2.484) million of employee compensation costs, $959,000
        in
        selling, general and administrative (SG&A) expenses, and $298,000 in
        increased depreciation and amortization expense and $6.271 million of impairment
        in investment. The increase in non-cash compensation cost of $555,000 in
        2006
        consisted of vested stock options related to employee compensation agreements.
        Included in the $959,000 SG&A increase was $727,000 in higher legal, audit
        and financing fees related to financing and registration activities, $290,000
        related to increased employee headcount and compensation, offset by ($57,000)
        in
        other lower costs primarily to reduced commissions on finders fees. Depreciation
        and amortization increased $298,000 due to higher deferred financing
        amortization in 2006. The $6.271 million impairment increase in 2006 resulted
        from the lack of cold flow production potential as well as unearned working
        interests.


22


In
      July
      2006, Signet increased its outstanding shares following the completion of a
      CDN$18.990 million financing. As of July 6, 2006, Signet and various other
      investors owned 52.85% of Signet’s common stock to reduce Surge’s outstanding
      voting security interest to less than 50%. Based upon this reduction in
      ownership, Surge has determined that it no longer has the legal power to control
      the operating policies and procedures of Signet and deconsolidated Signet from
      its consolidated financial statements during the fiscal quarter ending
      September 30, 2006. Due to the change in influence on Signet’s operations,
      Surge will reflect its Signet operations as an equity investment using the
      27.30% equity interest effective for the year ended December 31, 2006 As a
      result, Equity
      in
      losses from affiliates increased by $1.043 million to $1.043 million for the
      twelve months ended December 31, 2006 from the zero in the prior period.


Net
        interest income (expense) for the twelve months ended December 31, 2006 and
        2005
        amounted to ($1.048) million and ($1.954) million, respectively. The decrease
        in
        interest expense was due to the non-reoccurring 2005 beneficial conversion
        feature notes payable and warrant expense.




Loss
      available to common stockholders increased by $7.195 million from a loss of
      $8.731 million in 2005 to $15.926 million in 2006 as a result of all the factors
      described above.





**Liquidity
      and Capital Resources**


As
        of
        December 31, 2006, we had a surplus in working capital of $950,000. For the
        year
        ended December 31, 2006, we had a net cash flow deficit from operating
        activities of $3.023 million, consisting primarily of year to date losses
        of
        ($15.926) million from continuing operations, $1.119 million of minority
        interest, adjusted by other non-cash charges of $1.043 million in share of
        affiliate loss from Signet, $4.779 million in employee compensation expense
        arising from stock options issued to employees and directors, $502,000 of
        loss on revaluation of warrant liability, $372,000 in depreciation and
        amortization, $818,000 in debt discount from Signet’s financing, $6.296 million
        in Signet equity interest impairment expenses and $211,000 in net increases
        and
        decreases in assets and liabilities primarily due to $291,000 decrease in
        other
        receivables.
  For
        the
        year ended December 31, 2006, cash flow used in investing activities from
        continuing operations was $1.528 million due to $73,000 in fixed asset
        additions, $10,000 in deposits and $1.445 million in oil property investment
        consisting of $133,000 in investment in Peace Oil and $1.311 million in Signet.
  For
        the
        year ended December 31, 2006, cash flow from financing activities were $3.250
        million. During the year ended December 31, 2006, the Company received $3.150
        million from stock subscription proceeds and $100,000 in option exercise
        proceeds.


23




In
      March
      2006, the Company completed a Private Placement offering of 1,200,000 shares
      at
      $1.50 per share, which resulted in gross proceeds of $1,800,000. Warrants to
      purchase 1,200,000 shares at $2.00 per share with a five-year term were issued
      at the same time. There were no commissions payable for the issuance of these
      shares. The  attached warrants include Piggy-back registration
      rights.





In
      November 2006, the Company issued an aggregate of 3 million shares of common
      stock to third party investors in exchange for net proceeds of $1,350,000.
      In
      connection with this private placement, the Company issued to the investors
      an
      aggregate of six million warrants that are subject to registration rights and
      penalties if the registration is not effective by March 28, 2007. Commissions totaling $135,000 resulted from the issuance of these shares. The
      Company filed an SB-2 registration of these shares of this Private Placement
      filed on December 20, 2006, within the required filing deadline of December
      28,
      2006.




By
      adjusting its operations and development to the level of capitalization,
      management believes it has sufficient capital resources to meet projected cash
      flow deficits. However, if during that period or hereafter, we are not
      successful in generating sufficient liquidity from operations or in raising
      sufficient capital resources, on terms acceptable to us, this could have a
      material adverse effect on our business, results of operations liquidity and
      financial condition.





The
      independent auditor's report on the Company's December 31, 2006 financial
      statements included in this Annual Report states that the Company's recurring
      losses raise substantial doubts about the Company's ability to continue as
      a
      going concern.




**Product
      Research and Development**




We
      do not
      anticipate performing research and development for any products during the
      next
      twelve months.




**Acquisition
      or Disposition of Plant and Equipment**




We
      do not
      anticipate the sale of any significant property, plant or equipment during
      the
      next twelve months. We plan significant asset outlays that may involve a
      combination of cash, equity and debt to acquire additional oil properties as
      discussed in our Description of Business and General Overview. We do not
      currently have sufficient resources available to meet these acquisition needs.
      Other than the oil property acquisitions, we do not anticipate the acquisition
      of any significant property, plant or equipment during the next 12 months,
      other
      than computer equipment and peripherals used in our day-to-day operations.




**Number
      of Employees**





From
      our
      inception through the period ended December 31, 2006, we have relied on the
      services of outside consultants for services and have four (4) full-time
      employees. In order for us to attract and retain quality personnel, we
      anticipate we will have to offer competitive salaries to future employees.
      As of
      March 31, 2007, we have four (4) full-time employees and we anticipate an
      employment base of seven (7) full-time employees during the next 12 months.





However,
      as we continue to expand, we will incur additional cost for personnel This
      projected increase in personnel is dependent upon our generating revenues and
      obtaining sources of financing. There is no guarantee that we will be successful
      in raising the funds required or generating revenues sufficient to fund the
      projected increase in the number of employees.


None
        of our employees are covered by collective bargaining agreements, and we
        believe
        our relations with our employees are favorable.


24


**Inflation**




Management
      believes that inflation has not had a material effect on our
      operations.




**Off
      Balance Sheet Arrangements**




We
      do not
      maintain off-balance sheet arrangements nor do we
      participate in non-exchange traded contracts requiring fair value accounting
      treatment.






**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**




Our
      discussion and analysis of our
      financial condition and results of operation are based upon consolidated
      financial statements, which have been prepared in accordance with accounting
      principles generally accepted in the United States of America. The following
      summarizes several of our critical accounting policies. See a complete list
      of
      significant accounting policies in Note A to the Consolidated Financial
      Statements.




Oil
      and Gas Properties





The
      Company follows the full cost accounting method to account for the costs
      incurred in the acquisition, exploration, exploitation, development and
      production of oil and gas reserves. All costs, including internal costs,
      directly related to acquisition, exploration, exploitation and development
      activities, are capitalized as oil and gas property costs. The capitalized
      costs
      of oil and gas properties, excluding unevaluated or unproven properties, are
      amortized using a unit-of-production method based on estimated proved
      recoverable oil and gas reserves. Amortization of unevaluated property costs
      begins when the properties become proved or their values become impaired.
      Impairment of unevaluated prospects is assessed based on management’s intention
      with regard to future exploration and development of individually significant
      properties and the ability of the Company to obtain funds to finance such
      exploration and development. The Company anticipates its unevaluated property
      costs to remain as unevaluated for no longer than two years.





Under
      full cost accounting rules for each cost center, capitalized costs of evaluated
      oil and gas properties, including asset retirement costs, less accumulated
      amortization and related deferred income taxes, may not exceed an amount (the
      “cost ceiling”) equal to the sum of (a) the present value of future net cash
      flows from estimated production of proved oil and gas reserves, based on current
      economic and operating conditions, discounted at 10%, plus (b) the cost of
      properties not being amortized, plus (c) the lower of cost or estimated fair
      value of any unproved properties included in the costs being amortized, less
      (d)
      any income tax effects related to differences between the book and tax basis
      of
      the properties involved. If capitalized costs exceed this limit, the excess
      is
      charged to earnings.





Given
      the
      volatility of oil and gas prices, it is reasonably possible that the estimate
      of
      discounted future net cash flows from proved oil and gas reserves could change
      in the near term. If oil and gas prices decline in the future, even if only
      for
      a short period of time, it is possible that additional impairments of oil and
      gas properties could occur. In addition, it is reasonably possible that
      additional impairments could occur if costs are incurred in excess of any
      increases in the present value of future net cash flows from proved oil and
      gas
      reserves, or if properties are sold for proceeds less than the discounted
      present value of the related proved oil and gas reserves.


25


Investment
      in unconsolidated subsidiary





Investee
      entities that the Company can exercise significant influence, but not control,
      are accounted for under the equity method of accounting. Whether the Company
      exercises significant influence with respect to an investee depends on an
      evaluation of several factors, among others, representation of the company’s
      board of directors and ownership level, generally 20% to 50% interest in the
      voting securities of the company including voting rights associated with the
      Company’s holdings in common, preferred and other convertible instruments in the
      company. Under the equity method of accounting, the Company’s share of the
      earnings or losses of these companies is included in the equity income (loss)
      section of the consolidated statements of operations.





A
      loss in
      value of an investment that is other than a temporary decline is recognized
      as a
      charge to operations. Evidence of a loss is value might include, but would
      not
      necessarily be limited to, absence of an ability to recover the carrying amount
      of the investment or inability of the investee to sustain an earnings capacity
      that would justify the carrying amount of the investment.





Impairment
      of Long-Lived Assets




The
      Company has adopted Statement of Financial Accounting Standards No. 144 (“SFAS
      144”). The Statement requires that long-lived assets and certain identifiable
      intangibles held and used by the Company be reviewed for impairment whenever
      events or changes in circumstances indicate that the carrying amount of an
      asset
      may not be recoverable. Events relating to recoverability may include
      significant unfavorable changes in business conditions, recurring losses, or
      a
      forecasted inability to achieve break-even operating results over an extended
      period. The Company evaluates the recoverability of long-lived assets based
      upon
      forecasted undercounted cash flows. Should an impairment in value be indicated,
      the carrying value of intangible assets will be adjusted, based on estimates
      of
      future discounted cash flows resulting from the use and ultimate disposition
      of
      the asset. SFAS No. 144 also requires assets to be disposed of be reported
      at
      the lower of the carrying amount or the fair value less costs to sell





Stock
      Based Compensation





On
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which
      requires the measurement and recognition of compensation expense for all
      share-based payment awards made to employees and directors including employee
      stock options based on estimated fair values. SFAS 123(R) supersedes the
      Company’s previous accounting under Accounting Principles Board Opinion
      No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods
      beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission
      issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS
      123(R). The Company has applied the provisions of SAB 107 in its adoption of
      SFAS 123(R).




The
      Company adopted SFAS 123(R) using the modified prospective transition method,
      which requires the application of the accounting standard as of January 1,
      2006,
      the first day of the Company’s fiscal year 2006. The Company’s Consolidated
      Financial Statements as of and for the year ended December 31, 2006 reflect
      the
      impact of SFAS 123(R). In accordance with the modified prospective transition
      method, the Company’s Consolidated Financial Statements for prior periods have
      not been restated to reflect, and do not include, the impact of SFAS 123(R).


26


NEW
      ACCOUNTING PRONOUNCEMENTS




On
      February 16, 2006 the FASB issued SFAS 155, “Accounting for Certain Hybrid
      Instruments,” which amends SFAS 133, “Accounting for Derivative Instruments and
      Hedging Activities,” and SFAS 140, “Accounting for Transfers and Servicing of
      Financial Assets and Extinguishments of Liabilities.” SFAS 155 allows financial
      instruments that have embedded derivatives to be accounted for as a whole
      (eliminating the need to bifurcate the derivative from its host) if the holder
      elects to account for the whole instrument on a fair value basis. SFAS 155
      also
      clarifies and amends certain other provisions of SFAS 133 and SFAS 140. This
      statement is effective for all financial instruments acquired or issued in
      fiscal years beginning after September 15, 2006. The Company does not
      expect its adoption of this new standard to have a material impact on its
      financial position, results of operations or cash flows.





The
      FASB
      issued SFAS No. 156, “Accounting for Servicing of Financial Assets an
      amendment of FASB Statement No. 140” (“SFAS No. 156”) in March
      2006. SFAS No. 156 requires a company to recognize a servicing asset
      or servicing liability each time it undertakes an obligation to service a
      financial asset. A company would recognize a servicing asset or servicing
      liability initially at fair value. A company will then be permitted to choose
      to
      subsequently recognize servicing assets and liabilities using the amortization
      method or fair value measurement method. SFAS No. 156 is effective for
      fiscal years beginning after September 15, 2006. The Company does not
      expect its adoption of this new standard to have a material impact on its
      financial position, results of operations or cash flows.




On
      July 13, 2006, the FASB issued FASB Interpretation No. 48, “Accounting
      for Uncertainty in Income Taxes-an Interpretation of FASB Statement
      No. 109” (“FIN No. 48”). FIN No 48 clarifies what
      criteria must be met prior to recognition of the financial statement benefit
      of
      a position taken in a tax return. FIN No. 48 will require companies to
      include additional qualitative and quantitative disclosures within their
      financial statements. The disclosures will include potential tax benefits from
      positions taken for tax return purposes that have not been recognized for
      financial reporting purposes and a tabular presentation of significant changes
      during each period. The disclosures will also include a discussion of the nature
      of uncertainties, factors which could cause a change, and an estimated range
      of
      reasonably possible changes in tax uncertainties. FIN No. 48 will also
      require a company to recognize a financial statement benefit for a position
      taken for tax return purposes when it will be more-likely-than-not that the
      position will be sustained. FIN No. 48 will be effective for fiscal
      years beginning after December 15, 2006 **.**The Company does not expect its adoption of this new standard to have
      a
      material impact on its financial position, results of operations or cash
      flows.




On
      September 15, 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements” (“SFAS No. 157”). SFAS No. 157 addresses how
      companies should measure fair value when they are required to use a fair value
      measure for recognition and disclosure purposes under generally accepted
      accounting principles. SFAS No. 157 will require the fair value of an
      asset or liability to be based on a market based measure which will reflect
      the
      credit risk of the company. SFAS No. 157 will also require expanded
      disclosure requirements which will include the methods and assumptions used
      to
      measure fair value and the effect of fair value measures on earnings.
      SFAS No. 157 will be applied prospectively and will be effective for
      fiscal years beginning after November 15, 2007 and to interim periods
      within those fiscal years. The
      Company does not expect its adoption of this new standard to have a material
      impact on its financial position, results of operations or cash
      flows.




In
      September 2006, the Financial Accounting Standards Board issued FASB Statement
      No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
      Postretirement Plans” (“SFAS 158”). SFAS 158 requires the Company to
      record the funded status of its defined benefit pension and other postretirement
      plans in its financial statements. The Company is required to record an asset
      in
      its financial statements if a plan is overfunded or record a liability in its
      financial statements if a plan is underfunded with a corresponding offset to
      shareholders’ equity. Previously unrecognized assets and liabilities are
      recorded as a component of shareholders’ equity in accumulated other
      comprehensive income, net of applicable income taxes. SFAS 158 also
      requires the Company to measure the value of its assets and liabilities as
      of
      the end of its fiscal year ending after December 15, 2008. The Company has
      implemented SFAS 158 using the required prospective method. The recognition
      provisions of SFAS 158 are effective for the fiscal year ending after
      December 15, 2006. The Company does not expect its adoption of this new
      standard to have a material impact on its financial position, results of
      operations or cash flows.


27


In
      December 2006, the FASB issued FSP EITF 00-19-2, Accounting for Registration
      Payment Arrangements (" FSP
      00-19 -2")
      which addresses accounting for registration payment arrangements. FSP
      00-19 -2
      specifies that the contingent obligation to make future payments or otherwise
      transfer consideration under a registration payment arrangement, whether issued
      as a separate agreement or included as a provision of a financial instrument
      or
      other agreement, should be separately recognized and measured in accordance
      with
      FASB Statement No. 5, Accounting for Contingencies. FSP
      00-19 -2
      further clarifies that a financial instrument subject to a registration payment
      arrangement should be accounted for in accordance with other applicable
      generally accepted accounting principles without regard to the contingent
      obligation to transfer consideration pursuant to the registration payment
      arrangement. For registration payment arrangements and financial instruments
      subject to those arrangements that were entered into prior to the issuance
      of
      EITF 00-19-2, this guidance is effective for financial statements issued for
      fiscal years beginning after December 15, 2006 and interim periods within those
      fiscal years. The
      Company has not yet determined the impact that the adoption of FSP 00-19-2
      will
      have on its financial statements.




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose
      to measure many financial instruments, and certain other items, at fair value.
      SFAS 159 applies to reporting periods beginning after November 15, 2007. The
      adoption of SFAS 159 is not expected to have a material impact on the Company’s
      financial condition or results of operations.




**ITEM
      7. FINANCIAL STATEMENTS**




Our
      consolidated financial statements are included beginning immediately following
      the signature page to this report. See Item 13 for a list of the financial
      statements and financial statement schedules included.




**ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**




None.




**ITEM
      8A. CONTROLS AND PROCEDURES**




As
      of the
      end of the period covered by this report, we conducted an evaluation, under
      the
      supervision and with the participation of our chief executive officer and chief
      financial officer of our disclosure controls and procedures (as defined in
      Rule
      13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation,
      our chief executive officer and chief financial officer concluded that our
      disclosure controls and procedures are effective to ensure that information
      required to be disclosed by us in the reports that we file or submit under
      the
      Exchange Act is recorded, processed, summarized and reported, within the time
      periods specified in the Commission’s rules and forms. There was no change in
      our internal controls or in other factors that could affect these controls
      during our last fiscal quarter that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial
      reporting.





**ITEM
      8B. OTHER INFORMATION**





None


28


**PART
      III**




**ITEM
      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
      WITH
      SECTION 16(a) OF THE EXCHANGE ACT**




Information
      required by this Item is incorporated by reference from our definitive proxy
      statement to include the election of directors, to be filed with the Commission
      by April 30, 2007.




**ITEM
      10. EXECUTIVE COMPENSATION**




Information
      required by this Item is incorporated by reference from our definitive proxy
      statement to include the election of directors, to be filed with the Commission
      by April 30, 2007.




**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**




Information
      required by this Item is incorporated by reference from our definitive proxy
      statement to include the election of directors, to be filed with the Commission
      by April 30, 2007.




**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**




Information
      required by this Item is incorporated by reference from our definitive proxy
      statement to include the election of directors, to be filed with the Commission
      by April 30, 2007.





**ITEM
      13. EXHIBITS**




Exhibit
              Number
            Description3(i).1
            Certificate
                of Incorporation filed with the State of Delaware on November 25,
                1997, as
                amended (including Certificate of Merger, filed November 25, 1997,
                Certificate of Designation, filed February 2, 1998, Certificate of
                Amendment, filed May 12, 1998, Certificate of Renewal, filed August
                20,
                2003, Certificate of Amendment, dated August 20, 2003 and Certificate
                of
                Amendment, filed September 30, 2004)(1)3(i).2
            Certificate
                of Amendment to Certificate of Incorporation filed with the State
                of
                Delaware on February 22, 2007(11)3(i).3
            Amended
                and Restated Certificate of Designations, Preferences, Rights and
                Limitations of Special Voting Preferred Stock filed with the State
                of
                Delaware on March 7, 2007(12)3(ii)
            Amended
                and Restated Bylaws of the Company(2)10.1
            Employment
                Agreement by and between the Company and David Perez dated November
                30,
                2004(1)10.2
            Sublease
                by and between the Company and Granite Financial Group dated November
                22,
                2004(1)10.3
            Farmout
                Agreement by and among the Company, Signet Energy, Inc. (f/k/a Surge
                Global Energy (Canada) Ltd.), Northern Alberta Oil Ltd. and Deep
                Well Oil
                & Gas, Inc. dated February 25, 2005(1)10.4
            Farmout
                Amending Agreement by and among the Company, Signet Energy, Inc.
                (f/k/a
                Surge Global Energy (Canada) Ltd.), Northern Alberta Oil Ltd. and
                Deep
                Well Oil & Gas, Inc. dated November 15, 2005(1)10.5
            Form
                of Note and Warrant Purchase Agreement by and between the Company
                and each
                of Mark C. Fritz, Victor G. Mellul and Irving L. Plaksen dated March
                17,
                2005(3)




29





Exhibit
              Number
            Description10.6
            Form
                of Convertible Note by and between the Company and each of Mark C.
                Fritz,
                Victor G. Mellul and Irving L. Plaksen dated March 17,
                2005(3)10.7
            Form
                of Warrant by and between the Company and each of Mark C. Fritz,
                Victor G.
                Mellul and Irving L. Plaksen dated March 17, 2005(3)10.8
            Letter
                Agreements by and between the Company and each of Mark C. Fritz,
                Victor G.
                Mellul and Irving L. Plaksen dated July 17, 2005(1)10.9
            Form
                of Securities Purchase Agreement by and among the Company, Mark Fritz,
                Chet Idziszek, Gary Vandergrift, Burton Gersh and Irving Plaksen
                effective
                as of August 19, 2005, relating to the private placement offering
                of
                common stock and warrants for an aggregate purchase price of
                $300,000(4)10.10
            Form
                of Warrant by and among the Company, Mark Fritz, Chet Idziszek, Gary
                Vandergrift, Burton Gersh and Irving Plaksen effective as of August
                19,
                2005(1)10.11
            Form
                of Registration Rights Agreement by and among the Company, Mark Fritz,
                Chet Idziszek, Gary Vandergrift, Burton Gersh and Irving Plaksen
                effective
                as of August 19, 2005(1)10.12
            Securities
                Purchase Agreement by and between the Company and Pawnee Holding
                Corporation dated October 24, 2005(1)10.13
            Warrant
                by and between the Company and Pawnee Holding Corporation dated October
                24, 2005(1)10.14
            Registration
                Rights Agreement by and between the Company and Pawnee Holding Corporation
                dated October 24, 2005(1)10.15
            Form
                of Subscription Agreement for 7% Convertible Debentures, by and between
                Signet Energy, Inc. (f/k/a Surge Global Energy (Canada) Ltd) and
                certain
                purchasers dated November 15, 2005(1)10.16
            Agency
                Agreement by and among the Company, Signet Energy, Inc. (f/k/a Surge
                Global Energy (Canada) Ltd.), and MGI Securities Inc. dated November
                15,
                2005(1)10.17
            Shareholders
                Agreement by and among the Company, Leigh Cassidy, Fred Kelly and
                Signet
                Energy, Inc. (f/k/a Surge Global Energy (Canada) Ltd.) dated November
                15,
                2005(1)10.18
            Voting
                Trust Agreement by and among the Company, Northern Alberta Oil Ltd.
                and
                Deep Well Oil and Gas (Alberta) Ltd. dated November 15,
                2005(1)10.19
            Trust
                Indenture by and among the Company, Signet Energy, Inc. (f/k/a Surge
                Global Energy (Canada) Ltd.) and Valiant Trust Company dated November
                15,
                2005(1)


30





Exhibit
              Number
            Description10.20
            Registration
                Rights Agreement by and among the Company and MGI Securities, Inc.,
                as
                agent to the purchasers of the debentures dated November 15,
                2005(1)10.21
            Release
                and Indemnification Agreement by and between the Company and Signet
                Energy, Inc. (f/k/a Surge Global Energy (Canada) Ltd.), dated November
                15,
                2005(5)10.22
            Escrow
                Agreement by and among the Company, Signet Energy, Inc. (f/k/a Surge
                Global Energy (Canada) Ltd.) and Valiant Trust Company, dated November
                15,
                2005(5)





10.23
            Securities
                Purchase Agreement by and between the Company and the Zemer Family
                Trust
                dated November 16, 2005(1)10.24
            Warrant
                by and between the Company and the Zemer Family Trust dated November
                16,
                2005(1)10.25
            Registration
                Rights Agreement by and between the Company and the Zemer Family
                Trust
                dated November 16, 2005(1)10.26
            Securities
                Purchase Agreement by and between the Company and Benjamin Financial
                Limited Partnership dated November 30, 2005(1)10.27
            Warrant
                by and between the Company and Benjamin Financial Limited Partnership
                dated November 30, 2005(1)10.28
            Registration
                Rights Agreement by and between the Company and Benjamin Financial
                Limited
                Partnership dated November 30, 2005(1)10.29
            Indenture
                by and between Signet Energy, Inc. (f/k/a Surge Global Energy (Canada)
                Ltd.) and Valiant Trust Company dated December 20, 2005
                (6)10.30
            Form
                of 7% Secured Convertible Debentures Certificate dated December 20,
                2005(6)10.31
            Form
                of Subscription Agreement for Flow-Through Shares by and between
                Signet
                Energy, Inc. (f/k/a Surge Global Energy (Canada) Ltd.) and certain
                purchasers dated December 20, 2005(6)10.32
            Form
                of Subscription Agreement for 7% Secured Convertible Debentures by
                and
                between Signet Energy, Inc. (f/k/a Surge Global Energy (Canada) Ltd.)
                and
                certain purchasers dated December 20, 2005(6)10.33
            Agency
                Agreement by and between Signet Energy, Inc. (f/k/a Surge Global
                Energy
                (Canada) Ltd.) and MGI Securities, Inc. dated December 20,
                2005(6)10.34
            Form
                of Securities Purchase Agreement effective as of March 14, 2006,
                relating
                to the private placement offering of common stock and warrants for
                an
                aggregate purchase price of
                $1,800,000(7)


31





Exhibit
              Number
            Description10.35
            Form
                of Warrant, effective as of March 14, 2006, relating to the private
                placement offering of common stock and warrants for an aggregate
                purchase
                price of $1,800,000(7)10.36
            Form
                of Registration Rights Agreement, effective as of March 14, 2006,
                relating
                to the private placement offering of common stock and warrants for
                an
                aggregate purchase price of $1,800,000(7)10.37
            Form
                of Non-Employee Director Agreement(10)10.38
            Form
                of Nonstatutory Stock Option Agreement(10)10.39
            Consulting
                Agreement by and between the Company and Richard Collato dated October
                6,
                2006(10)10.40
            Securities
                Purchase Agreement by and between the Company and each of Gemini
                Master
                Fund Limited and Mark C. Fritz dated November 28,
                2006(8)10.41
            Registration
                Rights Agreement by and between the Company and each of Gemini Master
                Fund
                Limited and Mark C. Fritz dated November 28, 2006(8)10.42
            Common
                Stock Purchase Warrants dated November 28, 2006 issued by the Company
                to
                each of Gemini Master Fund Limited and Mark C. Fritz(8)10.43
            “Greenshoe”
                Common Stock Purchase Warrants dated November 28, 2006 issued by
                the
                Company to each of Gemini Master Fund Limited and Mark C.
                Fritz(8)10.44
            Stock
                Purchase Agreement among Cold Flow Energy ULC, the Company, Peace
                Oil
                Corp., and Shareholders of Peace Oil Corp. dated November 30,
                2006(8)10.45
            Employment
                Agreement between the Company and William Greene dated December 14,
                2006(9)10.46
            First
                Amendment to Stock Purchase Agreement by and among Cold Flow Energy
                ULC,
                the Company, Peace Oil Corp., and the shareholders of Peace Oil dated
                March 2, 2007(12)10.47
            Voting
                and Exchange Trust Agreement by and among the Company, Cold Flow
                Energy
                ULC, and Olympia Trust Company dated March 2, 2007(12)10.48
            Support
                Agreement by and among the Company, Cold Flow Energy ULC, and 1294697
                Alberta Ltd. dated March 2, 2007(12)10.49
            Promissory
                Note dated March 2, 2007 issued by Cold Flow Energy ULC in the principal
                amount of CDN$1,500,000 with a maturity date of June 30,
                2007(12)


32





Exhibit
              Number
            Description





10.50
            Promissory
                Note dated March 2, 2007 issued by Cold Flow Energy ULC in the principal
                amount of CDN$1,000,000 with a maturity date of July 30,
                2007(12)10.51
            Promissory
                Note dated March 2, 2007 issued by Cold Flow Energy ULC in the principal
                amount of CDN$1,500,000 with a maturity date of August 30,
                2007(12)10.52
            Promissory
                Note dated March 2, 2007 issued by Cold Flow Energy ULC in the principal
                amount of CDN$1,600,000 with a maturity date of December 31,
                2007(12)10.53
            Petroleum,
                Natural Gas and General Rights Conveyance by and among 1304146 Alberta
                Ltd., Peace Oil Corp., Cold Flow Energy ULC, and the Company dated
                March
                2, 2007(12)10.54
            Escrow
                Agreement by and among Burstall Winger LLP, Peace Oil Corp., the
                Company,
                Cold Flow Energy ULC, and 1304146 Alberta Ltd. dated March 2,
                2007(12)10.55
            Royalty
                Agreement by and between 1304146 Alberta Ltd. and Peace Oil Corp.
                dated
                March 2, 2007(12)10.56
            Warrant
                to purchase 1,000,000 shares of Surge common stock dated March 2,
                2007(12)21.0
            Subsidiaries
                of Company31.1
            Certification
                by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
                of the Exchange Act, promulgated pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2
            Certification
                by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
                of the Exchange Act, promulgated pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1
            Certification
                by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
                of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of
                the
                United States Code, promulgated pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.32.2
            Certification
                by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
                of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of
                the
                United States Code, promulgated pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.





_________________




(1)
            Incorporated
                by reference to the Company’s Registration Statement on Form SB-2, filed
                with the Securities and Exchange Commission on December 30,
                2005.




(2)
            Incorporated
                by reference to the Company’s Current Report on Form 8-K, filed with the
                Securities and Exchange Commission on October 25,
                2006.




(3)
            Incorporated
                by reference to the Company’s Current Report on Form 8-K, filed with the
                Securities and Exchange Commission on March 24,
                2005.


33




(4)
            Incorporated
                by reference to the Company’s Current Report on Form 8-K, filed with the
                Securities and Exchange Commission on August 25,
                2005.




(5)
            Incorporated
                by reference to the Company’s Annual Report for the fiscal year ended
                December 31, 2005 on Form 10-KSB, filed with the Securities and Exchange
                Commission on April 17, 2006.




(6)
            Incorporated
                by reference to the Company’s Current Report on Form 8-K, filed with the
                Securities and Exchange Commission on December 28,
                2005.(7)
            Incorporated
                by reference to the Company’s Current Report on Form 8-K, filed with the
                Securities and Exchange Commission on March 23, 2006.(8)
            Incorporated
                by reference to the Company’s Current Report on Form 8-K, filed with the
                Securities and Exchange Commission on December 4, 2006.(9)
            Incorporated
                by reference to the Company’s Current Report on Form 8-K, filed with the
                Securities and Exchange Commission on December 14,
                2006.(10)
            Incorporated
                by reference to the Company's Registration Statement on Form SB-2,
                filed
                with the Securities and Exchange Commission on December 20, 2006.(11)
            Incorporated
                by reference to the Company’s Current Report on Form 8-K, filed with the
                Securities and Exchange Commission on February 22,
                2007.(12)
            Incorporated
                by reference to the Company’s Current Report on Form 8-K, filed with the
                Securities and Exchange Commission on March 8, 2007.


**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**




Information
      required by this Item is incorporated by reference from our definitive proxy
      statement to include the election of directors, to be filed with the Commission
      by April 30, 2007.


34


**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**SURGE
                GLOBAL ENERGY, INC.**Dated:
                April 17,2007
            By:
            /s/
                David
                PerezDavid
                Perez
              Chief
                Executive Officer
              (Principal
                Executive Officer)Dated:
                April 17,2007
            By:
            /s/
                William
                GreeneWilliam
                Greene
              Chief
                Financial Officer
              (Principal
                Accounting Officer)






In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.




SIGNATURE
            TITLE
            DATE/s/
                David Perez
            Chairman
                of the Board, Chief Executive Officer and Director
            April
                17, 2007/s/
                William Greene
            Chief
                Financial Officer
            April
                17, 2007/s/
                Chet Idziszek
            Director
            April
                17, 2007/s/
                Robert B. Fields
            Director
            April
                17, 2007/s/
                Kenneth Druck, Ph. D.
            Director
            April
                17, 2007/s/
                Richard Collato
            Director
            April
                17, 2007/s/
                Thomas A. Page
            Director
            April
                17, 2007/s/
                John Stiska
            Director
            April
                17, 2007




35


**SECURITIES
        AND EXCHANGE COMMISSION**
 
 **WASHINGTON,
        D.C. 20549**
 
 
 
 **FINANCIAL
        STATEMENTS**
 
 **DECEMBER
        31, 2006 AND 2005**
 
 
 
 **FORMING
        A PART OF ANNUAL REPORT**
 **PURSUANT
        TO THE SECURITIES EXCHANGE ACT OF 1934**
 
 
 **SURGE
        GLOBAL ENERGY, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
  
  **SURGE
        GLOBAL ENERGY, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **INDEX
        TO FINANCIAL STATEMENTS**
  
 Page
                  NoReport
                  of Independent Registered Certified Public Accounting Firm
              
              F-2Consolidated
                  Balance Sheet at December 31, 2006
              
              F-3Consolidated
                  Statements of Losses for the Years Ended December 31, 2006 and
                  2005, and
                  for the period from
                January
                  1, 2005 (date of inception of development stage) through December
                  31, 2006
              
              F-4Consolidated
                  Statements of Stockholders' Equity for the Years ended December
                  31, 2006
                  and 2005, and for the
                period
                  from January 1, 2005 (date of inception of development stage) through
                  December 31, 2006
              
              F-5
                  ~ F-7Consolidated
                  Statements of Cash Flows for the Years Ended December 31, 2006
                  and 2005,
                  and for the period from
                January
                  1, 2005 (date of inception of development stage) through December
                  31,
                  2006
              
              F-8
                  ~ F-9Notes
                  to Consolidated Financial statements
              
              F-10
                  ~ F-32
 
  F-1
  **RUSSELL
        BEDFORD STEFANOU MIRCHANDANI LLP**
 **Certified
        Public Accountants**
 
 
 **REPORT
        OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING
        FIRM**
 
  To
        the
        Board of Directors
 Surge
        Global Energy, Inc.
 San
        Diego, California
 
 
 We
        have
        audited the accompanying consolidated balance sheet of Surge Global Energy,
        Inc.
        (the “Company”), as of December 31, 2006 and the related consolidated statements
        of losses, stockholders’ equity, and cash flows for the two years then ended,
        and for the period January 1, 2005 (date of inception of development stage)
        through December 31, 2006. These financial statements are the responsibility
        of
        the company’s management. Our responsibility is to express an opinion on these
        financial statements based upon our audits.
 
 We
        conducted our audits in accordance with standards of the Public Company
        Accounting Oversight Board (United States of America). Those standards require
        that we plan and perform the audit to obtain reasonable assurance about whether
        the financial statements are free of material misstatements. An audit includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements. An audit also includes assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall financial statement presentation. We believe our audits
        provide a reasonable basis for our opinion.
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated financial position of the Company
        as
        of December 31, 2006, and the results of its operations and its cash flows
        for
        the two years then ended, and for the period January 1, 2005 (date of inception
        of development stage) through December 31, 2006, in conformity with accounting
        principles generally accepted in the United States of America.
 As
          discussed in Note A to the consolidated financial statements, the Company
          adopted the provisions of Statement of Financial Accounting Standards No.
          123
          (R), “Shared-Based Payment,” effective January 1, 2006 .
 
 The
        accompanying consolidated financial statements have been prepared assuming
        the
        Company will continue as a going concern. As discussed in Note M to the
        consolidated financial statements, the Company is experiencing difficulty
        in
        generating sufficient cash flow to meet its obligations and sustain its
        operations, which raises substantial doubt about its ability to continue
        as a
        going concern. Management's plans in regard to these matters are also described
        in Note M. The financial statements do not include any adjustments that might
        result from the outcome of this uncertainty.
 
 
 /s/RUSSELL
                  BEDFORD STEFANOU MIRCHANDANI LLPRussell Bedford Stefanou Mirchandani LLPCertified Public Accountants
  
 McLean,
        Virginia
 March
        21,
        2007
  F-2
 
 **SURGE
                  GLOBAL ENERGY, INC.****(A
                  DEVELOPMENT STAGE COMPANY)****CONSOLIDATED
                  BALANCE SHEET**
  **DECEMBER
                  31,**
                **2006****ASSETS**Current
                  assets:Cash
                  and cash equivalents (Note A)
              
              $
              1,527,073Other
                  receivable
              
              
              129Prepaid
                  expense
              
              
              25,914Total
                  current assets
              
              
              1,553,116Property
                  and equipment, net (Note A)
              
              
              16,918Investment
                  in Signet (Note C)
              
              
              4,597,217Investment
                  in Peace Oil (Note D)
              
              
              133,449Total
                  Assets
              
              $
              6,300,700
  **LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable and accrued liabilities (Note E)
              
              $
              603,540Total
                  current liabilities
              
              
              603,540Warrant
                  liability (Note F)
              
              
              2,309,400Total
                  long-term liabilities
              
              
              2,309,400Commitment
                  and contingencies (Note L )
              
              
              -Stockholders'
                  equity:Preferred
                  stock, par value $0.001 per share; 10,000,000 shares authorized:Series
                  A - none issued and outstanding (Note G)
              
              
              -Series
                  B - none issued and outstanding (Note G)
              
              
              -Common
                  stock, par value $0.001 per share; 200,000,000 shares
                  authorized**;**30,587,097****shares
                  issued and outstanding (Note G)
              
              
              30,587Additional
                  paid-in capital
              
              
              40,198,386Accumulated
                  other comprehensive income: Foreign currency translation
                  adjustment
              
              
              153,600Accumulated
                  deficit
              
              
              (12,337,511
              )Deficit
                  from inception of development stage
              
              
              (24,657,302
              )Total
                  stockholders' equity
              
              
              3,387,760Total
                  liabilities and stockholders' equity
              
              $
              6,300,700
  See
                  accompanying footnotes to consolidated financial statements
 F-3
 
 **SURGE
                  GLOBAL ENERGY, INC.****(A
                  DEVELOPMENT STAGE COMPANY)****CONSOLIDATED
                  STATEMENTS OF LOSSES**
 For
                    the period fromJanuary
                    1, 2005 (dateof
                    inception ofdevelopment
                    stage)2006
                
                2005
                
                through
                    December 31, 2006Operating
                    expenses:Selling,
                    general and administrative expenses
                
                $
                3,003,780
                
                $
                2,044,315
                
                $
                5,048,095Amortization
                    of deferred compensation (Note H)
                
                
                -
                
                
                3,039,038
                
                
                3,039,038Non
                    cash compensation to employees (Note H)
                
                
                4,779,130
                
                
                4,224,583
                
                
                9,003,713Depreciation
                    and amortization
                
                
                372,762
                
                
                74,896
                
                
                447,658Oil
                    and Gas impairment (Note B and C)
                
                
                6,296,016
                
                
                25,000
                
                
                6,321,016Total
                    operating expenses
                
                
                14,451,688
                
                
                9,407,832
                
                
                23,859,520Loss
                    from operations
                
                
                (14,451,688
                )
                
                (9,407,832
                )
                
                (23,859,520
                )Equity
                    in losses from affiliates (Note C)
                
                
                (1,043,085
                )
                
                -
                
                
                (1,043,085
                )Net
                    gain (loss) on revaluation of warrant liability (Note F)
                
                
                (502,161
                )
                
                70,900
                
                
                (431,261
                )Interest
                    income (expense), net
                
                
                (1,048,186
                )
                
                (1,954,346
                )
                
                (3,002,532
                )Loss
                    from operations, before income taxes, and minority
                    interest
                
                
                (17,045,120
                )
                
                (11,291,278
                )
                
                (28,336,398
                )Provision
                    for income taxes (Note K)
                
                
                -
                
                
                -
                
                
                -Loss
                    before minority interest
                
                
                (17,045,120
                )
                
                (11,291,278
                )
                
                (28,336,398
                )Loss
                    applicable to minority interest (Note C)
                
                
                1,119,027
                
                
                2,560,069
                
                
                3,679,096Loss
                    available to common stockholders
                
                $
                (15,926,093
                )
                $
                (8,731,209
                )
                $
                (24,657,302
                )Other
                    comprehensive income (loss): foreign currency translation
                    loss
                
                
                339,014
                
                
                (185,414
                )
                
                153,600Comprehensive
                    loss
                
                $
                (15,587,079
                )
                $
                (8,916,623
                )
                $
                (24,503,702
                )Loss
                    per common share (basic and diluted) (Note J)
                
                $
                (0.58
                )
                $
                (0.36
                )
                $
                (0.97
                )Weighted
                    average shares outstanding
                
                
                27,360,878
                
                
                24,262,535
                
                
                25,437,728
  See
        accompanying footnotes to consolidated financial statements
 F-4
  **SURGE
                  GLOBAL ENERGY, INC.****(A
                  DEVELOPMENT STAGE COMPANY)****CONSOLIDATED
                  STATEMENTS OF STOCKHOLDERS' EQUITY****FOR
                  THE YEARS ENDED DECEMBER 31, 2006 AND 2005****AND
                  FOR THE PERIOD FROM JANUARY 1, 2005 (DATE OF INCEPTION OF DEVELOPMENT
                  STAGE) THROUGH DECEMBER 31,
                  2006**
  Preferred
                  Stock Shares
              
              Preferred
                  Stock Amount
              
              Common
                  Stock Shares
              
              Common
                  Stock Amount
              
              Additional
                  Paid-in Capital
              
              Deferred
                  Compensation
              
              Common
                  Stock Subscription
              
              Foreign
                  Currency Translation Adjustment
              
              Accumulated
                  Deficit during Development Stage
              
              Accumulated
                  Deficit
              
              Total**Balance
                  at January 1, 2005**
              
              
              **-**
              
              **$**
              **-**
              
              
              **23,367,097**
              
              **$**
              **23,367**
              
              **$**
              **18,996,881**
              
              **$**
              **(7,020,985**
              **)**
              **$**
              **-**
              
              **$**
              **-**
              
              **$**
              **-**
              
              **$**
              **(12,337,511**
              **)**
              **$**
              **(338,248**
              **)**Issuance
                  of common stock in February 2005 in exchange for stock options
                  exercised
                  at $0.25 per share
              
              
              -
              
              
              -
              
              
              100,000
              
              
              100
              
              
              24,900
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              25,000Issuance
                  of common stock in August 2005 in exchange for cash, net of costs
                  and fees
                  at $1.00 per share
              
              
              -
              
              
              -
              
              
              300,000
              
              
              300
              
              
              299,700
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              300,000Issuance
                  of common stock in August 2005 in exchange for conversion of convertible
                  notes payable at $1.00 per share
              
              
              -
              
              
              -
              
              
              1,675,000
              
              
              1,675
              
              
              1,673,325
              
              
              -
              
              
              35,000
              
              
              -
              
              
              -
              
              
              -
              
              
              1,710,000Issuance
                  of common stock in October 2005 in exchange for convertible notes
                  converted in August 2005
              
              
              -
              
              
              -
              
              
              35,000
              
              
              35
              
              
              34,965
              
              
              -
              
              
              (35,000
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Issuance
                  of common stock in November 2005 in exchange for cash, net of costs
                  and
                  fees at $1.00 per share
              
              
              -
              
              
              -
              
              
              800,000
              
              
              800
              
              
              799,200
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              800,000Beneficial
                  conversion feature in connection with issuance of convertible notes
                  payable (Note G)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,022,492
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,022,492Value
                  of warrants attached to convertible notes payable (Note G)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              629,192
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              629,192Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              (185,414
              )
              
              -
              
              
              -
              
              
              (185,414
              )Amortization
                  of deferred compensation (Note H)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,039,038
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,039,038Valuation
                  of warrant liabilities in connection with private placement (Note
                  F)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,245,100
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,245,100
              )Other
                  stock options awards granted pursuant to employment agreement (Note
                  H)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              202,418
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              202,418Increase
                  in value of investment in Signet Energy, Inc. (Note C)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,890,785
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,890,785Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (8,731,209
              )
              
              -
              
              
              (8,731,209
              )**Balance
                at December 31, 2005**
              
              
              **-**
              
              $
              **-**
              
              
              **26,277,097**
              
              **$**
              **26,277**
              
              **$**
              **28,328,758**
              
              **$**
              **(3,981,947**
              )
              **$**
              -
              
              **$**
              **(185,414**
              )
              **$**
              **(8,731,209**
              **)**
              **$**
              **(12,337,511**
              **)**
              **$**
              **3,118,954**
  See
        accompanying notes to consolidated financial information
  F-5
 
 **SURGE
                  GLOBAL ENERGY, INC.****(A
                  DEVELOPMENT STAGE COMPANY)****CONSOLIDATED
                  STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)****FOR
                  THE YEARS ENDED DECEMBER 31, 2006 AND 2005****AND
                  FOR THE PERIOD FROM JANUARY 1, 2005 (DATE OF INCEPTION OF DEVELOPMENT
                  STAGE) THROUGH DECEMBER 31,
                  2006**
  Preferred
                  Stock Shares
              
              Preferred
                  Stock Amount
              
              Common
                  Stock Shares
              
              Common
                  Stock Amount
              
              Additional
                  Paid-in Capital
              
              Deferred
                  Compensation
              
              Common
                  Stock Subscription
              
              Foreign
                  Currency Translation Adjustment
              
              Accumulated
                  Deficit during Development Stage
              
              Accumulated
                  Deficit
              
              Total**Balance
                  at December 31, 2005**
              
              
              **-**
              
              **$**
              **-**
              
              
              **26,277,097**
              
              **$**
              **26,277**
              
              **$**
              **28,328,758**
              
              **$**
              **(3,981,947**
              **)**
              **$**
              **-**
              ****
              **$**
              **(185,414**
              **)**
              **$**
              **(8,731,209**
              **)**
              **$**
              **(12,337,511**
              **)**
              **$**
              **3,118,954**Reversal
                  of unamortized deferred compensation upon adoption of SFAS 123R
                  (Note
                  H)
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              (3,981,947
              )
              
              3,981,947
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**Issuance
                  of common stock in April 2006 in exchange for cash, net of costs
                  and fees
                  at $1.50 per share
              
              
              **-**
              
              
              **-**
              
              
              1,200,000
              
              
              1,200
              
              
              1,798,800
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              1,800,000Shares
                  returned and cancelled in June 2006 related to the acquisition
                  of Phillips
                  & King International Inc. during August 2000
              
              
              **-**
              
              
              **-**
              
              
              (450,000
              )
              
              (450
              )
              
              450
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**Issuance
                  of common stock in June 2006 in exchange for convertible notes
                  in
                  subsidiary
              
              
              **-**
              
              
              **-**
              
              
              160,000
              
              
              160
              
              
              178,456
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              178,616Issuance
                  of common stock in July 2006 in exchange for stock options exercised
                  at
                  $0.25 per share
              
              
              **-**
              
              
              **-**
              
              
              400,000
              
              
              400
              
              
              99,600
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              100,000Issuance
                  of common stock in November 2006 in exchange for cash, net of costs
                  and
                  fees at $0.45 per share
              
              
              **-**
              
              
              **-**
              
              
              3,000,000
              
              
              3,000
              
              
              1,347,000
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              1,350,000Conversion of
                  warrant liability upon registration of warrants in May
                  2006
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              3,787,861
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              3,787,861Valuation
                  of warrant liabilities in connection with private placement (Note
                  F)
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              (3,420,900
              )
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              (3,420,900
              )Gain
                  on investment
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              4,147,556
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              4,147,556Conversion
                  to equity method
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              3,133,622
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              3,133,622Employee
                  stock option expense (Note H)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,138,639
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,138,639Other
                  stock options awards granted
                pursuant
                  to employment agreement (Note H)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              640,491
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              640,491Foreign
                  currency translation adjustment
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              
              
              
              **-**
              
              
              **-**
              
              
              339,014
              
              
              -
              
              
              -
              
              
              339,014Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (15,926,093
              )
              
              
              
              
              (15,926,093
              )**Balance
                  at December 31, 2006**
              
              
              **-**
              
              **$**
              **-**
              
              
              **30,587,097**
              
              **$**
              **30,587**
              
              **$**
              **40,198,386**
              
              **$**
              **-**
              
              **$**
              **-**
              
              **$**
              **153,600**
              
              **$**
              **(24,657,302**
              )
              **$**
              **(12,337,511**
              **)**
              **$**
              **3,387,760**
 
 See
        accompanying notes to consolidated financial information
 F-6
 
 **SURGE
                  GLOBAL ENERGY, INC.****(A
                  DEVELOPMENT STAGE COMPANY)****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS**
  For
                  the period fromJanuary
                  1, 2005 (dateof
                  inception ofdevelopment
                  stage)2006
              
              2005
              
              through
                  December 31, 2006**Cash
                  flows from operating activities:**Net
                  loss
              
              $
              (15,926,093
              )
              $
              (8,731,209
              )
              $
              (24,657,302
              )Minority
                  interest
              
              
              (1,119,027
              )
              
              (2,560,069
              )
              
              (3,679,096
              )Adjustments
                  to reconcile net loss to net cash (used in) operating
                  activities:Share
                  of affiliate loss
              
              
              1,043,085
              
              
              -
              
              
              1,043,085Depreciation
                  and amortization
              
              
              372,762
              
              
              74,896
              
              
              447,658Impairment
                  (Note B and C)
              
              
              6,296,016
              
              
              25,000
              
              
              6,321,016Amortization
                  and write-off of debt discount - beneficial conversion
                feature
                  of convertible debenture (Note G)
              
              
              -
              
              
              1,022,492
              
              
              1,022,492Amortization
                  and write-off of discount attributable to warrants (Note
                  G)
              
              
              -
              
              
              629,192
              
              
              629,192Stock
                  options granted pursuant to employment agreement (Note H)
              
              
              4,779,130
              
              
              202,417
              
              
              4,981,547Amortization
                  of deferred compensation costs (Note H)
              
              
              -
              
              
              3,039,038
              
              
              3,039,038Gain/loss
                  on revaluation of warrant liability (Note F)
              
              
              502,161
              
              
              (70,900
              )
              
              431,261Debt
                discount
              
              
              817,944
              
              
              192,735
              
              
              1,010,679Founders
                stock
              
              
              -
              
              
              4,265,640
              
              
              4,265,640Increase/decrease
                  in:Other receivable
              
              
              290,738
              
              
              (418,834
              )
              
              (128,096
              )Prepaid
                  expenses
              
              
              (34,173
              )
              
              (16,297
              )
              
              (50,470
              )Other
                  assets
              
              
              80,958
              
              
              -
              
              
              80,958Accounts
                  payable and accrued liabilities
              
              
              (126,568
              )
              
              587,171
              
              
              460,603**Net
                  cash used in operating activities**
              
              
              (3,023,067
              )
              
              (1,758,728
              )
              
              (4,781,795
              )**Cash
                  flows from investing activities:**Purchase
                  of property and equipment
              
              
              (73,384
              )
              
              (24,303
              )
              
              (97,687
              )Deposits
              
              
              (9,913
              )
              
              -
              
              
              (9,913
              )Capital
                  expenditures in oil and gas properties
              
              
              (1,444,708
              )
              
              (10,324,225
              )
              
              (11,768,933
              )Asset
                retirement
                obligation
              
              
              -
              
              
              51,273
              
              
              51,273Oil
                leases
              
              
              -
              
              
              6,314,820
              
              
              6,314,820Deduct
                Signet June 2006 cash balance
              
              
              (5,626,405
              )
              
              -
              
              
              (5,626,405
              )**Net
                  cash used in investing activities**
              
              
              (7,154,410
              )
              
              (3,982,435
              )
              
              (11,136,845
              )**Cash
                  flows from financing activities:**Proceeds
                  from sale of common stock and stock subscription, net of costs
                  and fees
                  (Note I)
              
              
              3,150,000
              
              
              1,100,000
              
              
              4,250,000Proceeds
                  from the exercise of options (Note G)
              
              
              100,000
              
              
              25,000
              
              
              125,000Proceeds
                  from convertible debenture (Note G and H)
              
              
              -
              
              
              1,710,000
              
              
              1,710,000Proceeds
                from notes
                payable, gross
              
              
              -
              
              
              10,421,933
              
              
              10,421,933Proceeds
                from Signet
                stock, net of costs and fees
              
              
              -
              
              
              1,769,602
              
              
              1,769,602Share
                Issuance
                costs
              
              
              -
              
              
              (124,987
              )
              
              (124,987
              )Deferred
                financing costs
              
              
              -
              
              
              (1,208,375
              )
              
              (1,208,375
              )**Net
                  cash provided by financing activities**
              
              
              3,250,000
              
              
              13,693,173
              
              
              16,943,173Effect
                  of exchange rates on cash and cash equivalents
              
              
              342,605
              
              
              -
              
              
              342,605Net
                  (decrease) increase in cash and cash equivalents
              
              
              (6,584,872
              )
              
              7,952,010
              
              
              1,367,138Cash
                  and cash equivalents at the beginning of the year
              
              
              8,111,945
              
              
              159,935
              
              
              159,935Cash
                  and cash equivalents at the end the year
              
              $
              1,527,073
              
              $
              8,111,945
              
              $
              1,527,073
 
 See
        accompanying footnotes to consolidated financial statements
 F-7
 
 **SURGE
        GLOBAL ENERGY, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS (Continued)**
 (A
        DEVELOPMENT STAGE
        COMPANY)
  For
                  the period fromJanuary
                  1, 2005 (dateof
                  inception ofdevelopment
                  stage)2006
              
              2005
              
              through
                  December 31, 2006Supplemental
                  Disclosures of Cash Flow Information:Cash
                  paid during the year for interest
              
              $
              -
              
              $
              -
              
              $
              -Cash
                  paid during the year for taxes
              
              
              -
              
              
              -
              
              
              -Supplemental
                  Disclosures of Non-Cash Transactions:Amortization
                  of debt discount - beneficial conversion feature of convertible
                  debenture
                  (Note G)
              
              
              
              
              
              1,022,492
              
              
              1,022,492Amortization
                  of discount attributable to warrants (Note G)
              
              
              
              
              
              629,192
              
              
              629,192Stock
                  options granted to Company officer pursuant to employment agreement
                  (Note
                  H)
              
              
              4,779,130
              
              
              202,417
              
              
              4,981,547Amortization
                  of deferred compensation costs (Note H)
              
              
              
              
              
              3,039,038
              
              
              3,039,038Gain
                  on revaluation of warrant liability (Note F)
              
              
              502,161
              
              
              (70,900
              )
              
              431,261Common
                  stock issued in exchange for convertible notes payable (Note
                  G)
              
              
              
              
              
              1,710,000
              
              
              1,710,000
  See
        accompanying footnotes to consolidated financial statements
  F-8
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 
 **NOTE
        A - SUMMARY OF ACCOUNTING POLICIES**
 
 A
        summary
        of the significant accounting policies applied in the preparation of the
        accompanying consolidated financial statements follows.
 
 Business
        and Basis of Presentation
 
 The
        consolidated financial statements include the accounts of Surge Global Energy,
        Inc., Signet Energy, Inc., (formerly Surge Global Energy (Canada), Ltd.)
        and
        Cold Flow Energy ULC, collectively the “Company”.
 
 As
        previously reported and as of July 7, 2006, we deconsolidated Signet Energy,
        Inc. (formerly Surge Surge Global Energy (Canada) Ltd.) from our consolidated
        financial statements (See Note C - Investment in Signet for further
        discussion).
 
 In
        January 2005, as a result of the Company disposing of its tobacco wholesale
        business in December 2004, and restructuring its management and ownership,
        the
        Company began implementing plans to establish an oil and gas development
        business. As a result, the Company is a development stage enterprise, as
        defined
        by Statement of Financial Accounting Standards No. 7 (“SFAS 7”) and is seeking
        to explore the acquisition and development of oil and gas properties in the
        United States, Canada and Argentina. From its inception of development stage
        through the date of these financial statements, the Company has not generated
        any revenues and has incurred significant operating expenses. Consequently,
        its
        operations are subject to all risks inherent in the establishment of a new
        business enterprise. For the period from inception of development stage through
        December 31, 2006, the Company has accumulated losses of
        $24,657,302.
 
 Oil
        and Gas Properties
 
 The
        Company follows the full cost accounting method to account for the costs
        incurred in the acquisition, exploration, exploitation, development and
        production of oil and gas reserves. All costs, including internal costs,
        directly related to acquisition, exploration, exploitation and development
        activities, are capitalized as oil and gas property costs. The capitalized
        costs
        of oil and gas properties, excluding unevaluated or unproven properties,
        are
        amortized using a unit-of-production method based on estimated proved
        recoverable oil and gas reserves. Amortization of unevaluated property costs
        begins when the properties become proved or their values become impaired.
        Impairment of unevaluated prospects is assessed based on management’s intention
        with regard to future exploration and development of individually significant
        properties and the ability of the Company to obtain funds to finance such
        exploration and development. The Company anticipates its unevaluated property
        costs to remain as unevaluated for no longer than two years.
 
 Under
        full cost accounting rules for each cost center, capitalized costs of evaluated
        oil and gas properties, including asset retirement costs, less accumulated
        amortization and related deferred income taxes, may not exceed an amount
        (the
“cost ceiling”) equal to the sum of (a) the present value of future net cash
        flows from estimated production of proved oil and gas reserves, based on
        current
        economic and operating conditions, discounted at 10%, plus (b) the cost of
        properties not being amortized, plus (c) the lower of cost or estimated fair
        value of any unproved properties included in the costs being amortized, less
        (d)
        any income tax effects related to differences between the book and tax basis
        of
        the properties involved. If capitalized costs exceed this limit, the excess
        is
        charged to earnings.
 
 Given
        the
        volatility of oil and gas prices, it is reasonably possible that the estimate
        of
        discounted future net cash flows from proved oil and gas reserves could change
        in the near term. If oil and gas prices decline in the future, even if only
        for
        a short period of time, it is possible that additional impairments of oil
        and
        gas properties could occur. In addition, it is reasonably possible that
        additional impairments could occur if costs are incurred in excess of any
        increases in the present value of future net cash flows from proved oil and
        gas
        reserves, or if properties are sold for proceeds less than the discounted
        present value of the related proved oil and gas reserves.
  F-9
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        A - SUMMARY OF ACCOUNTING POLICIES (Continued)**
 
 Investment
        in unconsolidated subsidiary
 
 Investee
        entities that the Company can exercise significant influence, but not control,
        are accounted for under the equity method of accounting. Whether the Company
        exercises significant influence with respect to an investee depends on an
        evaluation of several factors, among others, representation of the company’s
        board of directors and ownership level, generally 20% to 50% interest in
        the
        voting securities of the company including voting rights associated with
        the
        Company’s holdings in common, preferred and other convertible instruments in the
        company. Under the equity method of accounting, the Company’s share of the
        earnings or losses of these companies is included in the equity income (loss)
        section of the consolidated statements of operations.
 
 A
        loss in
        value of an investment that is other than a temporary decline is recognized
        as a
        charge to operations. Evidence of a loss in value might include, but would
        not
        necessarily be limited to, absence of an ability to recover the carrying
        amount
        of the investment or inability of the investee to sustain an earnings capacity
        that would justify the carrying amount of the investment.
 
 Cash
        Equivalents
  For
        purposes of the Statements of Cash Flows, the Company considers all highly
        liquid debt instruments purchased with a maturity date of three months or
        less
        to be cash equivalents.
 
 Property
        and Equipment
 
 Property
          and equipment are stated at cost. When retired or otherwise disposed, the
          related carrying value and accumulated depreciation are removed from the
          respective accounts and the net difference less any amount realized from
          disposition, is reflected in earnings. For financial statement purposes,
          property and equipment are depreciated using the straight-line method over
          their
          estimated useful lives of the assets. Depreciation expenses from operations
          amounted to $372,762 and $74,896 for the years ended December 31, 2006
          and 2005,
          respectively. As previously reported and as of July 7, 2006, we deconsolidated
          Signet Energy, Inc. (formerly Surge Global Energy (Canada) Ltd.) from our
          consolidated financial statements (See Note C - Investment in Signet for
          further
          discussion). For the year ended December 31, 2006 and net of the deconsolidation
          entries, assets and accumulated depreciation values were reduced to correspond
          to the table listed below. Maintenance, repairs, and minor renewals are
          charged
          against earnings when incurred. Additions and major renewals are capitalized.
 
 December
                  31, 2006Furniture
              
              $
              23,506Accumulated
                  depreciation
              
              
              (6,588
              )Property
                  and equipment, net
              
              $
              16,918
 
  F-10
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        A - SUMMARY OF ACCOUNTING POLICIES (Continued)**
 
 Impairment
        of Long-Lived Assets
  The
        Company has adopted Statement of Financial Accounting Standards No. 144 (“SFAS
        144”). The Statement requires that long-lived assets and certain identifiable
        intangibles held and used by the Company be reviewed for impairment whenever
        events or changes in circumstances indicate that the carrying amount of an
        asset
        may not be recoverable. Events relating to recoverability may include
        significant unfavorable changes in business conditions, recurring losses,
        or a
        forecasted inability to achieve break-even operating results over an extended
        period. The Company evaluates the recoverability of long-lived assets based
        upon
        forecasted undercounted cash flows. Should an impairment in value be indicated,
        the carrying value of intangible assets will be adjusted, based on estimates
        of
        future discounted cash flows resulting from the use and ultimate disposition
        of
        the asset. SFAS No. 144 also requires assets to be disposed of be reported
        at
        the lower of the carrying amount or the fair value less costs to sell. For
        the
        year ended December 31, 2006, the Company recorded an impairment charge of
        $6,296,016 (Note C).
  Income
        Taxes
  Income
        taxes are provided based on the liability method for financial reporting
        purposes in accordance with the provisions of Statement of Financial Accounting
        Standards No. 109, “Accounting for Income Taxes.” Under this method deferred tax
        assets and liabilities are recognized for the future tax consequences
        attributable to differences between the financial statement carrying amounts
        of
        existing assets and liabilities and are measured using enacted tax rates
        expected to apply to taxable income in the years in which those temporary
        differences are expected to be removed or settled. The effect on deferred
        tax
        assets and liabilities of a change in tax rates is recognized in the statements
        of operations in the period that includes the enactment date.
  Earnings
        (Loss) Per Share
 
 The
        Company has adopted Statement of Financial Accounting Standards No. 128,
        "Earnings Per Share," specifying the computation, presentation and disclosure
        requirements of earnings per share information. Basic earnings (loss) per
        share
        has been calculated based upon the weighted average number of common shares
        outstanding. During the years ended December 31, 2006 and 2005, convertible
        debt
        and security, stock options and warrants were excluded as common stock
        equivalents in the diluted earnings per share because they are anti dilutive.
        The weighted average number of common shares outstanding used in the computation
        of earnings (loss) per share was 27,360,878 and 24,262,535 for the year ended
        December 31, 2006 and 2005 respectively.
 
 Use
        of
        Estimates
  The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect certain reported amounts and disclosures. Accordingly, actual results
        could differ from those estimates.
  Revenue
        Recognition
  For
        revenue from product sales, the Company recognizes revenue in accordance
        with
        Staff Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), which
        superceded Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL
        STATEMENTS ("SAB101").
 
 SAB
        101
        requires that four basic criteria must be met before revenue can be recognized:
        (1) persuasive evidence of an arrangement exists; (2) delivery has occurred;
        (3)
        the selling price is fixed and determinable; and (4) collectibility is
        reasonably assured. Determination of criteria (3) and (4) are based on
        management’s judgments regarding the fixed nature of the selling prices of the
        products delivered and the collectibility of those amounts. Provisions for
        discounts and rebates to customers, estimated returns and allowances, and
        other
        adjustments are provided for in the same period the related sales are recorded.
        The Company defers any revenue for which the product has not been delivered
        or
        is subject to refund until such time that the Company and the customer jointly
        determine that the product has been delivered or no refund will be
        required.
  SAB
        104
        incorporates Emerging Issues Task Force 00-21 ("EITF 00-21"),
        MULTIPLE-DELIVERABLE REVENUE ARRANGEMENTS. EITF 00-21 addresses accounting
        for
        arrangements that may involve the delivery or performance of multiple products,
        services and/or rights to use assets. The effect of implementing EITF 00-21
        on
        the Company's consolidated financial position and results of operations was
        not
        significant.
  F-11
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        A - SUMMARY OF ACCOUNTING POLICIES (Continued)**
 
 Advertising
  The
        Company follows the policy of charging the costs of advertising to expenses
        incurred. For the years ended December 31, 2006 and 2005, the Company incurred
        $112,770 and $101,827 advertising costs, respectively.
  Research
        and Development
  The
        Company accounts for research and development costs in accordance with the
        Financial Accounting Standards Board’s Statement of Financial Accounting
        Standards No. 2 (“SFAS 2”), “Accounting for Research and Development Costs.
        Under SFAS 2, all research and development costs must be charged to expense
        as
        incurred. Accordingly, internal research and development costs are expensed
        as
        incurred. Third-party research and developments costs are expensed when the
        contracted work has been performed or as milestone results have been achieved.
        Company-sponsored research and development costs related to both present
        and
        future products are expensed in the period incurred. The Company incurred
        no
        research and product development costs for the year ended December 31, 2006
        and
        2005.
 
 Foreign
        Currency Translation
 
 The
        Company translates the foreign currency financial statements in accordance
        with
        the requirements of Statement of Financial Accounting Standards No. 52, "Foreign
        Currency Translation." Assets and liabilities are translated at the rates
        of
        exchange at the balance sheet date, and related revenue and expenses are
        translated at average monthly exchange rates in effect during the period.
        Resulting translation adjustments are recorded as a separate component in
        stockholders' equity. Foreign currency transaction gains and losses are included
        in the statement of income.
 
 Concentrations
        of Credit Risk
 
 Financial
        instruments and related items which potentially subject the Company to
        concentrations of credit risk consist primarily of cash, cash equivalents
        and
        trade receivables. The Company places its cash and temporary cash investments
        with credit quality institutions. At times, such investments may be in excess
        of
        the FDIC insurance limit. The Company periodically reviews its trade receivables
        in determining its allowance for doubtful accounts. The Company had no allowance
        for doubtful accounts at December 31, 2006.
  Fair
        Value of Financial Instruments
 
 Statement
        of Financial Accounting Standards No. 107, "Disclosures About Fair Value
        of
        Financial Instruments," requires disclosure of the fair value of certain
        financial instruments. The carrying value of cash and cash equivalents, accounts
        receivable, accounts payable and short-term borrowings, as reflected in the
        balance sheets, approximate fair value because of the short-term maturity
        of
        these instruments.
 
 Stock
        Based Compensation
 
 On
        January 1, 2006, the Company adopted Statement of Financial Accounting Standards
        No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which
        requires the measurement and recognition of compensation expense for all
        share-based payment awards made to employees and directors including employee
        stock options based on estimated fair values. SFAS 123(R) supersedes the
        Company’s previous accounting under Accounting Principles Board Opinion
        No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods
        beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission
        issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS
        123(R). The Company has applied the provisions of SAB 107 in its adoption
        of
        SFAS 123(R).
   F-12
 
 **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        A - SUMMARY OF ACCOUNTING POLICIES (Continued)**
 
 Stock
        Based Compensation (Continued)
 
 The
        Company adopted SFAS 123(R) using the modified prospective transition method,
        which requires the application of the accounting standard as of January 1,
        2006,
        the first day of the Company’s fiscal year 2006. The Company’s Consolidated
        Financial Statements as of and for the year ended December 31, 2006 reflect
        the
        impact of SFAS 123(R). In accordance with the modified prospective transition
        method, the Company’s Consolidated Financial Statements for prior periods have
        not been restated to reflect, and do not include, the impact of SFAS 123(R).
        Stock-based compensation expense recognized under SFAS 123(R) for the year
        ended
        December 31, 2006 was $4,138,639, net of tax effect.
  SFAS
        123(R) requires companies to estimate the fair value of share-based payment
        awards on the date of grant using an option-pricing model. The value of the
        portion of the award that is ultimately expected to vest is recognized as
        expense over the requisite service periods in the Company’s Consolidated
        Statement of Losses. Prior to the adoption of SFAS 123(R), the Company accounted
        for stock-based awards to employees and directors using the intrinsic value
        method in accordance with APB 25 as allowed under Statement of Financial
        Accounting Standards No. 123, “Accounting for Stock-Based Compensation”
(“SFAS 123”). Under the intrinsic value method, no stock-based compensation
        expense had been recognized in the Company’s Consolidated Statement of Losses
        because the exercise price of the Company’s stock options granted to employees
        and directors approximated or exceeded the fair market value of the underlying
        stock at the date of grant.
  Stock-based
        compensation expense recognized during the period is based on the value of
        the
        portion of share-based payment awards that is ultimately expected to vest
        during
        the period. Stock-based compensation expense recognized in the Company’s
        Consolidated Statement of Losses for the year ended December 31, 2006 included
        compensation expense for share-based payment awards granted prior to, but
        not
        yet vested as of December 31, 2005 based on the grant date fair value estimated
        in accordance with the pro forma provisions of SFAS 123 and compensation
        expense
        for the share-based payment awards granted subsequent to December 31, 2005
        based
        on the grant date fair value estimated in accordance with the provisions
        of SFAS
        123(R). SFAS 123(R) requires forfeitures to be estimated at the time of grant
        and revised, if necessary, in subsequent periods if actual forfeitures differ
        from those estimates. In the Company’s pro forma information required under SFAS
        123 for the periods prior to fiscal 2006, the Company accounted for forfeitures
        as they occurred.
  Upon
        adoption of SFAS 123(R), the Company is using the Black-Scholes option-pricing
        model as its method of valuation for share-based awards granted beginning
        in
        fiscal 2006, which was also previously used for the Company’s pro forma
        information required under SFAS 123. The Company’s determination of fair value
        of share-based payment awards on the date of grant using an option-pricing
        model
        is affected by the Company’s stock price as well as assumptions regarding a
        number of highly complex and subjective variables. These variables include,
        but
        are not limited to the Company’s expected stock price volatility over the term
        of the awards, and certain other market variables such as the risk free interest
        rate.
  The
        following table shows the effect on net earnings and earnings per share had
        compensation cost been recognized based upon the estimated fair value on
        the
        grant date of stock options for the years ended December 31, 2005, in accordance
        with SFAS 123, as amended by SFAS No. 148 “Accounting for Stock-Based
        Compensation - Transition and Disclosure."
 
 2005Net
                  loss - as reported
              
              $
              (8,731,209
              )Add:
                  Total stock based employee compensation expense as reported under
                  intrinsic value method (APB. No. 25)
              
              
              -Deduct:
                  Total stock based employee compensation expense as reported under
                  fair
                  value based method (SFAS No. 123)
              
              
              -Net
                  loss - Pro Forma
              
              $
              (8,731,209
              )Net
                  loss attributable to common stockholders - Pro forma
              
              $
              (8,731,209
              )Basic
                  (and assuming dilution) loss per share - as reported
              
              $
              (0.36
              )Basic
                  (and assuming dilution) loss per share - Pro forma
              
              $
              (0.36
              )
 
  F-13
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        A - SUMMARY OF ACCOUNTING POLICIES (Continued)**
 
 Liquidity
 
 As
        shown
        in the accompanying consolidated financial statements, the Company incurred
        net
        loss from operations of $14,451,688 and $9,407,832 for the year ended
        December 31, 2006 and 2005, respectively. The Company's current assets, on
        a
        consolidated basis, exceeded its current liabilities by $949,576 as of December
        31, 2006.
 
 Comprehensive
        Income
 
 Statement
        of Financial Accounting Standards No. 130 (“SFAS 130”), “Reporting Comprehensive
        Income,” establishes standards for reporting and displaying of comprehensive
        income, its components and accumulated balances. Comprehensive income is
        defined
        to include all changes in equity except those resulting from investments
        by
        owners and distributions to owners. Among other disclosures, SFAS 130 requires
        that all items that are required to be recognized under current accounting
        standards as components of comprehensive income be reported in a financial
        statement that is displayed with the same prominence as other financial
        statements.
  Segment
        Information
  Statement
        of Financial Accounting Standards No. 131, “Disclosures about Segments of an
        Enterprise and Related Information” (“SFAS 131”) establishes standards for
        reporting information regarding operating segments in annual financial
        statements and requires selected information for those segments to be presented
        in interim financial reports issued to stockholders. SFAS 131 also establishes
        standards for related disclosures about products and services and geographic
        areas. Operating segments are identified as components of an enterprise about
        which separate discrete financial information is available for evaluation
        by the
        chief operating decision maker, or decision-making group, in making decisions
        how to allocate resources and assess performance. The information disclosed
        herein materially represents all of the financial information related to
        the
        Company’s principal operating segment.
  Sales
        of Subsidiary Stock
  Securities
        and Exchange Commission (SEC) Staff
        Accounting Bulletin No. 51, "Accounting for Sales of Stock by a Subsisary"
        (SAB
        51), provides guidance on accounting for the effect of issuances of a
        subsidiary's stock on the parent's investment in that subsidiary. SAB 51
        allows
        registrants to elect an accounting policy of recording such increases or
        decreases in a parent's investment (SAB 51 credits or charges, respectively)
        either in income or in stockholders' equity. In accordance with the election
        provided in SAB 51, we adopted a policy of recording such SAB 51 credits
        or
        charges directly to "additional paid-in capital" in stockholders'
        equity.
  New
        Accounting Pronouncements
  On
        February 16, 2006 the FASB issued SFAS 155, “Accounting for Certain Hybrid
        Instruments,” which amends SFAS 133, “Accounting for Derivative Instruments and
        Hedging Activities,” and SFAS 140, “Accounting for Transfers and Servicing of
        Financial Assets and Extinguishments of Liabilities.” SFAS 155 allows financial
        instruments that have embedded derivatives to be accounted for as a whole
        (eliminating the need to bifurcate the derivative from its host) if the holder
        elects to account for the whole instrument on a fair value basis. SFAS 155
        also
        clarifies and amends certain other provisions of SFAS 133 and SFAS 140. This
        statement is effective for all financial instruments acquired or issued in
        fiscal years beginning after September 15, 2006. The Company does not
        expect its adoption of this new standard to have a material impact on its
        financial position, results of operations or cash flows.
 
 The
        FASB
        issued SFAS No. 156, “Accounting for Servicing of Financial Assets an
        amendment of FASB Statement No. 140” (“SFAS No. 156”) in March
        2006. SFAS No. 156 requires a company to recognize a servicing asset
        or servicing liability each time it undertakes an obligation to service a
        financial asset. A company would recognize a servicing asset or servicing
        liability initially at fair value. A company will then be permitted to choose
        to
        subsequently recognize servicing assets and liabilities using the amortization
        method or fair value measurement method. SFAS No. 156 is effective for
        fiscal years beginning after September 15, 2006. The Company does not
        expect its adoption of this new standard to have a material impact on its
        financial position, results of operations or cash flows.
  F-14
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        A - SUMMARY OF ACCOUNTING POLICIES (Continued)**
 
 New
        Accounting Pronouncements (Continued)
 
 On
        July 13, 2006, the FASB issued FASB Interpretation No. 48, “Accounting
        for Uncertainty in Income Taxes-an Interpretation of FASB Statement
        No. 109” (“FIN No. 48”). FIN No. 48 clarifies what
        criteria must be met prior to recognition of the financial statement benefit
        of
        a position taken in a tax return. FIN No. 48 will require companies to
        include additional qualitative and quantitative disclosures within their
        financial statements. The disclosures will include potential tax benefits
        from
        positions taken for tax return purposes that have not been recognized for
        financial reporting purposes and a tabular presentation of significant changes
        during each period. The disclosures will also include a discussion of the
        nature
        of uncertainties, factors which could cause a change, and an estimated range
        of
        reasonably possible changes in tax uncertainties. FIN No. 48 will also
        require a company to recognize a financial statement benefit for a position
        taken for tax return purposes when it will be more-likely-than-not that the
        position will be sustained. FIN No. 48 will be effective for fiscal
        years beginning after December 15, 2006 .
The
        Company does not expect its adoption of this new standard to have a material
        impact on its financial position, results of operations or cash
        flows.
  On
        September 15, 2006, the FASB issued SFAS No. 157, “Fair Value
        Measurements” (“SFAS No. 157”). SFAS No. 157 addresses how
        companies should measure fair value when they are required to use a fair
        value
        measure for recognition and disclosure purposes under generally accepted
        accounting principles. SFAS No. 157 will require the fair value of an
        asset or liability to be based on a market based measure which will reflect
        the
        credit risk of the company. SFAS No. 157 will also require expanded
        disclosure requirements which will include the methods and assumptions used
        to
        measure fair value and the effect of fair value measures on earnings.
        SFAS No. 157 will be applied prospectively and will be effective for
        fiscal years beginning after November 15, 2007 and to interim periods
        within those fiscal years. The
        adoption of SFAS 157 is not expected to have a material impact on the Company’s
        financial condition or results of operations.
  In
        September 2006, the Financial Accounting Standards Board issued FASB Statement
        No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
        Postretirement Plans” (“SFAS 158”). SFAS 158 requires the Company to
        record the funded status of its defined benefit pension and other postretirement
        plans in its financial statements. The Company is required to record an asset
        in
        its financial statements if a plan is overfunded or record a liability in
        its
        financial statements if a plan is underfunded with a corresponding offset
        to
        shareholders’ equity. Previously unrecognized assets and liabilities are
        recorded as a component of shareholders’ equity in accumulated other
        comprehensive income, net of applicable income taxes. SFAS 158 also
        requires the Company to measure the value of its assets and liabilities as
        of
        the end of its fiscal year ending after December 15, 2008. The Company has
        implemented SFAS 158 using the required prospective method. The recognition
        provisions of SFAS 158 are effective for the fiscal year ending after
        December 15, 2006. The Company does not expect its adoption of this new
        standard to have a material impact on its financial position, results of
        operations or cash flows.
  In
        December 2006, the FASB issued FSP EITF 00-19-2, Accounting for Registration
        Payment Arrangements (" FSP
        00-19 -2")
        which addresses accounting for registration payment arrangements. FSP
        00-19 -2
        specifies that the contingent obligation to make future payments or otherwise
        transfer consideration under a registration payment arrangement, whether
        issued
        as a separate agreement or included as a provision of a financial instrument
        or
        other agreement, should be separately recognized and measured in accordance
        with
        FASB Statement No. 5, Accounting for Contingencies. FSP
        00-19 -2
        further clarifies that a financial instrument subject to a registration payment
        arrangement should be accounted for in accordance with other applicable
        generally accepted accounting principles without regard to the contingent
        obligation to transfer consideration pursuant to the registration payment
        arrangement. For registration payment arrangements and financial instruments
        subject to those arrangements that were entered into prior to the issuance
        of
        EITF 00-19-2, this guidance is effective for financial statements issued
        for
        fiscal years beginning after December 15, 2006 and interim periods within
        those
        fiscal years. The
        Company has not yet determined the impact that the adoption of FSP 00-19-2
        will
        have on its financial statements.
  In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose
        to measure many financial instruments, and certain other items, at fair value.
        SFAS 159 applies to reporting periods beginning after November 15, 2007.
        The
        adoption of SFAS 159 is not expected to have a material impact on the Company’s
        financial condition or results of operations.
  F-15
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        B -****INVESTMENT
        IN****MIRASOL
        GAS WELL**
 
 In
        June
        2004, the Company entered into an “Assignment of Oil and Gas Leases”
(“Assignment”) with Castle Rock Resources, Inc. (“Assignor”), an entity
        controlled by the Company’s Chief Financial Officer and Director. Pursuant to
        the Assignment, the Assignor sold, conveyed and delivered to the Company
        all
        right, title, and interest in a 50% working interest ownership, and 37.5%
        net
        revenue interest in the Mirasol oil and gas leases, in exchange for cash
        consideration paid by the Company in the amount of $25,000. Assignor has
        the
        right to recoup the first $400,000 from income derived from the gas well.
        As of
        December 31, 2006, no drilling on a new well had commenced by the Company
        and no
        revenues or expenses have been generated from the lease. In view of the delays
        in drilling this well, the Company wrote off its capitalized costs in the
        Mirasol Oil and Gas Leases during the year ended December 31, 2005 as an
        impairment.
 
 **NOTE
        C -** **INVESTMENT
        IN SIGNET** ****
 
 ***History***
 
 On
        February 25, 2005, the Company formed a Canadian subsidiary initially named
        Surge Global Energy (Canada) Ltd., which entered into a Farmout Agreement
        with
        Deep Well Oil & Gas, Inc. (hereafter ”Deep Well”) and Northern Alberta Oil,
        Ltd., (hereafter “NAOL”) . The Farmount Agreement provided that the Company was
        initially obligated to drill two Test Wells on the Sawn Lake Property located
        in
        Northern Alberta, Canada and to drill a total of ten wells to perfect all
        rights. At the time, the Company was also obligated to issue one third of
        its
        outstanding common stock on a fully diluted basis after the two Test Wells
        were
        producing. Surge Global Energy (Canada) Ltd., was a wholly -owned subsidiary
        of
        the Company until November 15, 2005.
 On
          November 15, 2005, the Company distributed 5,100,000 shares of the subsidiary’s
          common stock to its founders, and 7,550,000 shares of Signet common stock
          to
          Deep Well and NAOL in exchange for leases of oil and gas properties The
          subsidiary was renamed Signet Energy, Inc. (“Signet”) in November 2005 in
          conjunction with the subsidiary’s financing activity. Signet became a minority
          owned subsidiary with the Company retaining a 77.3% voting control of Signet
          at
          December 31, 2005 pursuant to a voting trust agreement. In July 2006, Signet
          completed a private placement transaction, and as a result of the financing
          and
          our election to not participate, our voting interest in Signet was reduced
          to
          47.15% (fully diluted voting interest of 35.14% which assumes the exercise
          of
          all outstanding warrants, conversion of all convertible debt and options
          are
          issued and exercised). Per the terms of the November 15, 2005 Voting Trust
          Agreement, voting control of 7.550 million Deep Well Oil & Gas (Alberta),
          Ltd. terminated which reduced Surge voting control to 29.31% as of February
          25,
          2007 (fully diluted voting interest of 21.84%).
  The
        Company originally paid a total of $2,000,000 in 2005 to Deep Well and NAOL
        for
        the Sawn Lake lease rights and in addition issued 7,550,000 shares of Signet
        common stock in place of one third of the Company’s shares to perfect the rights
        under the Farmout Agreement and to settle all claims with Deep Well and NAOL.
        The Signet shares were valued at $6,314,820 for financial statement purposes
        pursuant to SAB No. 51.
 
 ***2006
        Deconsolidation***
 
 In
        July
        2006, Signet increased its outstanding shares following the completion of
        a C$
        18.990 million financing. As of July 6, 2006, Signet and various other investors
        owned 52.85% of Signet’s common stock to reduce Surge’s outstanding voting
        security interest to less than 50%. Based upon this reduction in ownership,
        Surge has determined that it no longer has the legal power to control the
        operating policies and procedures of Signet and deconsolidated Signet from
        its
        consolidated financial statements during the fiscal quarter ending
        September 30, 2006. Due to the change in influence on Signet’s operations,
        Surge will reflect its Signet operations as an equity investment using the
        27.30% equity interest effective for the year ended December 31,
        2006.
 Considering
            the less than 50% interest in Signet as of July 6, 2006 and December
            31, 2006,
            effective July 6, 2006, the Company has recorded the investment in Signet
            using
            the equity method of accounting.  Upon deconsolidation, the Company valued
            the Signet investment at $11.936 million which resulted in a gain of
            $4.148
            million which was recorded to the investment account with a corresponding
            credit
            to additional paid in capital.
  F-16
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        C -** **INVESTMENT
        IN SIGNET** **(Continued)**
 
 ***Pro
        Forma Information***
 
 The
        following pro forma unaudited financial information has been prepared by
        management of Surge Global Energy, Inc., (the “Company”) in order to present
        consolidated financial results of operations of the Company as to give effect
        to
        the loss of control of Signet using the lower 27.3% equity interest The pro
        forma condensed consolidated statement of losses for the year ended December
        31,
        2006 and 2005 present pro forma results had the transaction taken place at
        January 1, 2005.
 
 The
        pro
        forma information is based on historical financial statements giving effect
        to
        the loss of control using the equity method of accounting and the assumptions
        and adjustments in the accompanying notes to the pro forma financial statements.
        The unaudited pro forma financial information is not necessarily indicative
        of
        the actual results of operations or the financial position which would have
        been
        attained had the acquisitions been consummated at either of the foregoing
        dates
        or which may be attained in the future.
  **2006**
                
                **2005**
                
                **For
                    the period from January 1, 2005 through December 31,
                    2006**Net
                    Loss - (as reported)
                
                $
                (15,926,093
                )
                $
                (8,731,209
                )
                $
                (24,657,302
                )Adjustments:Loss
                    from Signet (prior to deconsolidation)
                
                
                2,026,122
                
                
                4,988,816
                
                
                7,014,937Loss
                    applicable to minority interest
                
                
                (1,119,027
                )
                
                (2,560,069
                )
                
                (3,679,096
                )Equity
                    losses from affiliate (27.3%)
                
                
                (553,131
                )
                
                (1,361,947
                )
                
                (1,915,078
                )Net
                    Loss - proforma
                
                $
                (15,572,129
                )
                $
                (7,664,409
                )
                $
                (23,236,539
                )Loss
                    per common share - Pro forma(basic
                    and diluted)
                
                $
                (0.57
                )
                $
                (032
                )
                $
                (0.91
                )
 ***2006
        Impairment***
  Signet
        is
        a pre-production stage development enterprise whose sole activity is the
        delineation and development of an oil sand resource at its Sawn Lake property.
        Signet has drilled, completed and production tested three horizontal wells
        on
        Sawn Lake property. The objective of these wells was to determine the
        feasibility of conventional oil production from the property oil sands resource,
        which feasibility was not established by the production test. As
        a
        result of these factors, management
        recorded an impairment charge of $6,296,016 for the year ended December 31,
        2006.
 
 For
        the
        year ended December 31, 2006, Surge charged operations for $1,043,085
        representing Surge's 27.30% share of Signet's loss. Both the impairment charge
        and share of Signet’s loss were reflected as a reduction to the Signet
        investment.  The net investment in Signet at December 31, 2006 was
        $4,597,217 representing the Company’s 27.3% share of Signet’s December 31, 2006
        net equity.
 
 In
        December 2006, beyond working interests earned to date, the right to earn
        additional working interests in the Sawn Lake property acreage effectively
        ended. These rights expired as the drilling results and lack of cold flow
        to
        date on the property did not justify further horizontal development wells
        as
        required by the farmout agreement. Accordingly, an amendment to the farmout
        agreement to drill vertical delineation wells to earn additional working
        interests in the property was sought but not granted by Deep Well. In addition,
        in December 2006 Deep Well notified Signet that it was questioning Signet’s
        earnings on 12 of the total 18 sections claiming Signet failed to properly
        complete the well by not conducting the production testing as reasonably
        required under the Farmout Agreement.
 
 As
        Signet
        obtains financing in the future, the Company may sustain additional dilution
        to
        its equity interest in Signet which may also result in further
        impairment.
  F-17
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        C -** **INVESTMENT
        IN SIGNET** **(Continued)**
 
 ***Equity
        Method***
 
 As
        described above, the Company uses the equity method to account for its
        investment in Signet effective July 6, 2006. Under the equity method of
        accounting, the Company's share of net income (loss) from Signet is reflected
        as
        an increase (decrease) in its investment accounts and is also recorded as
        equity
        loss from affiliates.
 
 Summarized
        financial position and results of operations of Signet as of December 31,
        2006
        and for the year then ended are as follows:
 
 **2006**Current
                  assets
              
              $
              15,504,467Non
                  current assets
              
              $
              12,476,338Current
                  liabilities
              
              $
              9,844,637Non
                  current liabilities
              
              $
              1,296,544
 
 
 **NOTE
        D -** **INVESTMENT
        IN PEACE OIL**
 
 On
        November 30, 2006, the Company entered into a Stock Purchase Agreement with
        Cold
        Flow Energy ULC, a corporation incorporated under the laws of Alberta, Canada
        (“Cold Flow”), Peace Oil Corp., a corporation incorporated under the laws of
        Alberta, Canada (“Peace Oil”), and shareholders of Peace Oil (the “Target
        Shareholders”). Cold Flow is a wholly owned subsidiary of the Company. Pursuant
        to the terms of the Stock Purchase Agreement, the parties agreed that Cold
        Flow
        will purchase all of the issued and outstanding shares of the capital stock
        of
        Peace Oil (the “Acquisition”) for a total purchase price of CDN$16,350,000,
        which consist of CDN$6,350,000 in cash and an aggregate of 8,965,390
        exchangeable shares of preferred stock of Cold Flow (the Exchangeable Shares”).
        On December 4, 2006, Cold Flow delivered an initial deposit of CDN$150,000,
        which deposit and any interest earned thereon will be deducted from the cash
        portion of the purchase price.
 
 Since
        completion of the Acquisition was extended beyond January 18, 2007, Cold
        Flow
        made an additional deposit of CDN$450,000 into escrow prior to January 18,
        2007,
        which additional deposit and any interest earned thereon will be deducted
        from
        the cash portion of the purchase price. On March 2, 2007, the Company completed
        its acquisition of Peace Oil Corp. In connection with the closing of the
        acquisition, the parties amended the Stock Purchase Agreement on March 2,
        2007
        to modify the payment of the purchase price such that CDN$5,600,000 of the
        cash
        portion of the purchase price is now payable in promissory notes issued by
        Cold
        Flow in favor of 1304146 Alberta Ltd., which is an entity formed by the
        shareholders of Peace Oil, and the remaining CDN$750,000 of the cash portion
        was
        paid in cash. In addition, through our indirectly-owned Canadian subsidiary,
        Cold Flow, we loaned CDN$250,000 to Peace Oil for retirement of its shareholder
        loans and paid CDN$20,000 of its legal fees incurred with this transaction.
        As a
        result of the acquisition, Peace Oil has become a wholly owned subsidiary
        of
        Cold Flow.
 The
          Stock
          Purchase Agreements provide that the Company, Cold Flow, and Computershare
          Trust
          Company of Canada will enter into a Voting and Exchange Trust Agreement
          on the
          closing date and that the Company and Cold Flow will enter into a Support
          Agreement on the closing date (collectively with the Stock Purchase Agreement,
          the “Acquisition Agreements”). The Acquisition Agreements provide that each
          Exchangeable Share is exchangeable into two shares of the Company’s common stock
          at any time from the closing until five years after the closing. In addition,
          the Company may redeem all of the then outstanding Exchangeable Shares
          at any
          time on or after the third anniversary of the closing date at a redemption
          price
          equal to the sum of the market price of two shares of the Company’s common stock
          plus all declared but unpaid dividends payable to the Exchangeable Shares.
          Should Surge be unable to fulfill its remaining secured note payable obligations
          of approximately CDN$4 million due by August 30, 2007, all cash monies
          advanced
          through that date will be forfeited and all shares and warrants shall be
          returned to Surge.
  F-18
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        D -** **INVESTMENT
        IN PEACE OIL** **(Continued)**
 
 The
        Stock
        Purchase Agreement provides a covenant by the Company to file with the SEC
        a
        registration statement registering the shares of the Company’s common stock
        issuable upon exchange of the Exchangeable Shares for resale by the Peace
        Oil
        shareholders. In addition, the Stock Purchase Agreement provides for
        representations and warranties, covenants regarding conduct of the parties
        prior
        to closing, and indemnification provisions typical of transactions involving
        the
        acquisition of a privately held company.
 
 The
        Company recorded the initial December 2006 CDN$150,000 deposit ($133,449
        in US$)
        to Peace Oil as an Investment in Peace Oil as of December 31, 2006.
 
 **NOTE
        E - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES**
 
 Accounts
        payable and accrued liabilities at December 31, 2006 are as
        follows:
 
 Accounts
                  payable
              
              $
              269,711Accrued
                  payroll, payroll expenses and taxes
              
              
              43,105Accrued
                  expenses
              
              
              290,724Total
              
              $
              603,540
 
 **NOTE
        F - WARRANT LIABILITY**
 
 In
        November 2005, the Company completed a private placement which resulted in
        gross
        proceeds of $800,000 (Note G). In connection with this private placement
        the
        Company sold 800,000 shares of common stock at a price of $1.00 per share
        and
        issued warrants to purchase up to 1,600,000 shares of common stock. The warrants
        have a 3 to 5 year term and an exercise price ranging from equal to $1.00
        to
        $1.45.
  Since
          the
          warrants are subject to certain registration rights, the Company valued
          the
          warrants using the Black-Scholes option pricing model, applying a life
          of 3 to
          year 5 years, a risk free interest rate of 4.42% to 4.54%, an expected
          dividend
          yield of 0%, a volatility of 205% and a deemed fair value of common stock
          of
          $1.22 to $1.55 which was the closing price of the Company’s common stock on
          November 14 and November 30, 2005, respectively, and recorded a warrant
          liability at grant date, totaling $2,245,100, in accordance with EITF 00-19
          “Accounting for Derivative Financial Instruments Indexed to, and Potentially
          Settled in, a Company’s Own Stock”. The warrant liability has subsequently been
          recalculated using the closing price of the Company’s common stock as of
          December 31, 2005 of $1.45. Assumptions regarding the life, the expected
          dividend yield and volatility were left unchanged but the Company did apply
          a
          risk free interest rate of 4.35%, a volatility of 200% and a deemed fair
          value
          of common stock of $1.45, which was the closing price of the Company’s common
          stock on December 31, 2005. The difference of $70,900 between the fair
          value of
          the warrants as of December 31, 2005 and the previous valuation as of November
          2005 has been recorded as a gain on revaluation of warrant liability, and
          included in the accompanying consolidated financial statements for the
          year
          ended December 31, 2005. Warrant liability at December 31, 2005 amounted
          $2,174,200.
 
 The
          registration rights provide for the Company to file with the Securities
          and
          Exchange Commission a Registration Statement covering the resale of all
          of the
          securities issued in connection with the private placement. The registration
          statement was filed with the Securities and Exchange Commission on December
          30,
          2005. The Company was required to have received an effective registration
          no
          later than May 15, 2006 closing date or six months following each investor’s
          private placement date. Per the terms of the registration rights agreement
          and
          since the registration was not effective until May 30, 2006, the Company
          was
          obligated to reprice 1 million of the $1.00 warrant exercise price by $0.005
          for
          each day the registration was not effective from May 15, 2006. As a result,
          the
          1 million $1.00 warrants were repriced to $0.93. Upon the registration
          becoming
          effective on May 30, 2006, the fair value of the warrant liability on that
          date,
          totaling $3,787,861, was reclassified to permanent equity. The difference
          of
          $1,613,661 between the fair value of the warrants as of December 31, 2005
          and
          May 30, 2006 has been recorded as a loss on revaluation of warrant liability,
          and included in the accompanying consolidated financial statements for
          the year
          ended December 31, 2006.
 F-19
 
 **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        F - WARRANT LIABILITY (Continued)**
 
 In
        November 2006, the Company completed a private placement which resulted in
        gross
        proceeds of $1,350,000 (Note G). In connection with this private placement,
        the
        Company also issued warrants to purchase an aggregate of 3 million shares
        of the
        Company’s common stock at an exercise price of $0.60 per share and a 5 year term
        as well as warrants to purchase an aggregate of 3 million shares of the
        Company’s common stock at an exercise price of $0.50 per share with a six month
        term.. The warrant exercise price is subject to a weighted average anti-dilution
        adjustment if the Company issues any shares of common stock for a consideration
        per share below the exercise price then in effect.
 
 Concurrently,
        the Company entered into a Registration Rights Agreement with each of the
        purchasers. Pursuant to its terms, the Company agreed to file a registration
        statement to cover the resale of the shares of common stock and the shares
        underlying the warrants within 30 days of the agreement and to cause such
        registration statement to be declared effective by the SEC within 120 days
        of
        the agreement. The Company filed the registration statement on December 20,
        2006. In the event that the Company fails to cause the registration statement
        to
        be declared effective by the SEC within the effective deadline pursuant to
        the
        agreement, the Company agreed to pay to each holder an amount in cash, as
        partial liquidated damages and not as a penalty, equal to 2.0% of the aggregate
        purchase price paid by such holder pursuant to the Securities Purchase Agreement
        for any registrable securities then held by such holder.
 
 Since
        the
        warrants are subject to certain registration rights, the Company recorded
        an
        initial warrant liability at grant date in accordance with EITF 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
        Settled in, a Company’s Own Stock”. The warrant liability has subsequently been
        recalculated using the closing price of the Company’s common stock as of
        December 31, 2006 of $0.57. The Company valued the warrants using the
        Black-Scholes option pricing model, applying a life of six months to 5 years,
        a
        risk free interest rate of 4.34% to 4.42%, an expected dividend yield of
        0%, a
        volatility of 155% and a deemed fair value of common stock of $0.77 which
        was
        the closing price of the Company’s common stock on November 30, 2006. Initial
        warrant liability was valued at $3,420,900 on November 30, 2006.
  At
          December 31, 2006, the Company revalued the warrants using the Black-Scholes
          option pricing model. Assumptions regarding the life, the expected dividend
          yield was left unchanged but the Company did apply a risk free interest
          rate
          range of 4.35% to 4.38%, a volatility of 155% and a deemed fair value of
          common
          stock of $0.57, which was the weighted average closing price based on trading
          volume of the Company’s common stock during the month of December 31, 2006. The
          decrease of $1,111,500 in the fair value of the warrants at December 31,
          2006
          from the previous valuation at November 30, 2006 has been recorded as a
          gain on
          revaluation of warrant liability for the year ended December 31, 2006.
          Warrant
          liability at December 31, 2006 amounted $2,309,400.
  **NOTE
        G - CAPITAL STOCK**
 
 Preferred
        Stock
 
 The
        Company is authorized to issue up to 10,000,000 shares of Preferred Stock
        in one
        or more series and to fix the rights, preferences, privileges, and restrictions
        thereof, including dividend rights, conversion rights, voting rights, terms
        of
        redemption, liquidating preferences, and the number of shares constituting
        any
        series or the designation of such series.
 
 The
        Company has issued 1,100,000 shares of its Series B Convertible Preferred
        Stock
        (Series B) $.001 par value to Duncan Hill, Inc in 1997. The Series B stock
        has
        the same voting privileges as the Common Stock. Each share of Series B stock
        is
        convertible into one share of the Company's Common stock at the option of
        either
        the holder or the Company upon the Company's net pre-tax profit reaching
        $500,000 in any given calendar year. The Series B stock is not subject to
        redemption. In the event of a voluntary or involuntary liquidation, dissolution
        or winding up of the affairs of the Company, each share of Series B stock
        has a
        liquidation preference of $.001 plus dividends in arrears, which is subordinated
        to the liquidation preference of the Series A stock. The holder of each share
        of
        Series B Preferred Stock will be entitled to receive, when, as, and if declared
        by the Board of Directors of the Company, out of funds legally available
        therefore, cumulative quarterly cash dividends at the rate of $.025 per share,
        quarterly on March 31, June 30, September 30, and December 31 commencing
        with
        March 31, 1998 before any dividend shall be declared, set apart for, or paid
        upon the Common Stock for such year, and the remainder of the surplus or
        net
        earnings applicable to the payment of dividends shall be distributed as
        dividends among the holders of Common Stock as and when the Board of Directors
        determines. There were no dividends declared or paid during the time the
        Series
        B Preferred Stock was outstanding.
  F-20
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        G - CAPITAL STOCK (Continued)**
 
 In
        connection with the Asset Purchase Agreement in December 2004 (Note A), Duncan
        Hill, Inc., an entity controlled by the Company’s former Chief Executive Officer
        agreed to convey to the Company for cancellation of 5,000,000 shares of Series
        A
        Preferred Stock and 1,100,000 shares of Series B Preferred Stock, and to
        release
        the Company from all obligations for accumulated dividends thereon, in exchange
        for 6,100 shares of the Company's Common Stock. The Company has no preferred
        stock issued and outstanding at December 31, 2006 and 2005.
 
 Common
        Stock
 
 Effective
        on February 22, 2007, we increased our authorized shares of capital stock
        to an
        aggregate of 210,000,000 shares, consisting of 200,000,000 shares of common
        stock with a par value of $0.001 per share and 10,000,000 shares of preferred
        stock pursuant to an amendment to our Certificate of Incorporation. As
        of
        December 31, 2006 and 2005, the Company has 30,587,097 and 26,277,097 shares
        of
        common stock issued and outstanding.
 
 The
        Company is not currently subject to any contractual arrangements, which restrict
        its ability to pay cash dividends. The Company's Certificate of Incorporation
        prohibits the payment of cash dividends on the Company's Common Stock in
        excess
        of $.05 per share per year so long as any Serial Preferred Stock remains
        outstanding unless all accrued and unpaid dividends on Serial Preferred Stock
        has been set apart and there are no arrearages with respect to the redemption
        of
        any Serial Preferred Stock.
 
 In
        February 2005, the Company issued 100,000 shares of common stock to one of
        the
        Company’s former Directors in connection with stock options exercised at $0.25
        per share for net proceeds of $25,000.
 
 In
        August
        2005, the Company issued an aggregate of 200,000 shares of common stock to
        third
        party investors and 100,000 shares of common stock to two Directors of the
        Company in exchange for net proceeds of $300,000. In connection with this
        private placement, the Company issued to the investors an aggregate of 150,000
        warrants with Piggy-back registration rights.
  In
          August
          and October 2005, the Company issued an aggregate of 1,710,000 shares of
          common
          stock in exchange for $1,710,000 of convertible notes. The Company entered
          into
          a Note and Warrant Purchase Agreement with investors on March 17, 2005
          for the
          issuance of an aggregate of $1,710,000 of convertible notes, and attached
          to the
          Convertible Notes were warrants to purchase 855,000 shares of the Company’s
          common stock. The Noteholders had the option to convert any unpaid note
          principal to the Company’s common stock at $2.25 per share anytime during the
          term of the note. In August 2005, the Company entered an agreement with
          the
          noteholders to reduce the conversion rate to $1.00 per share, and the
          noteholders advised the company of their intent to convert the Notes into
          common
          stock. In accordance with Emerging
          Issues Task Force Issue 98-5, Accounting for Convertible Securities with
          a
          Beneficial Conversion Features or Contingently Adjustable Conversion Ratios
          (“EITF 98-5”) ,
          the
          Company recognized an imbedded beneficial conversion feature present in
          the
          convertible note in the amount of $1,022,492 (after adjustment for note
          amendment in August 2005) to additional paid-in capital and a discount
          against
          the convertible note.  In
          accordance with Emerging
          Issues Task Force Issue 00-27, Application of Issue No. 98-5 to Certain
          Convertible Instruments (“EITF - 0027”) ,
          the
          Company recognized the value attributable to the warrants in the amount
          of
          $629,192 (after adjustment for the note amendment in August 2005) to additional
          paid-in capital and a discount against the Convertible Note. The Company
          valued
          the warrants in accordance with EITF 00-27 using the Black-Scholes pricing
          model
          and the following assumptions: contractual terms of 5 years, an average
          risk
          free interest rate of 4.00%, a dividend yield of 0%, and volatility of
          174%. The
          debt discount attributed to the beneficial conversion feature and value
          of the
          warrants issued is amortized over the convertible note’s maturity period (one
          year) as interest expense. Upon the conversion of the $1,710,000 promissory
          notes to the Company’s common stock, all unamortized debt discount was charged
          to operations. The Company recorded non-cash interest expense in the amount
          of
          $1,651,684 during the year ended December 31, 2005 in connection with the
          $1,710,000 convertible notes.
  In
        November 2005, the Company issued an aggregate of 800,000 shares of common
        stock
        to third party investors in exchange for net proceeds of $800,000. In connection
        with this private placement, the Company issued to the investors an aggregate
        of
        1,600,000 warrants that are subject to registration rights and penalties
        if the
        registration is not effective by May 15, 2006. The Company has accounted
        for the
        warrants issued in accordance with EITF 00-19 “Accounting for Derivative
        Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
        Stock” (Note F).
 
 In
        March
        2006, the Company received $1,800,000 of net proceeds from third party investors
        for 1,200,000 shares of common stock subscribed. In connection with this
        private
        placement, the Company issued to the investors an aggregate of 1,200,000
        warrants that are subject to Piggy-back registration rights. The common shares
        subscribed were issued in April 2006.
 
 In
        June
        2006, the Company issued 160,000 shares in exchange for C$200,000 in convertible
        debt related to the Signet subsidiary and charged the Signet investment for
        US$
        178,618.
 
 In
        June
        2006, 450,000 shares were returned for services not completed related to
        the
        acquisition of Phillips & King International Inc. during August
        2000.
 
 In
        July
        2006, the Company issued 400,000 shares of common stock to a former Company
        officer and director in connection with stock options exercised at $0.25
        per
        share for net proceeds of $100,000.
  F-21
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        G - CAPITAL STOCK (Continued)**
 
 Common
        Stock (Continued)
 
 While
        the
        Company no longer presents consolidated results for its equity interest in
        Signet, CDN$8.550 million of Signet debenture holders have an option to convert
        their debentures into Surge common stock. In November 2005, the Company’s equity
        affiliate Signet Energy, Inc., issued convertible promissory notes in exchange
        for aggregate gross proceeds of  CDN$8.550 million. During the quarter
        ended June 30, 2006, CDN$200,000 of promissory notes were converted to stock
        reducing total notes payable to CDN$8.350 million. Per the terms of the
        Debenture Subscription Agreement, and at the option of the holder, the
        debentures are exchangeable into either Signet or Surge common shares or
        are
        subject to automatic conversion should Signet complete a going public
        transaction on the Toronto Stock Exchange. Converting to Surge shares also
        increased Surge’s ownership percentage in Signet.
 
 Other
        than the C$200,000 conversion that occurred during the quarter ended June
        30,
        2006, there have been no other conversions or a going public transaction
        during
        the year ended December 31,, 2006. Should the holder opt to convert to Surge
        common shares, the holder can only convert on either June 30 or December
        31 in
        each year prior to the 2007 maturity date, at an exchange price of
        US$1.25.  The Surge U.S. Share Exchange Price shall be adjusted in
        accordance with specified anti-dilution clauses relating to changes in Surge
        U.S.’s share capital (including share splits, dividends, share consolidations,
        share dividends and similar recapitalizations) and other distributions of
        Surge
        U.S. Shares.
 
 At
        December 31, 2006, had the Signet debenture holders elected to convert into
        Surge shares, the Company would have issued 6,680,000 of common shares in
        exchange for 8,350,000 shares of Signet. Accordingly, Surge’s equity interest in
        Signet would have increased from 27.30% to 39.28% while the Company’s aggregate
        voting interest, including indirect voting interests, in Signet would have
        increased from 47.15% to 55.57%.
 
 There
        was
        no economic incentive for the Signet debenture holders to convert since the
        closing price of the Company’s common stock was $0.46 on December 31, 2006 and
        the conversion price was $1.25 .
 
 In
        November 2006, the Company issued an aggregate of 3 million shares of common
        stock to third party investors in exchange for net proceeds of $1,350,000.
        In
        connection with this private placement, the Company issued to the investors
        an
        aggregate of six million warrants that are subject to registration rights
        and
        penalties amounting to 2% of the proceeds on a monthly basis if the registration
        is not effective by March 28, 2007. To address pending SEC comments, the
        Company
        is obligated to provide and disclose Peace Oil financials as well as a pro
        forma of the combined companies. The Company has accounted for the warrants
        issued in accordance with EITF 00-19 “Accounting for Derivative Financial
        Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (Note
        F).
  We
        were unable to obtain an effectiveness of the Form
        SB-2 Registration Statement as of March 28, 2007. Subsequently, the investors
        have orally agreed to extend the time for the effectiveness of the Form SB-2
        Registration Statement from March 28, 2007 to 120 days from the Amendment
        Agreement date. The investor's counsel has provided us with copies of the
        foregoing waiver and extension agreement, and has orally agreed to the terms,
        but the documents have not yet been signed by the investors.
 
 **NOTE
        H - WARRANTS AND STOCK OPTIONS**
 
 Class
        A Warrants
 
 The
        Company granted an aggregate of 855,000 warrants in March 2005 in connection
        with issuance of convertible notes payable (Note G). Additionally, the Company
        issued an aggregate of 150,000 warrants in connection with the equity financing
        in August 2005 and 1,600,000 warrants related to the November 2005 financing
        (Note G). During 2006, the Company granted an aggregate of 1,200,000 warrants
        in
        connection with an equity financing in March 2006 and 6,000,000 warrants
        in
        connection with an equity financing in November 2006. The following table
        summarizes the changes at December 31, 2006.
  F-22
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        H - WARRANTS AND STOCK OPTIONS (Continued)**
 
 Class
        A Warrants (Continued)
 
 Warrants
                  Outstanding
              
              Warrants
                  ExercisableExercise
                  Prices
              
              Number
                Outstanding
              
              Weighted
                  Average
                Remaining
                Contractual
                  Life
                (Years)
              
              Weighed
                  Average
                Exercise
                  Price
              
              Number
                Exercisable
              
              Weighted
                  Average
                Exercise
                  Price$0.50
              
              
              3,000,000
              
              $
              0.41
              
              $
              0.50
              
              
              3,000,000
              
              $
              0.500.60
              
              
              3,000,000
              
              
              4.91
              
              
              0.60
              
              
              3,000,000
              
              
              0.600.93
              
              
              1,000,000
              
              
              1.88
              
              
              0.93
              
              
              1,000,000
              
              
              0.931.45
              
              
              600,000
              
              
              2.55
              
              
              1.45
              
              
              600,000
              
              
              1.451.60
              
              
              1,005,000
              
              
              2.98
              
              
              1.60
              
              
              1,005,000
              
              
              1.602.00
              
              
              1,200,000
              
              
              4.22
              
              
              2.00
              
              
              1,200,000
              
              
              2.009,805,000
              
              $
              2.80
              
              $
              0.93
              
              
              9,805,000
              
              $
              0.93


Transactions
        involving the Company's warrant issuance are summarized as follows:
 Number
                    of
                  Shares
                
                Weighted
                    Average Price Per ShareOutstanding
                    at January 1, 2005
                
                
                -
                
                $
                -Granted
                
                
                2,605,000
                
                
                1.32Exercised
                
                
                -
                
                
                -Canceled
                    or expired
                
                
                -
                
                
                -Outstanding
                    at December 31, 2005
                
                
                2,605,000
                
                $
                1.32Granted
                
                
                7,200,000
                
                
                0.79Exercised
                
                
                -
                
                
                -Canceled
                    or expired
                
                
                -
                
                
                -Outstanding
                    at December 31, 2006
                
                
                9,805,000
                
                $
                0.93
 In
        connection with the placement of the convertible notes in March 2005, the
        Company issued detachable warrants granting the holders the right to acquire
        855,000 shares of the Company’s common stock at $4.00 per share. In August 2005,
        the exercise price of the warrants was reduced to $1.60 per share. The Company
        recognized the value attributable to the warrants in accordance with Emerging
        Issues Task Force Issue 00-27, Application of Issue No. 98-5 to Certain
        Convertible Instruments (“EITF - 0027”) using
        the Black-Scholes pricing model.
  F-23
 
 **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        H - WARRANTS AND STOCK OPTIONS (Continued)**
 
 Class
        A Warrants (Continued)
 
 In
        connection with a private placement in August 2005, the Company issued to
        the
        investors an aggregate of 150,000 warrants with Piggy-back registration rights.
        The exercise price of these warrants was above the fair value of the Company’s
        common stock at grant date, and accordingly no intrinsic value was measured.
  In
          connection with a private placement in November 2005, the Company issued
          to the
          investors an aggregate of 1,600,000 warrants. These warrants are subject
          to
          registration rights and the Company accounted for the warrants issued in
          accordance with EITF 00-19 “Accounting for Derivative Financial Instruments
          Indexed to, and Potentially Settled in, a Company’s Own Stock” (Note
          F).
 
 In
          connection with a private placement in March 2006, the Company issued to
          the
          investors an aggregate of 1,200,000 warrants with Piggy-back registration
          rights.
  In
        connection with a private placement in November 2006, the Company issued
        to the
        investors an aggregate of 6,000,000 warrants. These warrants are subject
        to
        registration rights and the Company accounted for the warrants issued in
        accordance with EITF 00-19 “Accounting for Derivative Financial Instruments
        Indexed to, and Potentially Settled in, a Company’s
 Own
          Stock” (Note F).
 
 Stock
        Options
 
 The
        following table summarizes the changes in options outstanding and the related
        prices for the shares of the Company's common stock issued to shareholders
        at
        December 31, 2006.
 
 Options
                  Outstanding
              
              Options
                  ExercisableExercise
                  Prices
              
              Number
                  Outstanding
              
              Weighted
                  Average Remaining Contractual Life (Years)
              
              Weighed
                  Average Exercise Price
              
              Number
                  Exercisable
              
              Weighted
                  Average Exercise Price$
                  0.001
              
              
              300,000
              
              
              9.79
              
              $
              0.001
              
              
              187,500
              
              $
              0.0010.25
              
              
              700,000
              
              
              0.64
              
              
              0.25
              
              
              700,000
              
              
              0.250.45
              
              
              429,000
              
              
              9.92
              
              
              0.45
              
              
              429,000
              
              
              0.450.50
              
              
              1,200,000
              
              
              9.79
              
              
              0.50
              
              
              300,000
              
              
              0.500.65
              
              
              4,605,555
              
              
              7.46
              
              
              0.65
              
              
              4,422,222
              
              
              0.651.00
              
              
              387,530
              
              
              8.71
              
              
              1.00
              
              
              387,530
              
              
              1.001.11
              
              
              1,200,000
              
              
              9.55
              
              
              1.11
              
              
              377,778
              
              
              1.111.35
              
              
              19,279
              
              
              7.93
              
              
              1.35
              
              
              19,279
              
              
              1.351.50
              
              
              178,727
              
              
              9.20
              
              
              1.50
              
              
              178,727
              
              
              1.501.55
              
              
              511,112
              
              
              9.21
              
              
              1.55
              
              
              222,222
              
              
              1.553.50
              
              
              80,000
              
              
              1.94
              
              
              3.50
              
              
              80,000
              
              
              3.509,611,203
              
              
              7.83
              
              $
              0.73
              
              
              7,304,258
              
              $
              0.70
 
  F-24
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        H - WARRANTS AND STOCK OPTIONS (Continued)**
 
 Stock
        Options (Continued)
 
 Transactions
        involving the Company's options issuance are summarized as follows:
 
 Number
                  of
                Shares
              
              Weighted
                Average
                  Price
                Per
                  ShareOutstanding
                  at January 1, 2005
              
              
              6,866,406
              
              $
              0.61Granted
              
              
              387,530
              
              
              1.00Exercised
              
              
              (100,000
              )
              
              0.25Canceled
                  or expired
              
              
              (337,778
              )
              
              0.61Outstanding
                  at December 31, 2005
              
              
              6,816,158
              
              $
              0.64Granted
              
              
              4,500,600
              
              
              0.94Exercised
                  (Note G)
              
              
              (400,000
              )
              
              0.25Canceled
                  or expired
              
              
              (1,305,555
              )
              
              1.12Outstanding
                  at December 31, 2006
              
              
              9,611,203
              
              $
              0.73


During
          the year ended December 31, 2004, the Company granted an aggregate of 5,500,000
          stock options to employees. The exercise prices of the stock options granted
          were below the fair value of the Company’s common stock at the grant date. The
          Company has originally accounted the intrinsic value of the stock options
          as
          deferred compensation costs in the amount of $9,189,705 and as a reduction
          of
          stockholders’ equity in the year ended December 31, 2004. The deferred
          compensation costs are amortized over the vesting period of the options.
          Compensation expense of $3,039,038 was charged to operations during the
          year
          ended December 31, 2005.
 
 If
          the
          Company recognized compensation cost for the stock options and warrants
          for the
          non-qualified employee stock option plan in accordance with SFAS No 123,
          the
          Company's pro forma net loss attributable to common shareholders and net
          loss
          per share would have been $(8,731,209) and $(0.36) for the year ended December
          31, 2005.
 
 Effective
          January 1, 2006, the Company adopted the fair value recognition provisions
          of
          SFAS 123R, using the modified-prospective transition method. Unamortized
          deferred compensation of $3,981,947 resulted from the intrinsic value of
          the
          stock options at grant date was reversed and the employee stock options
          granted
          prior to, but not vested as of January 1, 2006, were valued based on the
          grant
          date fair value estimated in accordance with the original provisions of
          SFAS
          123. During the year ended December 31, 2006, total stock-based compensation
          expense charged to operations in connection with new grant and vested employee
          stock options was $4,138,639, net of tax effect.
 
 In
          addition, the Company issued an aggregate of 600,600 and 387,530 stock
          options
          to its Chief Executive Officer as compensation for certain equity the Company
          issued during the year ended December 31, 2006 and 2005, respectively.
          The
          estimated value of the options granted during the year ended December 31,
          2006
          and 2005 was determined using the Black-Scholes option pricing model and
          the
          Company has charged to operations compensation expense of $640,491 and
          $202,418,
          respectively.
 F-25
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        H - WARRANTS AND STOCK OPTIONS (Continued)**
 
 Stock
        Options (Continued)




During
        the year ended December 31, 2006, the Company granted additional 3,900,000
        stock
        options to employees and directors. Terminations resulted in the cancellation
        of
        1,305,555 and 337,778 employee stock options during the year ended December
        31,
        2006 and 2005, respectively
 
 The
        weighted-average fair value of stock options granted to employees and directors
        during the years ended December 31, 2006 and 2005 and the weighted-average
        significant assumptions used to determine those fair values, using a
        Black-Scholes option pricing model are as follows:
 
 2006
              
              2005Significant
                  assumptions (weighted-average):Risk-free
                  interest rate at grant date
              
              
              4.42
                  - 5.13
              %
              
              2.80
                  - 4.52
              %Expected
                  stock price volatility
              
              
              143
                  - 155
              %
              
              169
                  - 178
              %Expected
                  dividend payout
              
              
              -
              
              
              -Expected
                  option life (in years)
              
              
              5.0
                  to 10.0
              
              
              3.0
                  to 10.0
 
 Total
        compensation expense of $4,779,130 and $4,224,583 was charged to operations
        during the year ended December 31, 2006 and 2005, respectively.
 
 **NOTE
        I - RELATED PARTY TRANSACTIONS**
 
 In
        June 2004, the Company entered into an “Assignment of Oil and Gas Leases”
(“Assignment”) with Castle Rock Resources, Inc. (“Assignor”), an entity
        controlled by E. Jamie Schloss, a previous Director and Chief Financial Officer.
        Pursuant to the Assignment, the Assignor sold, conveyed and delivered to
        us all
        right, title, and interest in a 50% working interest ownership, and 37.5%
        net
        revenue interest in the oil and gas leases, in exchange for cash consideration
        paid by us in the amount of $25,000. The rights the Company had pursuant
        to
        these leases expired in the third quarter of 2005. During the year ended
        December 31, 2005, no drilling on a new well had commenced by the Company
        and no
        revenues or expenses have been generated from the lease. The Company wrote
        off
        its capitalized costs in the Mirasol Oil and Gas Leases during the year ended
        December 31, 2005 (Note B). In November, 2004, Mr. Schloss gave the Company
        a
        free option until July, 2006 to acquire two producing oil & gas properties
        owned or controlled by him for a price equal to 36 months net production
        for the
        past twelve months prior to exercising the option. The option expired in
        July
        2006. On June 28, 2006, Mr. Schloss was terminated as CFO and replaced as a
        director by shareholder vote at the annual meeting on July 27,
        2006.





F-26





**SURGE
      GLOBAL ENERGY, INC.**


(A
      DEVELOPMENT STAGE
      COMPANY)


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006 AND 2005**





**NOTE
      I - RELATED PARTY TRANSACTIONS (Continued)**




Our
      previously disclosed expression of intent to enter an agreement with Dynamo
      Energy Corporation (“Dynamo”) to obtain a right of first refusal on Dynamo's
      prospects was never formalized by a signed agreement. On September 16, 2005
      our Board determined that the proposed agreement with Dynamo had not been
      authorized by the Board and made an offer of settlement to Mr. Vandergrift,
      which was not accepted. Mr. Vandergrift has since resigned as a member of
      our Board of Directors. On November 15, 2006, plaintiff Dynamo Energy
      Corporation filed a complaint against the Company as well as previous officers
      (Note L).




The
      Company paid $135,000 and $171,000 in commissions to a Broker-dealer owned
      by
      Daniel Schreiber who was a named a Director of the Company in March, 2006,
      for
      the years ended December 31, 2006 and 2005, respectively.




On
      August 19, 2005 the Company completed a private placement offering which
      resulted in proceeds to the Company in the amount of $50,000 from Chet Idziszek
      and $50,000 from Gary Vandergrift, both members of the Company’s Board of
      Directors at the time of the transaction.




As
      a
      result of the Signet November 2005 financing, Mr. Kelly entered into a new
      compensation agreement with Signet which replaced the previous agreement with
      the Company. In January 2006, he resigned as Chief Executive Officer of the
      Company to become Signet’s Chief Operating Officer. Mr. Kelly’s new Agreement
      provided a salary of C$220,000 per annum to be paid by Signet Energy, Inc.
      In
      November 2005, Mr. Kelly and Mr. Perez received 1,700,000 shares and
      855,000 shares respectively in Signet.





On
      October 6, 2006, we entered into an agreement with Richard Collato, who is
      a
      member of our Board of Directors, as a consultant to provide business
      implementation strategies as well as locate and introduce three prospective
      appointees for our Board of Directors in exchange for a $6,000 monthly retainer.
      The agreement terminates at the earlier of project completion, the consultant’s
      10-day written notice or the Company’s 30-day written notice. In addition to the
      monthly retainer, the consultant also earns other compensation as follows:
      $25,000 upon placement of each of three Board of Director appointee and
      $2,083.33 monthly for each month that the appointee serves for a maximum of
      twelve months. In addition, the consultant was granted 300,000 options with
      an
      exercise price of $0.001, with 150,000 options vesting immediately and 12,500
      options vesting monthly over the next twelve months.





F-27





**SURGE
      GLOBAL ENERGY, INC.**


(A
      DEVELOPMENT STAGE
      COMPANY)


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006 AND 2005**





**NOTE
      J - EARNINGS (LOSS) PER SHARE**





The
      following table presents the computation of basic and diluted losses per
      share:





2006
            
            2005Net
                loss available for common shareholders
            
            $
            (15,926,093
            )
            $
            (8,731,209
            )Basic
                and fully diluted loss per share
            
            $
            (0.58
            )
            $
            (0.36
            )Weighted
                average common shares outstanding (basic and assuming
                dilution)
            
            
            27,360,878
            
            
            24,262,535


For
        the
        year ended December 31, 2006 and 2005, 7,390,245 and 3,121,598 potential
        shares,
        respectively, were excluded from the shares used to calculate diluted losses
        per
        share as their inclusion would reduce net losses per share.
  **NOTE
        K - INCOME TAXES**
 
 The
        Company has adopted Financial Accounting Standard number 109 which requires
        the
        recognition of deferred tax liabilities and assets for the expected future
        tax
        consequences of events that have been included in the financial statement
        or tax
        returns. Under this method, deferred tax liabilities and assets are determined
        based on the difference between financial statements and tax basis of assets
        and
        liabilities using enacted tax rates in effect for the year in which the
        differences are expected to reverse. Temporary differences between taxable
        income reported for financial reporting purposes and income tax purposes
        are
        insignificant.
 
 For
        income tax reporting purposes, the Company's aggregate unused net operating
        losses approximate $8,336,000 ,
        which
        expire through 2025 subject to limitations of Section 382 of the Internal
        Revenue Code, as amended. . The deferred tax asset related to the carry forward
        is approximately $2,834,000 .
        The
        Company has provided a valuation reserve against the full amount of the net
        operating loss benefit, since in the opinion of management based upon the
        earning history of the Company, it is more likely that the benefits will
        not be
        realized.
 
 Components
        of deferred tax assets as of December 31, 2006 are as follows:
 
 Non
                  Current:Net
                  operating loss carry forward
              
              $
              2,834,000Less:
                  valuation allowance
              
              
              (2,834,000
              )Net
                  deferred tax asset
              
              $
              -
 
 **NOTE
        L- COMMITMENTS AND CONTINGENCIES**
 
 Operating
        Leases
  Commencing
        in November 2004 and in continuing in 2006, the Company subleased office
        space
        in San Diego, California from a company owned by a director of the Company
        at a
        monthly rental of $4,094.00 per month. In April 2006, the Company established
        Cold Flow Energy ULC as a new wholly owned subsidiary based in Alberta, Canada
        to exploit oil and gas opportunities with monthly base rent of $293 per month.
        Total rent and related expenses of $46,024 and $25,172 were charged to operating
        expenses for the years ended December 31, 2006 and 2005
        respectively.
  F-28
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        L- COMMITMENTS AND CONTINGENCIES (Continued)**
 
 Employment
        Agreement
 
 The
        Company has employment agreements with its Executives. In addition to salary
        and
        benefit provisions, the agreements include defined commitments should the
        Executives terminate employment with or without cause.
 
 Chief
        Executive Officer: On
        November 30, 2004, the Company entered into a five year employment agreement
        with its Chief Operating Officer (“COO”), David Perez. Upon the resignation of
        Fred Kelly in January 2006, Mr. Perez became Chief Executive Officer and
        retained his title as Chairman of the Board of the Company. The term extends
        to
        ten years if net income before income taxes, as adjusted, exceeds $1,500,000
        during any of the first three fiscal years ending on or after January 1,
        2005.
        Base compensation will be $250,000 per year, with increases subject to the
        board
        or the compensation committee’s discretion. The performance bonus is equal to 5%
        of net income before income taxes, as adjusted, in excess of $500,000 for
        each
        fiscal year. Mr. Perez also receives an automobile allowance, term life
        insurance on his behalf, reimbursement of incurred legal expenses and other
        benefits. Mr. Perez’s stock options include 3,000,000 shares of common stock at
        an exercise price of $.65 per share. The option has a life of ten years.
        1,000,000 of these shares vested immediately with the balance vesting monthly
        over two years.
 
 Other
        stock options include 600,000 shares of common stock at an exercise price
        of
        $0.65 per share with a ten year life and vesting monthly over three years.
        In
        connection with his appointment to the Company's board on November 4, 2004,
        Mr.
        Perez was granted a five-year option to purchase 400,000 shares of common
        stock
        at an exercise price of $0.65 per share with 275,000 shares vesting immediately
        and the remaining 125,000 shares vesting on November 4, 2005 (Note G). For
        any
        additional equity the Company issues, Mr. Perez receives additional options
        for
        a number of shares equal to 14.3% of, subject to exceptions for stock dividends,
        stock splits, shares issued to employees, directors and consultants pursuant
        to
        board-approved compensation plans, shares issued in a public offering, shares
        issued for business combinations and up to 200,000 shares issued to certain
        vendors. The additional options exercise price is equal to the price the
        issued
        securities sold or deemed sold, immediately vest and have a ten year life
        (Note
        H). All options are subject to continuing service with the Company.  In
        November, 2005, Mr. Perez received 850,000 shares in Signet Energy, Inc.
 
 Chief
        Financial Officer: In July
        2003, the Company entered into an agreement with Jamie Schloss as its acting
        Chief Financial Officer and his affiliated company Castle Rock Resources
        to
        provide consulting and related services to assist the Company in locating
        oil
        and gas properties on a non-exclusive contract basis. The agreement provided
        the
        Company with a 30 day right of first refusal on each prospect property. The
        affiliated company received options to purchase 400,000 shares at $25 per
        share.
        Mr. Schloss exercised these options in August 2006. For wells proposed by
        the
        affiliated company and drilled by the Company, the affiliated company received
        a
        management fee of $5,000 per month. In addition, the affiliated company will
        oversee operations and finances for such wells. For all cash raised by the
        affiliated company on behalf of the Company, the affiliated company was to
        receive a 10% finder's fee and reimbursement of certain expenses. The finder's
        fee is payable in cash or stock at the affiliated company's option. The
        affiliated company had a right in certain circumstances to require registration
        under the Securities Act for the resale of the shares could have been
        purchased upon exercise of its stock option. The agreement expired on July
        21,
        2006. On December 9, 2004 the Company granted Mr. Schloss a 10-year option
        to
        purchase 400,000 shares at $0.65 per share and vesting in 36 equal monthly
        installments (Note H). In December 2005, the Company agreed to compensate
        Mr.
        Schloss at the salary of $80,000 per annum. On June 28, 2006, Mr. Schloss
        was
        terminated with William Greene appointed as CFO.
 
 William
        Greene was appointed as Chief Financial Officer in June 2006. Mr. Greene
        is
        entitled to an annual salary of $180,000, plus medical benefits. He is entitled
        to 400,000 options with a ten year term at an exercise price of $1.11 per
        share,
        vesting monthly on a pro rata basis over a three-year period, and otherwise
        subject to our employee stock option plan. If Mr. Greene is terminated as a
        result of a change in control, then all outstanding options become vested
        immediately. Upon termination without cause, the Company will pay Mr. Greene
        the
        balance of his contract and pro rate his options based on the date of departure.
         Stock option awards include 400,000 options received in July 2006 and
        fully valued at $676,000 per FAS123R and a vested 2006 cost of $131,444 per
        FAS
        123R. For the period ended December 31, 2006, no options have been
        exercised.
  F-29
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
        DEVELOPMENT STAGE
        COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        L - COMMITMENTS AND CONTINGENCIES (Continued)**
  Pension
        Plans
 The
          Company currently sponsors a voluntary qualified 401(k) savings plan and
          a
          pension plan, available to full-time employees. The pension plan is a
          non-contributory defined contribution plan. The 401(k) plan provides for
          discretionary employee contribution of up to 100% of annual pre-tax earnings,
          subject to the maximum amount established annually under Section 401(k)
          of the
          Internal Revenue Code or $15,000 for the year ended December 31, 2006.
          In the
          year ended December 31, 2006, discretionary Company contributions totaling
          $73,000 were made to the 401(k) saving plan and pension plan and resulted
          in an
          equal and corresponding reduction to base salaries to leave total gross
          compensation unchanged. The Company had no 401(k) savings plan and pension
          plan
          in effect for the year ended December 31, 2005.
 
 Total
          expense relative to these plans for the years ended December 31, 2006 and
          2005
          was $1,585 and $0, respectively.
  Consulting
        Agreements
 
 The
        Company has consulting agreements with outside contractors, certain of whom
        are
        also Company shareholders and directors. The Agreements are generally for
        a term
        of 12 months from inception and renewable automatically from year to year
        unless
        either the Company or Consultant terminates such engagement by written
        notice.
 
 Litigation
 
 Our
        previously disclosed expression of intent to enter an agreement with Dynamo
        Energy Corporation, a Canadian corporation (“Dynamo”), to obtain a right of
        first refusal on Dynamo’s prospects was never formalized by a signed agreement.
        On September 16, 2005 our Board determined that the proposed agreement with
        Dynamo had not been authorized by the Board and made an offer of settlement
        to
        Mr. Vandergrift, which was not accepted. Mr. Vandergrift has since
        resigned as a member of our Board of Directors.
  On
        November 15, 2006, plaintiff Dynamo Energy Corporation filed a First Amended
        Complaint against Surge Global Energy Inc., Signet Energy Inc., Frederick
        C.
        Berndt and E. Jamie Schloss in the Superior Court of the State of California,
        County of San Diego, Case No. GIC 874973.  Dynamo has alleged causes of
        action for Breach of Contract, Restitution, Declaratory Relief and Fraud. 
Dynamo's claims arise from an alleged agreement/contract in which Dynamo
        claims
        to be entitled to a finder's fee for certain acquisitions of oil and gas
        development opportunities in Canada that Surge was evaluating.  In
        addition, Dynamo claims a 5% gross overriding royalty on all the petroleum
        and
        natural gas rights acquired in certain oil and gas transactions by
        Surge.  Dynamo's complaint does not specify the amount of money they
        are seeking in this case.  Surge is challenging the Complaint on
        jurisdictional grounds.  The Superior Court has not yet made any ruling on
        the jurisdictional challenges to the Complaint.
  As
        previously disclosed, our Board had determined that the proposed agreement
        with
        Dynamo had not been authorized by the Board. We intend to vigorously defend
        this lawsuit. Although it is impossible to predict with certainty the outcome
        of
        this proceeding, or the outcome of any litigation, we are confident in the
        merits of our defense and do not anticipate an unfavorable outcome.
  From
        time
        to time, we receive claims of and become subject to commercial litigation
        related to the conduct of our business. Such litigation could be costly and
        time
        consuming and could divert our management and key personnel from our business
        operations. The uncertainty of litigation increases these risks. In connection
        with such litigation, we may be subject to significant damages or equitable
        remedies relating to the operation of our business. Any such litigation may
        materially harm our business, results of operations and financial
        condition.
 
 **NOTE
        M - GOING CONCERN MATTERS**
 The
          accompanying statements have been prepared on a going concern basis, which
          contemplates the realization of assets and the satisfaction of liabilities
          in
          the normal course of business. As shown in the financial statements during
          the
          years ended December 31, 2006 and 2005, the Company incurred losses from
          operations of $14,451,688 and $9,407,832, respectively. Subsequent to December
          31, 2006, the Company made payments that totaled approximately $747,000
          towards
          its Peace Oil acquisition commitments (see Note D). These factors among
          others
          may indicate that the Company will be unable to continue as a going concern
          .
  F-30
  **SURGE
        GLOBAL ENERGY, INC.**
 (A
          DEVELOPMENT STAGE
          COMPANY)
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006 AND 2005**
 
 **NOTE
        M - GOING CONCERN MATTERS** **(Continued)**
 
 The
        Company has historically used debt and equity financing to fund its operations.
        Until such time as we are able to generate significant cash flows from
        operations, we will be required to continue our reliance on investor financing
        and debt to fund our operations. In
        order
        to improve the Company's liquidity, the Company is actively pursuing additional
        equity financing through discussions with investment bankers and private
        investors. There can be no assurance the Company will be successful in its
        effort to secure additional equity financing.
 
 The
        financial statements do not include any adjustments relating to the
        recoverability and classification of recorded asset amounts or the amounts
        and
        classification of liabilities that might be necessary should we be unable
        to
        continue as a going concern. Our continuation as a going concern is dependent
        upon its ability to generate sufficient cash flow to meet our obligations
        on a
        timely basis, to obtain additional financing, and ultimately to attain
        successful operations. Management is continuing its efforts to obtain additional
        funds so that we can meet our obligations and sustain operations. However,
        no assurance can be given that management's actions will result in profitable
        operations or the resolution of its liquidity problems.


F-31