UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)
[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934
     FOR THE FISCAL YEAR ENDED MAY 31, 2006

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934
     For the transition period from                   to
                                    ------------------   --------------

                         Commission file number: 0-28627

                            PATCH INTERNATIONAL INC.
                 (Name of small business issuer in its charter)

           NEVADA                                       87-0393257
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

   666 BURRARD STREET, SUITE 1220, VANCOUVER, BRITISH COLUMBIA V6C 2X8 CANADA
          (Address of principal executive offices)             (Zip Code)

                    Issuer's telephone number: (604) 688-2790

       Securities registered under Section 12(b) of the Exchange Act: NONE

         Securities registered under Section 12(g) of the Exchange Act:

                          COMMON STOCK, $.001 PAR VALUE
                                (Title of class)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] 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. [ ]

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

State issuer's revenues for its most recent fiscal year:  $178,594

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates  computed by reference to the price at which the common equity
was sold,  or the average bid and asked  price of such  common  equity,  as of a
specified date within the past 60 days: $16,210,121 AS OF AUGUST 10, 2006

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:  15,752,862 SHARES OF COMMON STOCK AS
OF AUGUST 10, 2006

Transitional Small Business Disclosure Format (Check one):  Yes    ; No  X
                                                               ----    ----

<PAGE>

                       GLOSSARY OF CERTAIN INDUSTRY TERMS

         The  definitions  set forth below shall apply to the indicated terms as
used  herein.  All volumes of natural  gas  referred to herein are stated at the
legal  pressure  base of the state or area  where the  reserves  exist and at 60
degrees  Fahrenheit  and in most  instances  are  rounded to the  nearest  major
multiple.

         AFTER  PAYOUT.  With  respect to an oil or gas  interest in a property,
refers to the time  period  after which the costs to drill and equip a well have
been recovered.

         BBL. One stock tank barrel,  or 42 U.S.  gallons  liquid  volume,  used
herein in reference to oil or other liquid hydrocarbons.

         BEFORE  PAYOUT.  With  respect to an oil or gas interest in a property,
refers to the time period  before which the costs to drill and equip a well have
been recovered.

         CASING.  Pipe cemented in the well to seal off formation fluids or keep
the hole from caving in.

         COMPLETION.  The installation of permanent equipment for the production
of  oil or  natural  gas  or,  in the  case  of a dry  hole,  the  reporting  of
abandonment to the appropriate agency.

         DEVELOPED  ACREAGE.   The  number  of  acres  which  are  allocated  or
assignable to producing wells or wells capable of production.

         DEVELOPMENT  WELL. A well  drilled  within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.

         DRY  HOLE  OR  WELL.   A  well  found  to  be  incapable  of  producing
hydrocarbons  in sufficient  quantities such that proceeds from the sale of such
production exceed production expenses and taxes.

         EXPLORATORY WELL. A well drilled to find and produce oil or natural gas
reserves not classified as proved, to find a new reservoir in a field previously
found to be productive of oil or natural gas in another reservoir or to extend a
known reservoir.

         FARM-IN OR FARM-OUT.  An  agreement  where under the owner of a working
interest  in an oil and natural  gas lease  assigns  the  working  interest or a
portion  thereof to another  party who  desires to drill on the leased  acreage.
Generally,  the assignee is required to drill one or more wells in order to earn
its  interest  in the  acreage.  The  assignor  usually  retains  a  royalty  or
reversionary  interest in the lease.  The interest  received by an assignee is a
"farm-in" while the interest transferred by the assignor is a "farm-out."

         FIELD. An area consisting of a single reservoir or multiple  reservoirs
all grouped on or related to the same individual  geological  structural feature
and/or stratigraphic condition.

         FINDING COSTS.  Costs  associated with acquiring and developing  proved
oil and  natural  gas  reserves  which are  capitalized  pursuant  to  generally
accepted  accounting  principles,  including  all costs  involved  in  acquiring
acreage, geological and geophysical work and the cost of drilling and completing
wells.

         FRACTURING OR "FRAC".  A method of breaking down a formation by pumping
fluid at very high pressures. The objective is to increase production rates from
a reservoir.

         GROSS ACRES OR GROSS WELLS.  The total acres or wells,  as the case may
be, in which a working interest is owned.

         MCF. One thousand cubic feet of natural gas.


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         MUD. A mixture of base  substance and  additives  used to lubricate the
drill bit and to counteract the natural pressure of the formation.

         NET ACRES OR NET WELLS.  The sum of the  fractional  working  interests
owned in gross  acres  or gross  wells.  Net  acreage  or wells is  obtained  by
multiplying  gross  acreage or wells by the working  interest  percentage in the
properties.

         NET REVENUE  INTEREST.  The  operating  interest  used to determine the
owner's share of total production.

         PRESENT VALUE.  When used with respect to oil and natural gas reserves,
the estimated future gross revenue to be generated from the production of proved
reserves, net of estimated production and future development costs, using prices
and  costs  in  effect  as of the  date  indicated,  without  giving  effect  to
nonproperty-related  expenses such as general and administrative  expenses, debt
service  and  future  income  tax  expense  or to  depreciation,  depletion  and
amortization, discounted using an annual discount rate of 10%.

         PRODUCTIVE  WELL.  A well  that is found  to be  capable  of  producing
hydrocarbons  in sufficient  quantities such that proceeds from the sale of such
production exceed production expenses and taxes.

         PROVED  DEVELOPED  NONPRODUCING  RESERVES.  Proved  developed  reserves
expected to be recovered from zones behind casing in existing wells.

         PROVED DEVELOPED PRODUCING RESERVES. Proved developed reserves that are
expected to be recovered from  completion  intervals  currently open in existing
wells and able to produce to market.

         PROVED DEVELOPED  RESERVES.  Proved reserves that can be expected to be
recovered from existing wells with existing equipment and operating methods.

         PROVED RESERVES. The estimated quantities of crude oil, natural gas and
natural gas liquids  that  geological  and  engineering  data  demonstrate  with
reasonable  certainty to be  recoverable  in future years from known  reservoirs
under existing economic and operating conditions.

         PROVED UNDEVELOPED  LOCATION. A site on which a development well can be
drilled  consistent  with  spacing  rules  for  purposes  of  recovering  proved
undeveloped reserves.

         PROVED  UNDEVELOPED  RESERVES.  Proved reserves that are expected to be
recovered  from new wells on undrilled  acreage or from  existing  wells where a
relatively major expenditure is required for recompletion.

         PV-10  VALUE.  The present  value of  estimated  future  revenues to be
generated from the production of proved  reserves  calculated in accordance with
Securities and Exchange Commission  guidelines,  net of estimated production and
future  development  costs,  using prices and costs as of the date of estimation
without  future  escalation,  without  giving  effect  to  non-property  related
expenses  such as general and  administrative  expenses,  debt  service,  future
income tax expense and depreciation,  depletion and amortization, and discounted
using an annual discount rate of 10%.

         RECOMPLETION. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.

         ROYALTY  INTEREST.  An  interest  in an oil and  natural  gas  property
entitling the owner to a share of oil or natural gas production free of costs of
production.

         SHUT-IN WELL. A well which is capable of producing but is not presently
producing.  Reasons for a well being shut in may be lack of equipment, market or
other.

         SPUD. The operation of drilling the first part of a new well.


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<PAGE>

         3-D SEISMIC DATA.  Three-dimensional pictures of the subsurface created
by collecting and measuring the intensity and timing of sound waves  transmitted
into the earth as they reflect back to the surface.

         UNDEVELOPED ACREAGE. Lease acreage on which wells have not been drilled
or  completed  to a  point  that  would  permit  the  production  of  commercial
quantities of oil and natural gas  regardless  of whether such acreage  contains
proved reserves.

         WORKING INTEREST. The operating interest that gives the owner the right
to drill,  produce and conduct operating  activities on the property and a share
of production.


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

         The  business of Patch  International  Inc. and its  subsidiaries  (the
"Company") is the exploration, development and production of oil and natural gas
reserves.  The main  focus is on  producing  oil and gas  assets  located in the
Kerrobert area in the Province of Saskatchewan,  Canada and on other oil and gas
assets, including oilsands leases, located in Alberta, Canada. Principal capital
expenditures  of the  Company  through  May 31,  2006  were  $3,158,070  for the
acquisition,  exploration,  and  development of its interests in the oil and gas
properties.

         Previously   the   Company's   business   was   the   development   and
commercialization of non-prescription  therapeutics and nutraceuticals  designed
to prevent inflammation and their sequelae, and the development of cosmetics for
skin conditions.  The Company had not generated any revenues from product sales,
royalties or license fees. Due to the inability of the Company to obtain funding
and/or partners to pursue its pharmaceutical  projects, it decided to seek other
business   opportunities.   On  October  20,  2003,  Patch   International  Inc.
("International")  entered into an Arrangement Agreement to acquire Patch Energy
Inc., a privately-held  company existing under the CANADA BUSINESS  CORPORATIONS
ACT ("Energy").

         At the Energy  shareholders'  meeting on February 20, 2004,  the Energy
shareholders   approved  the  Plan  of  Arrangement.   As  of  March  15,  2004,
International acquired Energy as a wholly owned subsidiary.

         On June 15,  2004,  International  changed  its  domicile to Nevada and
changed its name to Patch International Inc.

BACKGROUND AND CORPORATE STRUCTURE

         International was incorporated as Praxis Pharmaceuticals,  Inc. on June
20, 1997 under the laws of the State of Nevada ("Praxis-Nevada").  In June 1998,
Praxis-Nevada  engaged in a reverse  acquisition  transaction with  Micronetics,
Inc.,  a  company   incorporated  in  Utah  on  December  31,  1981,  where  the
shareholders of Praxis-Nevada gained control over Micronetics.  Micronetics then
changed its name to Praxis Pharmaceuticals Inc. ("Pharmaceuticals"). Immediately
after the reverse  acquisition  transaction,  the  shareholders of Praxis-Nevada
held   approximately   98%  of  the  outstanding   shares  of   Pharmaceuticals.
Praxis-Nevada was merged into  Pharmaceuticals  effective June 30, 2002, thereby
eliminating Praxis-Nevada as a subsidiary of Pharmaceuticals.

         A wholly owned Australian subsidiary,  Praxis Pharmaceuticals Australia
Pty.  Ltd.  (ACN 082 811 630) was  formed in May 1998 as a private  company.  In
October 1999 an equity  investment  was made in this  subsidiary  by  Rothschild
Bioscience  Managers  Limited  (now known as GBS Venture  Partners  Ltd),  which
reduced Pharmaceuticals' equity ownership to 35%. The funds raised were used for
the development of autoimmune  disease  research  licensed from Anutech Pty Ltd,
the  development  arm of the Australian  National  University.  Praxis-Australia
changed  its  name to  "Pharmaxis  Ltd"  in  June  2002.  An  additional  equity
investment was made in Pharmaxis in August 2002, which reduced  Pharmaceuticals'
equity ownership to 19.6%. Pharmaceuticals' equity ownership was further reduced
to 10.4% upon  completion of an initial public offering by Pharmaxis in November
2003,  and  current  stands at less than 5% due to further  share  issuances  by
Pharmaxis and due to the sale of Pharmaxis  shares by the Company.  Pharmaxis is
listed on the Australian  Stock Exchange under the symbol "PXS".


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<PAGE>

Pharmaxis is  a  specialist  pharmaceutical  company  committed to the research,
development and  commercialization  of  human  therapeutic  products for chronic
respiratory  and  autoimmune  diseases and  the  development of an improved lung
function test.

         The 11,200,000  Pharmaxis  shares held for resale were  restricted from
trading until  November 11, 2005.  In addition,  the Company had entered into an
agreement  not to sell 65%  (7,280,000)  of its  Pharmaxis  shares for a further
lock-up period that expired February 28, 2006.

         The Company  has  proposed  the  distribution  of a cash  dividend on a
pro-rata  basis  of 50% of the net  proceeds  of the sale of its  investment  in
Pharmaxis. Net proceeds includes the costs related to the sale of the shares and
related  taxes.  The  directors  have fixed July 30,  2004 as record  date.  The
dividend is subject to the Company receiving all required regulatory approvals.

         A second wholly owned  Australian  subsidiary,  Praxis  Pharmaceuticals
International Pty. Ltd. (ACN 092 654 870)  ("Praxis-International"),  was formed
on May 2, 2000. Praxis-International was dissolved effective March 3, 2004.

         As  of  March  15,  2004,  International  consummated  the  Arrangement
Agreement   with  Energy   under  which   International   acquired   Energy,   a
privately-held  oil and gas  company  continued  under the laws of Canada,  in a
stock-for-stock transaction. As a result of the acquisition,  Energy is a wholly
owned subsidiary of International.  In the arrangement, each issued common share
of Energy  was  exchanged  for one  common  share of  International.  A total of
18,232,625 shares (4,558,155 post-reverse and forward split shares) were issued,
bringing the issued and  outstanding  shares of  International  to 38,224,372 at
that time. David Stadnyk,  a former officer and director of International,  then
controlled   approximately  two-thirds  of  the  Energy  shares.  He  controlled
approximately  17.1% of the outstanding shares of International as of August 10,
2006.

         The  acquisition  has  been  treated  for  accounting  purposes  as  an
acquisition  by Energy  of the net  assets  and  liabilities  of  International.
Because  Energy is deemed  to be the  purchaser  for  accounting  purposes,  the
consolidated  financial statements are presented as a continuation of Energy and
include the results of operations of Energy since  incorporation on February 11,
2002,  and  the  results  of  operations  of  International  since  the  date of
acquisition on March 15, 2004.

         As of July 25, 2005, the Company  effected a 1-for-10  reverse split of
its common stock and as of March 27, 2006, it effected a 2.5-for-1 forward split
on its common  stock.  All share  amounts  have been  adjusted to reflect  these
splits unless otherwise noted.

HISTORY AND DEVELOPMENT OF ENERGY

         DEVELOPMENT  OF ENERGY.  Energy was  incorporated  on February 11, 2002
under the name "Patch Energy Inc." by  registration  of Memorandum  and Articles
under the COMPANY ACT of British Columbia,  Canada.  Effective January 16, 2003,
Energy continued  jurisdiction of incorporation  from the COMPANY ACT of British
Columbia  to the  CANADA  BUSINESS  CORPORATIONS  ACT and as a  result  is now a
federally incorporated company.

         THE  BUSINESS  OF  ENERGY.  Energy's  principal  business  has been the
exploration,  development and production of oil and natural gas reserves through
participation in farmout arrangements where third parties act as the operator of
the project. Energy's main focus had been on its assets located in the Kerrobert
area in the Province of Saskatchewan, Canada.

PATCH OILSANDS LTD. AND PATCH OILSANDS LIMITED PARTNERSHIP

         On February 3, 2006,  Energy formed a  wholly-owned  subsidiary,  Patch
Oilsands Ltd.  ("Oilsands") in the Province of British Columbia. On February 27,
2006,  Oilsands formed a Canadian  limited  partnership,  Patch Oilsands Limited
Partnership  (the  "Partnership"),  of  which  Energy  owns a 75%  interest  and
Oilsands is the general


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<PAGE>

partner.   The  purpose  of  the  Partnership  is  to  pursue  the  acquisition,
exploration  and  development of land or other property  interests  primarily in
the Alberta Oil Sands area of Canada.

         Under  the  terms of the  limited  partnership  agreement,  Energy  can
subscribe  for units at a  preferential  rate to the  current  minority  limited
partners,  Habanero  Resources  Inc.  ("Habanero")  and  Micron  Enviro  Systems
("Micron").  Habanero owns 20.8333% interest while Micron owns 4.1667% interest.
Habanero and Micron have to pay a multiple of 1.285714 of the base  subscription
price for all  subscription  funds raised,  except that portion which applies to
cover the cost of the Company's  shares purchased by the Partnership and used as
consideration in transactions  undertaken by the Partnership.  The difference in
the  preferential  subscription  pricing  expires at the  earlier of  $4,538,000
(CDN$5,000,000) in capital raised or the date that the Partnership accepts a new
limited  partner.   As  of  May  31,  2006,   Energy  had  advanced   $1,594,334
(CDN$1,873,279) in tranches  representing its share of the initial  subscription
contribution to the Partnership.

         David  Stadnyk,  an officer and director of the Company at the time the
Partnership was formed,  had a finder's agreement with Habanero and a consulting
agreement with Micron.  Mr. Stadnyk has resigned all of his officer and director
positions with the Company, except for President of Oilsands, effective April 7,
2006, but remains as a consultant to the Company.

PRINCIPAL PRODUCTS

         The Company conducts  exploration  activities to locate natural gas and
crude  petroleum.  The  Company  produces  light crude oil in  Saskatchewan  and
Alberta,  Canada. Such products are generally sold at the wellhead to purchasers
in the immediate area where the products are produced.

COMPETITION

         Oil and gas exploration and acquisition of undeveloped  properties is a
highly competitive and speculative business.  The Company competes with a number
of  other  companies,  including  major  oil  companies  and  other  independent
operators which are more experienced and which have greater financial resources.
The Company does not hold a significant  competitive position in the oil and gas
industry.

GOVERNMENTAL REGULATION/ENVIRONMENTAL ISSUES

         The Company's oil and gas  operations  are subject to various  federal,
provincial and local  governmental  regulations.  Matters  subject to regulation
include  discharge  permits for drilling  operations,  drilling and  abandonment
bonds,  reports  concerning  operations,  the  spacing of wells,  and pooling of
properties  and taxation.  From time to time,  regulatory  agencies have imposed
price controls and  limitations on production by restricting the rate of flow of
oil and gas wells below actual production capacity in order to conserve supplies
of oil and gas. The production,  handling, storage,  transportation and disposal
of oil and gas, by-products thereof, and other substances and materials produced
or used in connection with oil and gas operations are also subject to regulation
under  federal,  state,  provincial  and  local  laws and  regulations  relating
primarily  to the  protection  of human  health  and the  environment.  To date,
expenditures  related to  complying  with these  laws,  and for  remediation  of
existing environmental  contamination,  have not been significant in relation to
the results of operations of the Company.  The requirements imposed by such laws
and regulations are frequently  changed and subject to  interpretation,  and the
Company  is unable  to  predict  the  ultimate  cost of  compliance  with  these
requirements or their effect on its operations.

         The  Company  is  subject  to laws and  regulations  that  control  the
discharge  of materials  into the  environment,  require  removal and cleanup in
certain  circumstances,  require  the  proper  handling  and  disposal  of waste
materials or otherwise relate to the protection of the environment. In operating
and owning  petroleum  interests,  it may be liable for damages and the costs of
removing  hydrocarbon  spills for which the Company  would be held  responsible.
Laws relating to the protection of the  environment  have in many  jurisdictions
become more stringent in recent years and may, in certain circumstances,  impose
strict liability,  rendering the Company liable for environmental damage without
regard to actual negligence or fault. Such laws and regulations may expose it to
liability  for the conduct of,


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or conditions caused by, others or for its own acts.  The Company  believes that
it has complied in all material  respects with applicable environmental laws and
regulations.

EMPLOYEES

         As of July 31, 2006, the Company had 1 full-time employee.

         The Company's opportunity for success depends largely upon the efforts,
abilities, and decision-making of its directors and executive officers. The loss
any of the Company's key personnel  could, to varying  degrees,  have an adverse
effect on its operations and research and development  efforts.  The loss of any
one of them would have a material  adverse  affect on the  Company.  The Company
does not currently maintain "key-man" life insurance on its executive officers.


ITEM 2.  DESCRIPTION OF PROPERTY.

KERROBERT AREA, SASKATCHEWAN, CANADA

         On May 1, 2002,  the  Company  entered  into a farmout  agreement  (the
"Farmout  Agreement")  with True Energy Inc.  ("True Energy") and Arsenal Energy
Inc.  ("Arsenal  Energy"),  pursuant to which it participated in the drilling of
ten test wells located in the Kerrobert area of Saskatchewan,  Canada.  Pursuant
to the terms of the Farmout  Agreement,  the Company had the right to earn 12.5%
interest in the Farmout Lands (as defined in the Farmout Agreement) by incurring
15.625% of the drilling costs for the wells.

         The assets cover approximately 40 acres, with the potential of up to 80
drillable  locations,  as well spacing rules in Saskatchewan allow one-half acre
per location.  The Company  earned a 12.5% working  interest in 10 test wells on
the properties in January 2003 however it assigned a 4.167% working  interest in
the 10 test wells to Fairchild,  pursuant to the Fairchild  First  Participation
Agreement described below. This interest was relinquished back to the Company on
April 15, 2005.

         On December 2, 2002, the Company entered into a participation agreement
with Fairchild (the "Fairchild First Participation Agreement").  Pursuant to the
terms  of the  Farmout  Agreement,  the  Company  had the  right to earn a 12.5%
interest in the Farmout Lands (as defined in the Farmout Agreement) by incurring
15.625% of the costs (the "Initial  Costs")  associated  with the Test Wells (as
defined in the Farmout  Agreement).  Pursuant to the terms of the  participation
agreement,  Fairchild had the right to earn up to a one-third (1/3) share of the
Interest (the "Partial Interest"),  being a 4.167% interest in the 10 Test Wells
in  consideration  of  incurring  an equal  portion of the costs to a maximum of
5.208% of the costs  associated  with the Test Wells.  In order for Fairchild to
earn a Partial Interest, it was to pay for costs otherwise to be incurred by the
Company pursuant to the terms of the Farmout  Agreement,  equal to the amount of
the  Partial  Interest  to be earned by  Fairchild  (the  "Partial  Costs")  and
Fairchild was to pay such Partial Costs as and when  requested by the Company in
order that the Company might fulfill its obligations under the Farmout Agreement
in respect of the Partial Costs provided that, if Fairchild  failed to make such
payments,  its right to earn the Partial  Interest would cease and the agreement
was to be terminated.

         On February 10, 2003,  the Company  entered into another  participation
agreement with  Fairchild  ("Fairchild  Second  Participation  Agreement").  The
parties to the Farmout  Agreement  were  proposing to carry out a further 9-well
drill program (the "Second  Program").  Under the terms of the Fairchild  Second
Participation  Agreement,  Fairchild  could earn a 1.75%  interest in the Second
Program  in  consideration  of  incurring  an  equal  percentage  of  the  costs
associated with the Second Program.

         On April 3, 2003, the Company entered into an amendment  agreement (the
"Fairchild   Amendment   Agreement")  to  the  Fairchild  Second   Participation
Agreement.  The Company confirmed with Fairchild that its ability to continue to
earn a 12.5%  interest in any wells drilled on the Farmout Lands under the terms
of the Farmout  Agreement was contingent  upon the Company paying 15.625% of the
costs associated with such wells.  The Fairchild  Amendment  Agreement  provided
that  Fairchild  was  obligated to incur 2.5% of the costs  associated  with the
Second  Program on the Farmout  Lands in order to earn a 1.75%  interest in such
wells,  as  opposed  to  incurring


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1.75% of  the  costs as  provided  for  in  the  Fairchild  First  Participation
Agreement, reflecting the increased costs to which the Company was subject.

         On November 5, 2003, Energy entered into a participation agreement with
Fairchild  to permit  Fairchild to earn a 6.75%  working  interest in future oil
wells in the Kerrobert drilling program in consideration of Fairchild  incurring
8.4375% of the costs  associated with any such  subsequent  wells. As of January
31, 2004, a total of 19 wells had been drilled on the Farmout Lands.

         The Company  entered  into a  participation  agreement on a second nine
test wells,  based upon the Company paying 15% of the costs  associated with the
program in order to earn a 12.5%  working  interest in those wells.  The Company
entered  into a  sub-participation  agreement  with Micron  Enviro  Systems Inc.
("Micron") dated March 27, 2003 whereby Micron earned a 3.5% working interest in
those wells by incurring 5% of the  associated  costs.  The Company also entered
into a  sub-participation  agreement on those same wells with Butler Development
Corporation ("Butler") dated April 28, 2003 whereby Butler earned a 3.5% working
interest  by  incurring  5% of the  associated  costs and by paying the  Company
$13,614.

BROWNING, SASKATCHEWAN

         On November 14, 2003, the Company  acquired a 12.5% working interest in
a test well  located in  Saskatchewan  and 6.25% in the  balance of the  farmout
lands, by incurring 12.5% of the costs. A total of $nil (2005 - $1,324) in costs
related to this well was charged to operations, as the well was shut-in.

BEAR CANYON PROJECT, ALBERTA, CANADA

         By a  participation  agreement  dated  March 10,  2005 with Park  Place
Petroleum Inc., the Company  acquired a 25% working  interest in the Bear Canyon
gas project, located in Northeast Alberta.

         The project  consisted of one initial well, with the potential to drill
multiple wells if the first were to be successful.  The well was spudded on July
15,  2005,  but the  operator  concluded  that the well was not  economic due to
excess water and an impairment  charge of $24,787 was  recognized in fiscal 2006
($nil in fiscal 2005).

MCLEOD PROJECT, ALBERTA, CANADA

         Pursuant  to a  farmout  agreement  dated  May 30,  2005  with  Winstar
Resources Ltd.  ("Winstar"),  the Company  acquired a 10% working  interest in a
test well,  known as the "McLeod  Project,"  located in Alberta.  The Company is
responsible  for 10% of the costs.  As of May 31, 2006, the Company had incurred
$150,739 towards the drilling costs.  The Company's  working interest is subject
to a convertible  sliding scale, gross overriding royalty reserved to Winstar of
5%-12% on oil and 12% on natural gas and other  petroleum  substances  and Crown
royalties.

         The first well began production in October 2005. A second test well was
drilled in December 2005 and was shut-in January 2006. The Company recognized an
impairment charge of $44,913 on this well in 2006 ($nil in fiscal 2005).

LLOYDMINSTER, ALBERTA, CANADA

         The Company entered into Agreements  dated November 8, 2005, to acquire
a working  interest in a test well and option well  project in the  Lloydminster
area of Alberta, Canada. Under the terms of the Agreement, a test well was to be
spudded on each property no later than December 31, 2005,  extended by agreement
to June 30, 2006. Site preparation for drilling is underway.  Since May 31, 2006
the Company has made cash call advances of $281,176 on this project. The Company
will earn a 50% working interest in a test well and an option well by paying 50%
of the costs,  subject to an overriding  royalty  convertible after pay-out such
that, if converted,  the Company's interest reverts to a 30% working interest in
those wells and a 30% working  interest in the balance of the farmout lands. The
lands are subject to a 1% gross overriding royalty and Crown royalties.


                                       8
<PAGE>

ELNORA, ALBERTA, CANADA

         On November 8, 2005,  the Company  entered  into an agreement on a test
well at Elnora.  The Company has decided not to proceed with the Elnora  project
at this time. Under the terms of the agreement, a test well was to be spudded on
each property no later than December 31, 2005, extended by agreement to June 30,
2006.  The Company has  decided not to proceed  with the Elnora  project at this
time.

ATLEE-BUFFALO

         The Company entered into Agreements  dated November 8, 2005, to acquire
a working interest in a test well project in the Atlee-Buffalo  area of Alberta.
Under the terms of each of the Agreements,  a test well was to be spudded on the
property no later than  December  31,  2005,  extended by  agreement to June 30,
2006. Since May 31, 2006, the Company has made cash call advances of $132,532 on
this project.  A test well has been drilled and cased to a secondary target. The
Company earns a 50% working interest in the test well,  subject to an overriding
royalty  convertible  after  pay-out  such that,  if  converted,  the  Company's
interest  reverts to a 30%  working  interest  in those  wells and a 30% working
interest in the balance of the farmout  lands,  by paying 50% of the cost of the
test well.  The lands are  subject to a 1% gross  overriding  royalty  and Crown
royalties.

HALKIRK, ALBERTA, CANADA

         The Company entered into an Agreement dated January 4, 2006, to acquire
a 100% working  interest in a test well  project  located in the Halkirk area of
Alberta. Since May 31, 2006, the Company has made cash call advances of $255,062
in respect of this project. The well has been spudded and is being completed and
frac tested; flow results are pending.  The Company will earn a 100% interest in
the test wells  subject to an  overriding  royalty such that if converted  after
payout the Company  will revert to a 50% working  interest in the well and a 50%
working  interest  in the balance of the  farmout  lands,  by paying 100% of the
costs of the test well. The lands are subject to a 1% gross  overriding  royalty
and Crown royalties.

PEACE RIVER AREA, ALBERTA

         The Company  entered into a Farmout and  Participation  Agreement dated
January 19, 2006, to acquire a working interest in oil and gas leases ("Block A"
and "Block B") in the Peace River arch area of  Alberta.  Under the terms of the
Agreement,  the Company  made a payment of $678,943  to the  titleholder  of the
farmout lands.  The Company will earn a 90% working  interest in a test well and
spacing unit,  subject to a convertible  overriding  royalty  exercisable  after
payout such that if exercised,  reduces the Company's interest to 54%, and a 54%
working  interest in the balance of the Block A lands,  by incurring  90% of the
costs of a test well to be spudded  on the Block A lands no later than  February
1, 2007.  The Company  will earn a 90% working  interest in the second test well
and spacing unit, subject to a convertible  overriding royalty exercisable after
payout such that if exercised,  reduces the Company's interest to 54%, and a 54%
working  interest in the balance of Block B lands by incurring  90% of the costs
of a test well to be  spudded  on the Block B lands no later  than  February  1,
2007.  The  lands  are  subject  to a 1%  gross  overriding  royalty  and  Crown
royalties.  To date, cash call payments totalling $46,521 have been made towards
the two test wells.

ATHABASCA OILSANDS, ALBERTA, CANADA

         On February 28, 2006, the Partnership entered into an agreement for the
acquisition of an Alberta Oilsands  property located just south of Fort McMurray
in the area of Leismer,  Alberta,  Canada. The property is divided into two half
sections  called  Block A and Block B. On March 2, 2006,  the  Partnership  paid
$726,080 and transferred  437,500 restricted shares of the Company at a price of
$1.08 per share for a 40%  working  interest  in Block A. On March 30,  2006 the
Partnership  paid an additional  $453,800 to earn a further 40% working interest
in Block A. The  Partnership  has the option,  exercisable on or before April 1,
2007,  to  acquire an 80%  interest  in Block B for the  payment  of  $1,179,880
(CDN$1,300,000) and 100,000 additional shares of the Company.  Both Blocks A and
B are subject to a 5% overriding  royalty and Crown  royalties.  The Partnership
must fund 80% of the costs of a 3D seismic


                                       9
<PAGE>

program  covering  approximately  1.2  square miles over the Block A and Block B
lands on or before March 1, 2007.  The Partnership  must  also fund a Test  Well
on the Block A lands, which must be spudded by March 1, 2007.

         On April 5,  2006,  Energy  acquired  three  Crown  oil  sands  leases,
comprising  four sections  (1,024  hectares) at the Alberta Crown Oil Sands sale
for $405,143.  The initial lease term is for 15 years with annual rental payable
to the Alberta  Crown of $3.18  (CDN$3.50)  per hectare and Crown  royalties  on
production.  On April 7, 2006 Energy sold those  leases to the  Partnership  for
$641,370.  The  inter-company  profit  of  $236,227  has  been  eliminated  upon
consolidation of Company's financial statements.

RED DEER, ALBERTA, CANADA

         Subsequent  to May 31, 2006 the Company  entered  into a  Participation
Agreement  with  Highview  Resources  Ltd.  ("Highview")  dated June 6, 2006, to
acquire 50% of Highview's majority interest in two sections of land located near
to the City of Red Deer in  Central  Alberta,  Canada.  Under  the  terms of the
Agreement,  the Company  paid 50% of past land  acquisition  and  seismic  costs
incurred by Highview of $48,963 and has incurred $38,169 in respect of its share
of a new  seismic  program.  Under  the terms of a Pooling  and  Seismic  Option
Agreement with a third party, the Company and Highview can elect to drill a test
well  in and  earn  100%  in  each  section  subject  to a 12%  non  convertible
overriding royalty of 12%, reduced  proportionately by the acreage  contribution
of the Company and Highview in each section.  Crown  royalties will apply on any
production.

RICH / RUMSEY, ALBERTA, CANADA

         Subsequent  to May 31, 2006 the Company  also entered into an Agreement
with Vanguard  Exploration Corp. dated July 7, 2006, to acquire a 26.25% working
interest in certain mineral rights on a quarter section of land and the right to
participate  as to 35% in a test  well and an  option  well  over two  sections,
convertible by a third party after payout to a 21% working interest, in the Rich
/ Rumsey area of Alberta,  Canada. Under the terms of the Agreement, the Company
paid a prospect fee of $60,182 to cover a share of seismic and land  acquisition
costs.  The Company  also paid  $462,548  towards its share of the  drilling and
casing costs back to a secondary  target of a test well.  Crown  royalties  will
apply on any production.

MANAHUILLA CREEK PROJECT, GOLIAD COUNTY, TEXAS

         The Company entered into a participation  agreement dated September 30,
2003 agreement  with PB Energy USA, Inc.  ("PB") whereby the Company was granted
the right to earn a 3.75% participating  working interest in a test well and the
oil and gas lands leased by PB totaling 856 acres lying within the Goliad County
of Texas, USA (the "Program  Lands") known as the Manahuilla  Creek Project,  by
paying $15,000 (5% of the acquisition  costs),  5% of the costs of the test well
and 3.75% of the costs relating to the development of the oil and gas lands. The
test well has been shut-in and the Company  recognized an  impairment  charge of
$34,385 in 2005.

          On November 6, 2003 Energy entered into a participation agreement with
Fairchild  in order for  Fairchild  to  participate  in an oil and gas  prospect
located in Goliad County,  Texas Under the agreement with  Fairchild,  Fairchild
has a right to earn one-half of Energy's interest (1.875%) by paying one-half of
Energy's costs. Through January 31, 2004, Fairchild has paid Energy $7,500 being
one-half of the $15,000  previously paid by Energy on account of the acquisition
costs. As of April 15, 2005,  Fairchild  relinquished its interest in Manahuilla
Creek Project back to the Company.

EAST CORNING PROJECT, TEHAMA COUNTY, CALIFORNIA

         On April 4, 2002, the Company loaned $70,000 to Fairchild International
Corporation  ("Fairchild"),  an oil and gas exploration  company,  pursuant to a
convertible  promissory  note  which  bore  interest  at 8% per  annum  and  was
convertible  into common  shares of  Fairchild.  As  consideration  for the loan
Fairchild  assigned to the Company a 20% working interest in Fairchild's oil and
gas  interests in Tehama  County,  California.  The note also  provided that the
Company  be  granted  a right  of  first  refusal  to  participate  as to 50% of
Fairchild's  interest in respect of any oil and gas  exploration  or  production
opportunities  Fairchild may  participate  in the future.  On July 16, 2002, the
Company elected to convert the loan into 1,750,000 common shares of Fairchild.


                                       10
<PAGE>

         Fairchild has a farmout agreement with Olympic Resources (Arizona) Ltd.
giving it a right to earn a 3.75% interest in five test wells. As of January 31,
2004,  Fairchild had earned a 3.75% interest in four of the five test wells as a
result of which the Company held a 0.75% interest in such wells. Under the terms
of the agreement with  Fairchild,  the Company was to receive its  proportionate
share of the revenues from such wells once Fairchild has received revenues equal
to the costs incurred by Fairchild to earn the interest in the wells.  By letter
dated  December  15,  2004,  the Company  relinquished  its right to its working
interest in these wells.  For the fiscal years ended May 31, 2006 and 2005,  the
Company  received  $nil and  $213,  respectively,  in  revenues  from its  0.75%
interest in the four test wells.

         The Company relinquished its interest in these wells in fiscal 2005.

UKRAINE

         In September  2003, the Company signed a letter of  understanding  with
NAFTOGAZ, the state-run oil company of Ukraine. On November 7, 2003, the Company
entered into an agreement with Fairchild whereby the Company agreed to negotiate
with  Fairchild so as to give  Fairchild the  opportunity  to participate in any
venture  Energy  may become  involved  in as a result of its  relationship  with
NAFTOGAZ.

         Negotiations  with  NAFTOGAZ  are still in process.  The  parties  have
agreed  to  continue  formal  discussions.  At the  present,  Ukraine  is having
political elections and under the advice of Ukrainian legal counsel, Energy will
wait until after the elections to continue its due diligence and  finalizing any
potential agreements.

         In August 2004, Energy signed a memorandum of understanding  with Firma
HAS to joint  venture  with respect to several  producing  oil and gas fields of
Chernigivska,  Sumska,  Poltavaska,  and Kharkivska  regions of Ukraine,  and to
further explore these properties for future targets.

         The Company  does not intend to proceed at this time with  drilling the
wells identified in the signed  Memorandum of  Understanding  with Firma HAS. No
capital costs have been incurred to date.

TUNISIA, NORTH AFRICA

         The Company  signed a Memorandum  of  Understanding  with  Carthago Oil
Company,  Tunisia,  for the right to acquire  40% of an oil and gas  interest in
Northern Tunisia by committing  approximately $4,000,000 to fund a work program,
which includes the drilling of one well. The terms of the Memorandum  expired on
April 30, 2005.

COMPANY RESERVE ESTIMATES

         No estimates of total,  proved net oil or gas reserves  have been filed
with or  included  in  reports  to any  federal  authority  or agency  since the
beginning of the last fiscal year.

VOLUME, PRICES AND OPERATING EXPENSES

         The following  table  presents  information  regarding  the  production
volumes,  average sales prices received, and average production costs associated
with the Company's sales of oil for the periods indicated:

                                                FOR THE YEARS ENDED MAY 31,
                                              2006         2005         2004
                                              ----         ----         ----
        Oil production (Bbl)                 3,515.5      3,558.4      5,280.9
        Average sales price per Bbl          $58.75       $45.34       $30.80
        Average production costs per Bbl     $14.18       $12.76       $13.98



                                       11
<PAGE>


PRODUCTIVE WELLS

         The following  summarizes the Company's  productive wells as of May 31,
2006.

<TABLE>
<CAPTION>
AREA                         GROSS OIL WELLS         NET OIL WELLS          GROSS GAS WELLS         NET GAS WELLS
----                         ---------------         -------------          ---------------         -------------
<S>                                <C>                    <C>                     <C>                    <C>
Saskatchewan                       19                     1.75                     -                      -
Alberta                             1                     0.10                     -                      -
                                   --                     ----                    ---                    ---
TOTAL                              19                     1.85                     -                      -
                                   ==                     ====                    ===                    ===
</TABLE>

OIL AND GAS ACREAGE

         The following table sets forth the undeveloped and developed  leasehold
acreage,  by area,  held by the Company as of May 31,  2006.  The table does not
include  acreage in which the Company has a  contractual  right to acquire or to
earn through  drilling  projects,  or any other acreage for which it has not yet
received leasehold assignments.

                               UNDEVELOPED ACRES            DEVELOPED ACRES
    AREA                    GROSS              NET       GROSS              NET
    ----                    -----              ---       -----              ---
    Saskatchewan              -                 -         760               70
    Alberta                  ---               ---        158               16
                                                          ---               --
         Total                -                 -         918               86
                             ===               ===        ===               ==

DRILLING ACTIVITY

         During fiscal 2003, the Company participated in drilling four gas wells
in Tehama County, California. In December 2003, the Company spudded the first of
10 wells drilled in phase 1 of the Kerrobert project in Saskatchewan, Canada. Of
the 14 wells drilled during 2003, 14 were initially commercially viable.

         During the fiscal year ended May 31, 2004, the Company  participated in
phase 2 of the Kerrobert  project in Saskatchewan for a total of nine wells. The
Company also  participated in the Browning project in Saskatchewan,  which was a
dry hole. Of the 10 wells drilled during fiscal 2004, 9 of 10 were  commercially
viable.

         During the fiscal year ended May 31, 2005, the Company relinquished its
rights to its working  interest in the East Corning  Project in California.  The
test well in the Manahuilla Creek Project was shut-in as it was not commercially
viable.

         During fiscal year ended May 31, 2006 the Company  participated  in the
Bear Canyon Project and McLeod Project in Alberta,  Canada. The Bear Canyon well
was not  economic.  One McLeod well entered  production in October of 2005 and a
second well was shut-in as it was not commercially viable.

         Subsequent to May 31, 2006, the Company  participated in three projects
that have been  drilled:  the  drilling and casing of a well back to a secondary
target at Rich / Rumsey area of Alberta,  Canada; the drilling and fracturing of
a well at Halkirk, Alberta where flow results are pending; and the drilling of a
well at Atlee-Buffalo and casing it back to a secondary target.

PRESENT ACTIVITIES

         The Company is evaluating  data to determine  whether to participate in
additional seismic work at Rich/Rumsey or to participate in drilling a secondary
target.  The Company is awaiting  flow  results  from a well drilled at Halkirk,
Alberta.  The  Company  has  drilled  and cased  back to a  secondary  target at
Atlee-Buffalo and is further evaluating before a decision as to participating in
further drilling is made. The Company is participating in a test and option well
program at Lloydminster,  Alberta,  where drill  preparations are underway.  The
Company has  participated  in a seismic  program on two sections of land located
near to the  City  of Red  Deer  in  Central  Alberta,  Canada  and  anticipates
participating  in further  seismic  work after which a decision as to whether to
drill will be made.  The Company  intends to conduct a test well  program at its
Peace River project.  The Company is continuing


                                       12
<PAGE>

to  acquire  prospective  oil  sands  leases  and  intends  to conduct a program
consisting  of seismic and  test wells to  help define  further  the  contingent
resource of oil sands reserves.

OFFICE SPACE

         The  executive  offices  for the Company and Energy are located at 1220
Park Place, 666 Burrard Street,  Vancouver,  British  Columbia,  Canada V6C 2X8.
This space accommodates all of its executive and administrative offices.


ITEM 3.  LEGAL PROCEEDINGS.

         None.


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

         None.




















                                       13
<PAGE>
                                     PART II

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

         The  Company's  common stock has been traded on the OTC Bulletin  Board
since July 23, 1998, except for two periods during which the stock was traded on
the  "Pink  Sheets":  March 9,  2000 to  November  21,  2000 and June 3, 2003 to
January 8, 2004. The trading symbol was changed from "PTII" to "PTCH"  effective
March 28,  2006.  The  following  table sets forth the range of high and low bid
quotations  for  each  fiscal  quarter  for the  last two  fiscal  years.  These
quotations  reflect  inter-dealer  prices without retail mark-up,  markdown,  or
commissions and may not necessarily represent actual transactions.

                                                       BID PRICES

2005 FISCAL YEAR                             HIGH                         LOW

Quarter ending 08/31/04                     $0.60                        $0.24
Quarter ending 11/30/04                     $0.36                        $0.20
Quarter ending 02/28/05                     $0.40                        $0.16
Quarter ending 05/31/05                     $0.44                        $0.24

2006 FISCAL YEAR

Quarter ending 08/31/05                     $0.70                        $0.02
Quarter ending 11/30/05                     $0.69                        $0.32
Quarter ending 02/28/06                     $1.67                        $0.38
Quarter ending 05/31/06                     $2.58                        $0.46

         On August 10,  2006,  the  closing  bid price for the common  stock was
$1.24.  The number of record  holders of the common stock as of August 10, 2006,
was  approximately  400 according to the Company's  transfer  agent.  Holders of
shares of common stock are entitled to dividends  when, and if,  declared by the
board of directors out of funds legally available therefor.

RECENT SALES OF UNREGISTERED SECURITIES

         During the quarter  ended May 31, 2006,  the Company sold  unregistered
securities in transactions as follows:

     o   On  March 3, 2006,  437,500  common shares to the Partnership that
         were used for the acquisition of oil and gas properties;
     o   On March 28, 2006,  75,299 common  shares  valued  at  $100,000  to two
         persons in consideration for public relations services rendered; and
     o   On May 15, 2006, the Company granted options to purchase 485,000 shares
         of its common stock at $1.54 to its interim President and 8 consultants
         for services rendered to the Company.

         No underwriters were used in the above transactions. The Company relied
upon the exemption from registration contained in Section 4(2) of the Securities
Act of 1933, as the purchasers were deemed to be sophisticated with regard to an
investment in the Company's stock.

PURCHASES OF EQUITY SECURITIES BY THE COMPANY AND AFFILIATED PURCHASERS

         The following is a summary of shares  repurchased  for  cancellation by
the Company in the quarter ended May 31, 2006:


                                       14

<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
              TOTAL NUMBER OF                    TOTAL NUMBER OF SHARES (OR      MAXIMUM NUMBER (OR APPROXIMATE
   PERIOD    SHARES (OR UNITS)   AVERAGE PRICE   UNITS) PURCHASED AS PART OF   DOLLAR VALUE) OF SHARES (OR UNITS)
                 PURCHASED      PAID PER SHARE   PUBLICLY ANNOUNCED PLANS OR   THAT MAY YET BE PURCHASED UNDER THE
                                   (OR UNIT)              PROGRAMS                      PLANS OR PROGRAMS
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
<S>               <C>                <C>                   <C>                               <C>
Mar 1, 2006        12,500            $1.64                 198,750                           478,750
     -
Mar 31, 2006
-------------------------------------------------------------------------------------------------------------------
Apr 1, 2006          0                 0                      0                              478,750
     -
Apr 30, 2006
-------------------------------------------------------------------------------------------------------------------
May 1, 2006          0                 0                      0                              478,750
     -
May 31, 2006
-------------------------------------------------------------------------------------------------------------------
   Total          198,750            $0.56                 198,750                           478,750
-------------------------------------------------------------------------------------------------------------------
</TABLE>

         The share repurchase  program was announced November 17, 2005 effective
December 1, 2005 and ends November 30, 2006.

         3,558 shares were  purchased  subsequent  to May 31, 2006 at an average
price of $1.33.

         112,808 post forward  split shares were  purchased in the year that did
not satisfy safe harbor requirements per Rule10b-18.


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

         The  following  discussion  of the  financial  condition and results of
operations for the Company should be read in conjunction  with the  accompanying
financial statements and related footnotes.

GENERAL

         The Company  participates in projects through  participation in farm-in
arrangements, where third parties act as the operator of the project and through
direct ownership of oil and gas leases.

         The   Company's   business   originally   was   the   development   and
commercialization of non-prescription  therapeutics and nutraceuticals  designed
to prevent inflammation and their sequelae, and the development of cosmetics for
skin conditions.  The Company had not generated any revenues from product sales,
royalties or license fees. Due to the inability of the Company to obtain funding
and/or partners to pursue its pharmaceutical  projects, it decided to seek other
business  opportunities.  As of March 15,  2004,  the  Company  consummated  the
Arrangement  Agreement with Patch Energy Inc. ("Energy") under which the Company
acquired Energy, a privately-held  oil and gas company  continued under the laws
of Canada,  in a  stock-for-stock  transaction.  As a result of the acquisition,
Energy is a wholly owned  subsidiary of the Company.  In the  arrangement,  each
issued common share of Energy was exchanged for one common share of the Company.
A total of 18,232,625 shares  (4,558,155  post-reverse and forward split shares)
were  issued,  bringing  the issued  and  outstanding  shares of the  Company to
38,224,372 at that time.

         The  acquisition  has  been  treated  for  accounting  purposes  as  an
acquisition by Energy of the net assets and liabilities of the Company.  Because
Energy is deemed to be the purchaser for accounting  purposes,  the consolidated


                                       15
<PAGE>

financial  statements are presented as a continuation  of Energy and include the
results of operations of Energy since  incorporation  on February 11, 2002,  and
the results of operations of the Company since the date of  acquisition on March
15, 2004.

         A 10:1 reverse split of the Company's  stock was made effective on July
25, 2005. A 1:2.5  forward split of the  Company's  stock was made  effective on
March 27, 2006.

         On  February  3,  2006  the  Company,  through  Energy,  formed  a  new
subsidiary, Patch Oilsands Ltd. ("Oilsands").  On February 27, 2006 the Company,
through Energy,  formed Patch Oilsands Limited  Partnership  ("Partnership")  in
which Energy owns 75% of the Limited Partnership units, Habanero Resources Inc.,
20.8333% and Micron Enviro Systems Inc., 4.1667%.  David Stadnyk, an officer and
director of the  Company,  Energy and Oilsands at the time the  Partnership  was
formed,  had a finder's  agreement  with  Habanero  Resources  and a  consulting
agreement with Micron Enviro Systems.

         Mr. Stadnyk has resigned all of his officer and director positions with
the Company and Energy,  except for Oilsands effective April 7, 2006 but remains
as a consultant to the Company.

         Under the terms of the Partnership  Agreement  Energy may subscribe for
units,  where  unit  proceeds  are for other than the  purchase  of stock in the
Company by the Partnership for  consideration in transactions  undertaken by the
Partnership,  at a preferential price to the two minority limited partners, such
that they pay a multiple of 1.28571 of Energy's  subscription  price,  up to the
earlier  of  $4,538,000   (CDN$5,000,000)   in  capital   contribution   or  the
introduction  of another third party limited  partner.  Oilsands will manage the
Partnership in its capacity as General Partner.

ACCOUNTING POLICIES

         The Company follows the successful efforts method of accounting for its
oil and gas producing  activities.  Under this method, all costs associated with
productive  exploratory wells and productive or nonproductive  development wells
are capitalized while the costs of nonproductive exploratory wells are expensed.
If an exploratory well finds oil and gas reserves, but a determination that such
reserves  can be  classified  as  proved is not made  after  one year  following
completion  of  drilling,  the costs of  drilling  are  charged  to  operations.
Indirect exploratory expenditures,  including geophysical costs and annual lease
rentals,  are expensed as incurred.  Unproved  oil and gas  properties  that are
individually  significant are periodically assessed for impairment of value, and
a loss is  recognized  at the time of  impairment  by  providing  an  impairment
allowance.  Capitalized  costs of producing oil and gas  properties  and related
support  equipment,  after considering  estimated  dismantlement and abandonment
costs  and  estimated  salvage  values,  are  depreciated  and  depleted  by the
unit-of-production method.

         On the sale or retirement of a complete unit of a proved property,  the
cost and related  accumulated  depreciation,  depletion,  and  amortization  are
eliminated  from  the  property  accounts,  and  the  resultant  gain or loss is
recognized.  On the retirement or sale of a partial unit of proved property, the
cost is charged to accumulated  deprecation,  depletion, and amortization with a
resulting gain or loss  recognized in income.  On the sale of an entire interest
in an unproved property for cash or cash equivalent, gain or loss on the sale is
recognized,  taking into consideration the amount of any recorded  impairment if
the  property  had been  assessed  individually.  If a  partial  interest  in an
unproved  property is sold, the amount received is treated as a reduction of the
cost of the interest  retained.  In joint ventured oil and gas  exploration  and
production  activities,  the accounts  reflect only the Company's  proportionate
interest in such activities.

RESULTS OF OPERATIONS

         The Company  generated  $178,594 in oil and gas  revenues  for the 2006
fiscal year,  an increase of $81,179 or 83% from fiscal  2005.  The increase was
due to an increase in the market price of oil and an increase in production  due
to the  McLeod  Well that  commenced  operations  during  the year.  Oil and gas
expenses  increased $236,606 or 275% to $322,607 in 2006 versus $86,001 in 2005.
As a result  there was a net oil and gas  operations  loss of  $144,013  in 2006
versus a profit of $11,414 in fiscal  2005,  an  increase in loss of $155,427 or
1,362%.  The increase in oil and gas  expenses  was due to increased  depletion,
depreciation,  impairment  and  accretion  costs of


                                       16
<PAGE>

$206,659 or 350% to $265,756 versus $59,097 in fiscal 2005 and increased oil and
gas  production, royalties and other expense of $29,947 or 100% to 56,851 versus
$26,904 in fiscal 2005.  Also  included  was an increase in abandonment costs of
$35,315 to $69,700 in 2006 due to the McLeod dry well versus $34,385 in 2005 due
to abandonment of Manahuilla Creek Project, Texas.

         The Company  generated total other revenue of $7,161,758 versus $nil in
fiscal 2005 comprising $83,557 in interest income, $101,664 in respect of a gain
on dilution related to the discount unit subscription  price paid by the Company
with respect to its investment in Patch Oilsands  Limited  Partnership,  $13,600
portion  of  Limited   Partnership  loss  attributable  to  the  non-controlling
partners'  interest  and  a  $6,962,937  gain  on  sale  of   available-for-sale
securities.  The gain on available for sale securities of $6,962,937 is the gain
before tax on the sale of 4,408,063 Pharmaxis Ltd shares.

         Expenses,  other than oil and gas production expenses,  were $1,924,390
for fiscal 2006  compared to  $1,033,877 in fiscal 2005, an increase of $890,513
or 86%. The increase in non-oil and gas expenses is primarily  due to a $386,091
or 83% increase in consulting  expense to $848,681,  of which  $520,810 is stock
option  expense  compared to $284,354 in fiscal 2005, an increase of $236,456 or
83%; a $287,732 or 152% increase in investor  relations to $477,514  compared to
$189,782 in fiscal 2005,  including $177,400 in share  compensation  compared to
$nil share  compensation  in fiscal  2005;  and  $211,867 of  professional  fees
compared  to  $113,596  in fiscal  2005,  an  increase  of 113,596 or 72% due to
increase in audit and  accounting  fees with  increased size and activity of the
Company and increase in legal fees due to new corporate structure and activity

         As a result of the significantly  increased expenses in 2006, operating
loss for fiscal 2006 was $2,068,403,  an increase of $1,045,940 or 102% over the
operating loss for fiscal 2005 of $1,022,463.

         As a  result  of other  income,  income  before  taxes  was  $5,093,355
compared to loss of $1,022,463 in fiscal 2005, an increase of $6,115,818 or 598%

         Provision  for income taxes was  $2,406,243 in 2006 compared to $nil in
fiscal 2005.

         Net income was  $2,687,112  in 2006 compared to a loss of $1,022,463 in
fiscal 2005, an increase in net income of $3,709,575 or 363%.

         Other   comprehensive   income  was  $1,234,000  in  2006  compared  to
$6,006,999  in fiscal 2005, a decrease of  $4,772,999  or 79% due to  unrealized
holding gain in 2005 of $6,006,999 on available for sale securities  compared to
$3,598,217 in 2006 and transfer to realized gain in 2006 of $2,364,217  compared
to $nil in fiscal 2005. Foreign currency  translation  adjustment of $111,560 in
fiscal  2006  compared  to  $nil in 2005 is  attributable  to  foreign  exchange
translation  gain  on  Patch  Oilsands  Limited  Partnership,  whose  functional
currency is Canadian dollars.

         Comprehensive  income was  $4,032,672  in 2006 compared to $4,984,536 a
decrease of $951,864 or 19%.

LIQUIDITY AND CAPITAL RESOURCES

         For the fiscal year ended May 31, 2006, the Company used $1,526,196 for
its  operations,  as  compared to $307,826  for the 2005 fiscal  year.  This was
primarily due to the operating  loss  generated in fiscal 2006 of $2,068,403 and
increase in income taxes  payable of  $2,181,000.  The Company also received net
cash from investing activities in 2006 of $4,526,232,  comprising  $6,962,937 in
proceeds from sale of available-for-sale  securities less $2,436,705 invested in
oil and gas interests.  This compared to using $79,725 in fiscal 2005. Financing
activities   provided  net  cash  of   $1,299,669   consisting  of  third  party
contribution  to the limited  partnership  of $666,996,  common stock issued for
cash of $743,750 less stock repurchased and cancelled  pursuant to an issuer bid
program at a cost of  $111,077.  In fiscal 2005 net cash  provided by  financing
activities was $477,810 and was wholly provided by common stock issued for cash.

         At May 31, 2006, the Company had working capital of $2,089,735 compared
to a deficit of $441,549 at May 31, 2005.


                                       17
<PAGE>

         At May 31, 2006, the Company's  remaining available for sale securities
comprise 6,791,937 shares of Pharmaxis Ltd, recorded at a market value after tax
of  $7,241,000.  At May 31, 2005,  the market value of 11,200,000  Pharmaxis Ltd
shares held was recorded at $6,007,000 after tax.

         The  Company  believes  it has  sufficient  working  capital  on  hand,
together with  expected  future  proceeds  from sales of its  Pharmaxis  shares,
together with proceeds from sale of stock,  to fund both its planned oil and gas
operations and expenses for the next 12 months and its proposed dividend.

PLAN OF OPERATION

         The Company is planning to use a portion of the proceeds  from the sale
of its remaining Pharmaxis shares to fund the acquisition and exploration of oil
and gas  properties,  to  repurchase  some of it shares and for general  working
capital.

         In  addition,  the  Company is  proposing  the  distribution  of a cash
dividend  on a  pro-rata  basis  of 50% of the net  proceeds  of the sale of its
investment in Pharmaxis Ltd. Net proceeds includes the costs related to the sale
of the shares and related  taxes.  The directors have fixed July 30, 2004 as the
record date.  The  distribution  will take place after the Company has completed
the final sale of its Pharmaxis  shares and is subject to the Company  receiving
all required regulatory  approvals.  The Company is conducting the final sale of
shares in an orderly manner so as to maximize the sale proceeds.

         The Company has a working  interest  in  nineteen  producing  oil wells
located at Kerrobert, Saskatchewan, Canada and a working interest in a producing
oil well (the "McLeod" project) located in Alberta, Canada.

         The Company has a working  interest  in a two well  project  located in
Lloydminster,  Alberta.  Drill preparations are underway on this project and the
wells will be spudded shortly.

         The Company has decided not to proceed with a proposed drill project at
Elnora, Alberta, Canada.

         The  Company  has  participated  in  drilling a well at  Atlee-Buffalo,
Alberta,  Canada, which has been cased back to a secondary target. A decision as
to further drilling will be made by the participants after further evaluation.

         The Company is awaiting  flow  results  from a well drilled at Halkirk,
Alberta.

         The Company has  participated  in a seismic  program on two sections of
land  located  near to the  City of Red  Deer in  Central  Alberta,  Canada  and
anticipates participating in a further seismic program after which a decision as
to whether to drill will be made.

         The Company participated in the drilling and casing of a well back to a
secondary target at Rich / Rumsey area of Alberta, Canada and is evaluating data
to determine whether to participate in additional seismic work or to participate
in drilling a secondary target.

         The Company is planning to  participate  in a two test well  program in
the Peace  River arch area of Alberta  to be spudded no later than  February  1,
2007. To date, the Company has paid a property  payment of $678,943 and has made
cash calls on the two wells totaling $46,521.

         The  Company is  planning  by March 1, 2007 to  undertake  a 3D seismic
program to cover  approximately  1.2  square  miles over the Block A and Block B
lands on Section 19 at the  Leismer  oilsands  property  and by March 1, 2007 to
spud a Test Well on the Block A lands.  The  Company  also  intends to conduct a
program  consisting  of  seismic  and test  wells  to help  define  further  the
contingent  resource of oil sands  reserves.  In addition the company intends to
acquire  more  oilsand  leases in the  Athabasca,  Peace River and Cold Lake oil
sands regions, and elsewhere in Western Canada.


                                       18
<PAGE>

          The Company  will not to proceed  with an Agreement it entered into as
of  November  1, 2005 to acquire a 30%  working  interest  in the  Warnes  Field
project, Santa Cruz, Bolivia.

         The Company does not intend to proceed at this time with drilling wells
in the Ukraine as outlined in a Memorandum of Understanding with Firma HAS.


ITEM 7.  FINANCIAL STATEMENTS.

         See pages beginning with page F-1.


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

         None.


ITEM 8A. CONTROLS AND PROCEDURES.

         On May 31, 2006,  John  Thornton,  the  Company's  principal  executive
officer and principal  financial  officer,  made an evaluation of its disclosure
controls and procedures.  In his opinion, the disclosure controls and procedures
are  effective.  There have been no changes in the Company's  internal  controls
that materially  affected,  or are reasonably likely to materially  affect,  its
internal control over financial reporting.


ITEM 8B. OTHER INFORMATION.

         None.















                                       19

<PAGE>
                                    PART III

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

         The officers and directors of the Company are as follows:

NAME                               AGE      POSITION

John Thornton                      72       Interim President and director

Tom Mayenknecht                    47       Secretary

Winston Cabell                     34       Director

         The term of office of each director ends at the next annual  meeting of
the  Company's  stockholders  or when such  director's  successor is elected and
qualifies. The term of office of each officer ends at the next annual meeting of
the Company's board of directors,  expected to take place  immediately after the
next annual meeting of stockholders, or when such officer's successor is elected
and qualifies.

         The last annual  meeting  was held on August 30,  1999,  in  Vancouver,
British Columbia.

         JOHN P.  THORNTON has been the interim  President and a director of the
Company since April 8, 2006. He has been a self-employed business and consultant
in the securities industry in the Vancouver,  British Columbia, area since 1986.
During the past five  years,  he has served as a director  of several  U.S.  and
Canadian public companies:
    o    Bonaventure Enterprises Inc., TSX Venture Exchange, Vancouver,  British
         Columbia, director from September 1998 to January 2006;
    o    Consolidated Odyssey Exploration Inc., TSX Venture Exchange, Vancouver,
         British Columbia, director from April 2000 to August 2005;
    o    Caesar's  Explorations  Inc.,  Canadian  Venture  Exchange,  Vancouver,
         British Columbia, director from August 1996 to September 2001;
    o    Goldnev  Resources  Inc.,  TSX  Venture  Exchange,  Vancouver,  British
         Columbia, director from September 2001 to June 2004;
    o    Knightsbridge  Resources Inc., OTC  Bulletin Board,  Vancouver, British
         Columbia, director from October 1996 to July 2002; and
    o    Fairchild  International Corp.,  OTC Bulletin Board, Vancouver, British
         Columbia, director from June 2002 to November 2004;

         TOM  MAYENKNECHT  has been the Secretary of the Company since September
26,  2005.  Mr.  Mayenknecht  has  over  25  years  of  experience  in  business
development,  marketing  communications,  and brand management,  with particular
emphasis in  professional  and  Olympic  sports.  He has been a principal  of M2
Strategies,  a  business  development  consulting  firm  in  Vancouver,  British
Columbia, since October 2004. He was the CEO of Sportworks  Entertainment,  Inc.
and  Governor of the  Vancouver  Ravens  Lacrosse  Club,  Inc.  from August 2001
through August 2002 and then from February 2003 to December 2004.

         WINSTON CABELL has been a director of the Company since August 2002 was
the corporate  Secretary from  September 2002 to September  2005. Mr. Cabell has
been in the financial  services  industry since 1996.  Since then, he has worked
with various publicly traded companies.  Duties have included investor relations
and securing major financing for these companies. Prior to joining the financial
services industry,  Mr. Cabell spent 8 years on the professional squash circuit.
Mr. Cabell is currently a director of a private oil and gas exploration  company
located in Canada.

         No other  directorships are held by each director in any company with a
class of securities registered pursuant to Section 12 of the Securities Exchange
Act of 1934 or any  company  registered  as an  investment  company,  under  the
Investment Company Act of 1940.


                                       20
<PAGE>

         Messrs. Stadnyk and Cabell may be deemed to be "promoters" and "control
persons" of the Company,  as that term in defined in the Securities Act of 1933.
There are no other control persons.

KEY CONSULTANT

         DAVID  STADNYK was the  President  and  Treasurer and a director of the
Company from August 2002 to April 2006.  He  previously  served as the Secretary
and a director  of the  Company  from June 19,  1998 to October  20,  2000.  Mr.
Stadnyk has diverse experience in corporate management and finance. He currently
serves as the chairman of Grand Slam Radio which launched team 1040, Vancouver's
first and only 24-hour sports radio station,  and chairman of Stadnyk  Corporate
Group,  a venture  corporate  finance and  investment  firm. Mr. Stadnyk was the
chairman of Starlight Sports &  Entertainment,  a sports  entertainment  company
that owned the Vancouver Whitecaps and Vancouver  Breakers,  professional soccer
teams,  from October 1999 to May 2002. He was also the president of A.C.  Global
Capital  Group Corp.,  a  CDNX-listed  capital pool  company,  from July 1999 to
September  2002.  He has  served as the  Chairman,  President,  Secretary  and a
director of Goanna Resources,  Inc., a publicly listed mining company (now known
as Syngas  International  Corporation)  from its inception in June 1997 to March
1999. He was the President and CEO of Alexander News  International,  a publicly
traded newspaper  publishing  chain in Canada,  from July 1994 to February 1997.
Mr.  Stadnyk was also a licensed  stockbroker  with Midland Walwyn Capital Inc.,
Yorkton  Securities Inc., and Georgia Pacific Securities Corp. from 1988 to 1991
in Canada.  From July 1997 to September 2000, Mr. Stadnyk has been the executive
director  of  Alexander  Cox & Co.  based in Sydney,  Australia  and  Vancouver,
British  Columbia,  which engaged in financial  consulting  and venture  capital
funding. He is a graduate of the University of British Columbia.

ADVISORY BOARD OF DIRECTORS

         In May 2005,  Khaled  Echikh was  appointed to the  Company's  Advisory
Board of  Directors,  as  Director  of North  African  Affairs.  He is a trained
geologist  with  almost  40  years'  experience  in  North  African  oil and gas
ventures.  For the past 10 years, Mr. Echikh worked as an independent consultant
in Algeria, Libya, England, and France for several oil and gas companies.

CODE OF ETHICS

         The Company  has not yet  adopted a code of ethics that  applies to its
principal executive officers,  principal financial officer, principal accounting
officer or controller,  or persons performing  similar  functions,  since it has
been focusing its efforts on obtaining  financing  for the company.  The Company
expects to adopt a code by the end of the current fiscal year.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Officers  and  directors,  and  persons  who  own  more  than  10% of a
registered  class of the  Company's  equity  securities,  are  required  to file
reports of ownership and changes in ownership  with the  Securities and Exchange
Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934. The
following  table sets forth reports that were not filed on a timely basis during
the most recently completed fiscal year:

--------------------------------------------------------------------------------
REPORTING PERSON                DATE REPORT DUE               DATE REPORT FILED
--------------------------------------------------------------------------------
David Stadnyk                 Form 4 due 06/07/05                 06/09/05
--------------------------------------------------------------------------------
David Stadnyk                 Form 4 due 09/06/05                 02/02/06
--------------------------------------------------------------------------------
David Stadnyk                 Form 4 due 02/03/06                 03/22/06
--------------------------------------------------------------------------------
David Stadnyk                 Form 4 due 05/01/06                 05/19/06
--------------------------------------------------------------------------------
David Stadnyk                 Form 4 due 05/23/06                 05/24/06
--------------------------------------------------------------------------------
David Stadnyk                 Form 4 due 06/01/06                 07/10/06
--------------------------------------------------------------------------------
Winston Cabell                Form 4 due 06/09/05                 07/07/05
--------------------------------------------------------------------------------
Winston Cabell                Form 4 due 12/06/05                 12/28/05
--------------------------------------------------------------------------------
Winston Cabell                Form 4 due 01/30/06                 02/02/06
--------------------------------------------------------------------------------


                                       21
<PAGE>


--------------------------------------------------------------------------------
REPORTING PERSON                DATE REPORT DUE               DATE REPORT FILED
--------------------------------------------------------------------------------
Winston Cabell                Form 4 due 03/24/06                 03/27/06
--------------------------------------------------------------------------------
John P. Thornton              Form 4 due 04/12/06                 04/13/06
--------------------------------------------------------------------------------
John P. Thornton              Form 4 due 05/17/06                 05/18/06
--------------------------------------------------------------------------------


ITEM 10. EXECUTIVE COMPENSATION.

         The following  table sets forth  information  the  remuneration  of the
Company's  chief  executive  officers and all executive  officers that earned in
excess of $100,000 per annum during any part of the last three fiscal years:

<TABLE>
                           SUMMARY COMPENSATION TABLE
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                                            LONG TERM COMPENSATION
                                ANNUAL COMPENSATION                  --------------------------------------
                                                                              AWARDS             PAYOUTS
                   ------------------------------------------------------------------------------------------------------
                                                         OTHER        RESTRICTED   SECURITIES
    NAME AND                                             ANNUAL          STOCK     UNDERLYING      LTIP        ALL OTHER
    PRINCIPAL                                          COMPENSA-       AWARD(S)     OPTIONS/      PAYOUTS       COMPENSA-
    POSITION         YEAR    SALARY ($)    BONUS ($)     TION($)          ($)       SARS (#)        ($)         TION ($)
-------------------------------------------------------------------------------------------------------------------------
<S>                  <C>      <C>            <C>          <C>            <C>        <C>             <C>           <C>
John Thornton        2006      10,000        -0-          -0-            -0-        137,500         -0-           -0-
  (1)<F1>
-------------------------------------------------------------------------------------------------------------------------
David Stadnyk        2006     175,000        -0-          -0-            -0-        300,000         -0-           -0-
  (2) <F2>           2005     113,583        -0-          -0-            -0-        55,000          -0-           -0-
                     2004     108,000        -0-          -0-            -0-        45,000          -0-           -0-
-------------------------------------------------------------------------------------------------------------------------
------------------
<FN>
(1)<F1>  Mr. Thornton became the interim President effective April 8, 2006.
(2)<F2>  Mr.  Stadnyk was the  President from  August 31, 2002 to April 7, 2006.
         Salary for 2004  consists of  compensation  from the Company and Energy
         for the entire fiscal year ended May 31, 2004.
</FN>
</TABLE>


<TABLE>
                      OPTION/SAR GRANTS IN LAST FISCAL YEAR
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                          NUMBER OF SECURITIES         % OF TOTAL
                               UNDERLYING         OPTIONS/SARS GRANTED
                          OPTIONS/SARS GRANTED      TO EMPLOYEES IN        EXERCISE OR BASE
NAME                               (#)                FISCAL YEAR            PRICE ($/SH)          EXPIRATION DATE
--------------------------------------------------------------------------------------------------------------------
<S>                              <C>                     <C>                     <C>                 <C>
John P. Thornton                 37,500                  17.2%                   $0.80                02/13/07
                                 100,000                                         $1.54                05/15/08
--------------------------------------------------------------------------------------------------------------------
David Stadnyk                    250,000                 37.5%                   $0.56                09/02/10
                                 50,000                                          $1.54                05/15/08
--------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
         AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
                                OPTION/SAR VALUES
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                         NUMBER OF SECURITIES
                                                                              UNDERLYING        VALUE OF UNEXERCISED
                                                                             UNEXERCISED            IN-THE-MONEY
                                                                           OPTIONS/SARS AT         OPTIONS/SARS AT
                                                                              FY-END (#)             FY-END ($)
                          SHARES ACQUIRED ON                                 EXERCISABLE/           EXERCISABLE/
NAME                         EXERCISE (#)         VALUE REALIZED ($)        UNEXERCISABLE           UNEXERCISABLE
----------------------------------------------------------------------------------------------------------------------
<S>                             <C>                     <C>                  <C>                    <C>
John P. Thornton                100,000                 70,500               137,500/-0-             $49,750/-0-
----------------------------------------------------------------------------------------------------------------------

David Stadnyk                     -0-                    -0-                 550,000/-0-            $641,500/-0-
----------------------------------------------------------------------------------------------------------------------
</TABLE>

         As of May 1, 2005,  the  Company  entered  into a  management  services
agreement with David Stadnyk.  The agreement is for a term of five years, ending
April 30, 2010. The Company agreed to pay Mr. Stadnyk $175,000 per annum for his
services  to the  Company.  In  connection  with  the  new  management  services
agreement,  the Company entered into a change of control  agreement as of May 1,
2005,  which provides that if a change of control  occurs,  Mr. Stadnyk shall be
entitled to terminate his employment  with the Company and receive  payment from
the Company equal to the greater of (i) the remaining base  compensation  due to
him  for  the  remaining  term  of the  management


                                       22
<PAGE>

services agreement or (ii) US$175,000. Such amount is payable  in cash or shares
of the Company at the option of Mr. Stadnyk. For the purposes of this agreement,
change of control is defined as:
         o   the acquisition of 20% or more of the voting power;
         o   a  consolidation or  merger by the  Company with or into any person
             whereby the Company's outstanding shares are  changed  in  any  way
             (other than a transaction  which has been approved by the Company's
             directors;
         o   a change in a majority of the board of director of the Company; or
         o   the resignation  or removal of a majority of the board of directors
other than a  transaction  or series of  transactions  which  involves a sale of
securities  or assets of the  Company  with which Mr.  Stadnyk is  involved as a
purchaser in any manner.


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

         The following table provides certain information as to the officers and
directors  individually  and as a group,  and the holders of more than 5% of the
Company's  common stock, as of August 10, 2006.  Except as otherwise  indicated,
the persons named in the table have sole voting and investing power with respect
to all shares of common stock owned by them.

<TABLE>
<CAPTION>
            NAME AND ADDRESS OF OWNER                   NUMBER OF SHARES OWNED             PERCENT OF CLASS (1)<F1>
<S>                                                         <C>                                   <C>
David Stadnyk
666 Burrard Street, Suite 1220                              3,240,184 (2)<F2>                     19.9%
Vancouver, BC  V6C 2X8 Canada

Winston Cabell                                               380,325 (3)<F3>                       2.4%
666 Burrard Street, Suite 1220
Vancouver, BC V6C 2X8 Canada

John Thornton                                                142,500 (4)<F4>                       0.9%

Tom Mayenknecht                                               75,000 (5)<F5>                       0.5%
Officers and directors as a group (3 persons)                597,825 (6)<F6>                       3.7%
------------
<FN>
(1)<F1>  Where persons listed on this table have the right to obtain  additional
         shares of common stock through the exercise of  outstanding  options or
         warrants or the  conversion of  convertible  securities  within 60 days
         from  August  10,  2006,  these  additional  shares  are  deemed  to be
         outstanding for the purpose of computing the percentage of common stock
         owned by such  persons,  but are not deemed to be  outstanding  for the
         purpose  of  computing  the  percentage  owned  by  any  other  person.
         Percentages are based on 15,752,862 shares outstanding.

(2)<F2>  Includes 550,000 shares issuable upon the exercise of stock options.

(3)<F3>  Includes 112,500 shares issuable upon exercise of stock options.

(4)<F4>  Includes 100,000 shares issuable upon exercise of stock options.

(5)<F5>  Includes 75,000 shares issuable upon exercise of stock options.

(6)<F6>  Includes 287,500 shares issuable upon exercise of stock options.
</FN>
</TABLE>

CHANGES IN CONTROL

         The  Company  is not  aware of any  arrangements  that may  result in a
change in control of the Company.


                                       23
<PAGE>


EQUITY COMPENSATION PLAN INFORMATION

         The following  table sets forth  information  as of the end of the most
recently completed fiscal year, May 31, 2006:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                Number of securities to be    Weighted average exercise
                                  issued upon exercise of       price of outstanding         Number of securities
                                   outstanding options,         options, warrants and       remaining available for
Plan category                       warrants and rights                rights                   future issuance
---------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                            <C>                        <C>
Equity compensation plans                   -0-                          --                           -0-
approved by security holders
---------------------------------------------------------------------------------------------------------------------
Equity compensation plans not            2,272,500                      $0.75                      1,015,000
approved by security holders
---------------------------------------------------------------------------------------------------------------------
Total                                    2,272,500                      $0.75                      1,015,000
---------------------------------------------------------------------------------------------------------------------
</TABLE>

         2004 STOCK OPTION PLAN.  On October 29, 2004,  the  Company's  Board of
Directors  adopted a 2004 Stock Option Plan under which  incentive stock options
and  non-qualified  stock options to purchase a total of 3,000,000 shares may be
granted to employees, and non-employees, such as directors and officers.

         The board of directors  administers the Stock Option Plan.  Options may
be granted for up to 10 years at not less than the fair market value at the time
of grant,  except  that the term may not exceed five years and the price must be
110% of fair market value for any person who at the time of grant owns more than
10% of the total voting power of the Company.  Unless otherwise  specified in an
optionee's  agreement,  options  granted  under  the  Plan  shall  vest  in full
immediately.  The Plan  will  remain in  effect  until  the  board of  directors
terminates it, except that no incentive stock option,  as defined in Section 422
of the Internal Revenue Code, may be granted after October 29, 2014.

         Options may be  exercised  by payment of the option  price (i) in cash,
(ii) by tender of shares of Company  common stock which have a fair market value
equal to the option price, or (iii) by such other  consideration as the board of
directors may approve at the time the option is granted.

         2005 STOCK OPTION  PLAN.  On August 22, 2005,  the  Company's  Board of
Directors  adopted a 2005 Stock Option Plan under which  incentive stock options
and  non-qualified  stock options to purchase a total of 2,250,000 shares may be
granted to employees, and non-employees, such as directors and officers.

         The board of directors  administers the Stock Option Plan.  Options may
be granted for up to 10 years at not less than the fair market value at the time
of grant,  except  that the term may not exceed five years and the price must be
110% of fair market value for any person who at the time of grant owns more than
10% of the total voting power of the Company.  Unless otherwise  specified in an
optionee's  agreement,  options  granted  under  the  Plan  shall  vest  in full
immediately.  The Plan  will  remain in  effect  until  the  board of  directors
terminates it, except that no incentive stock option,  as defined in Section 422
of the Internal Revenue Code, may be granted after August 22, 2015.

         Options may be  exercised  by payment of the option  price (i) in cash,
(ii) by tender of shares of Company  common stock which have a fair market value
equal to the option price, or (iii) by such other  consideration as the board of
directors may approve at the time the option is granted.

         2006  STOCK  OPTION  PLAN.  On May 15,  2006,  the  Company's  Board of
Directors  adopted a 2006 Stock Option Plan under which  incentive stock options
and  non-qualified  stock options to purchase a total of 1,500,000 shares may be
granted to employees, and non-employees, such as directors and officers.

         The board of directors  administers the Stock Option Plan.  Options may
be granted for up to 10 years at not less than the fair market value at the time
of grant,  except  that the term may not exceed five years and the price must be
110% of fair market value for any person who at the time of grant owns more than
10% of the total voting power


                                       24
<PAGE>

of the Company.  Unless otherwise  specified in an optionee's agreement, options
granted under the Plan  shall vest in full immediately.  The Plan will remain in
effect  until  the  board of  directors  terminates it, except that no incentive
stock option,  as defined in Section 422  of  the  Internal Revenue Code, may be
granted after May 15, 2016.

         Options may be  exercised  by payment of the option  price (i) in cash,
(ii) by tender of shares of Company  common stock which have a fair market value
equal to the option price, or (iii) by such other  consideration as the board of
directors may approve at the time the option is granted.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         DAVID STADNYK.  David Stadnyk and/or  companies  under his control have
advanced sums to the Company from time to time for working  capital  needs.  Mr.
Stadnyk was a former  officer and director of the Company and  continues to be a
principal shareholder. Interest did not accrue and there was no date established
for  repayment.  At May 31, 2006 and 2005,  $86,878 and $342,813,  respectively,
were owed to directly or indirectly to Mr. Stadnyk.

         FAIRCHILD INTERNATIONAL INC. On April 4, 2002, Energy loaned $70,000 to
Fairchild to a convertible  promissory  note which bore interest at 8% per annum
and was convertible into common shares of Fairchild.  As  consideration  for the
loan Fairchild  assigned to Energy a 20% working interest in Fairchild's oil and
gas interests in Tehama County,  California.  The note also provided that Energy
be granted a right of first  refusal  to  participate  as to 50% of  Fairchild's
interest in respect of any oil and gas  exploration or production  opportunities
Fairchild may  participate  in the future.  On July 16, 2002,  Energy elected to
convert the loan into 1,750,000 common shares of Fairchild.

         During the year ended May 31, 2004,  the Company  sold  776,550  common
shares of  Fairchild  for  proceeds of $30,488.  The Company  also  purchased an
additional  91,000  common  shares of Fairchild at a cost of $3,772.  During the
year ended May 31, 2005,  all of the remaining  common shares of Fairchild  were
sold for proceeds of $14,059.

         As  of  April  15,  2005,   the  Company   entered  an  assumption  and
cancellation  of debt  agreement with Fairchild  whereby  Cdn$14,213.57  owed by
Fairchild  to Energy were offset  against  Cdn$16,028.07  owed by the Company to
Fairchild.  Fairchild  agreed to cancel the remaining debt of  Cdn$1,814.50  and
relinquish its interests in the Kerrobert oil field and the Manahuilla Creek oil
field in  consideration  for the assumption by the Company of certain debts owed
by Fairchild to the following:

            o   Grand Slam Radio, Inc. in the amount of Cdn$6,089.29;
            o   David Stadnyk, in the amount of Cdn$14,316.62;
            o   George Tsafalas in the amount of Cdn$3,491.88; and
            o   Byron Cox in the amount of Cdn$582.89.


ITEM 13. EXHIBITS.

--------------------------------------------------------------------------------
REGULATION                                                           SEQUENTIAL
S-B NUMBER                         EXHIBIT                           PAGE NUMBER
--------------------------------------------------------------------------------
   2.1      Stock Exchange Agreement with Micronetics, Inc. (1)          N/A
--------------------------------------------------------------------------------
   2.2      Arrangement Agreement made among Praxis Pharmaceuticals      N/A
            Inc. and Patch Energy Inc. dated as of October 20, 2003
            (2)
--------------------------------------------------------------------------------
   2.3      Articles of Merger Merging Praxis Pharmaceuticals Inc., a    N/A
            Utah Corporation, into Patch International Inc., a Nevada
            Corporation (3)
--------------------------------------------------------------------------------


                                       25
<PAGE>

--------------------------------------------------------------------------------
REGULATION                                                           SEQUENTIAL
S-B NUMBER                         EXHIBIT                           PAGE NUMBER
--------------------------------------------------------------------------------
   3.1      Articles of Incorporation, as amended (4)                    N/A
--------------------------------------------------------------------------------
   3.2      Bylaws (4)                                                   N/A
--------------------------------------------------------------------------------
   3.3      Certificate of Change Pursuant to NRS 78.209 (5)             N/A
--------------------------------------------------------------------------------
   3.4      Certificate of Change Pursuant to NRS 78.209 (6)             N/A
--------------------------------------------------------------------------------
  10.1      1999 Stock Option Plan (1)                                   N/A
--------------------------------------------------------------------------------
  10.2      Shareholders Agreement dated August 23, 2002 among Praxis    N/A
            Pharmaceuticals Inc., Perpetual Trustees Nominees Limited,
            Rothschild Bioscience Managers Limited, CM Capital
            Investments Pty Ltd, CIBC Australia VC Fund LLC,
            Mooroolbark Technology Pty Ltd, The Australian National
            University and Pharmaxis Pty Ltd, Dr. William Cowden and
            Dr. Brett Charlton (7)
--------------------------------------------------------------------------------
  10.3      Letter agreement dated February 18, 2004 regarding           N/A
            Termination Agreement with Fairchild International
            Corporation (8)
--------------------------------------------------------------------------------
  10.4      2005 Stock Option Plan (9)                                   N/A
--------------------------------------------------------------------------------
  10.5      Assumption and Cancellation of Debt agreements with          N/A
            Fairchild International Corporation dated April 15,
            2005 (4)
--------------------------------------------------------------------------------
  10.6      Management services agreement with David Stadnyk dated       N/A
            May 1, 2005 (4)
--------------------------------------------------------------------------------
  10.7      Change of Control Agreement with David Stadnyk dated May     N/A
            1, 2005 (4)
--------------------------------------------------------------------------------
  10.8      2006 Stock Option Plan
--------------------------------------------------------------------------------
   21       Subsidiaries of the registrant (4)                           N/A
--------------------------------------------------------------------------------
  31.1      Rule 13a-14(a) Certification of Principal Executive and
            Financial Officer
--------------------------------------------------------------------------------
  32.1      Certification Pursuant to 18 U.S.C. Section 1350 as
            Adopted Pursuant to Section 906 of the Sarbanes-Oxley
            Act of 2002
--------------------------------------------------------------------------------
------------------
(1)  Incorporated  by  reference  to the  exhibits  filed with the  Registration
     Statement on Form 10-SB, file no. 0-28627.
(2)  Incorporated  by  reference  to  the  exhibits  filed with the registrant's
     current report on Form 8-K dated March 15, 2004.
(3)  Incorporated  by  reference  to  the  exhibits  filed with the registrant's
     current report on Form 8-K dated June 15, 2004.
(4)  Incorporated  by  reference  to  the exhibits  filed with the  registrant's
     annual report on Form 10-KSB for the fiscal year ended May 31, 2005.
(5)  Incorporated  by  reference  to the  exhibits  filed with the  registrant's
     current report on Form 8-K dated July 8, 2005.
(6)  Incorporated  by  reference  to  the  exhibits  filed with the registrant's
     current report on Form 8-K dated March 14, 2006.
(7)  Incorporated  by  reference  to the  exhibits  filed  with the registrant's
     annual report on Form 10-KSB for the fiscal year ended May 31, 2002.
(8)  Incorporated  by  reference  to the  exhibits  filed with the  registrant's
     annual report on Form 10-KSB for the fiscal year ended May 31, 2004.


                                       26
<PAGE>



(9)  Incorporated  by  reference  to the  exhibits  filed with the  registrant's
     registration statement on Form S-8, file number 333-128627, filed September
     27, 2005.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

AUDIT FEES

         For the  fiscal  years  ended  May 31,  2006 and  2005,  the  principal
accountants  for the Company billed $14,500 and $13,780,  respectively,  for the
audit of the annual  financial  statements  and review of  financial  statements
included in the Form 10-QSB filings of the Company.

AUDIT-RELATED FEES

         For the  fiscal  years  ended  May 31,  2006 and  2005,  the  principal
accountants for the Company billed $16,830 and $nil, respectively,  for services
reasonably  related to the  performance  of the audit or review of the financial
statements outside of those fees disclosed above under "Audit Fees".

TAX FEES

         For the  fiscal  years  ended  May 31,  2006 and  2005,  the  principal
accountants  for the  Company  billed  $8,700 and $640 for tax  compliance,  tax
advice, and tax planning work for fiscal years 2006 and 2005.

ALL OTHER FEES

         There were no other fees billed by the  principal  accountants  for the
Company other than those disclosed above for fiscal years 2006 and 2005.

PRE-APPROVAL POLICIES AND PROCEDURES

            Prior to engaging its  accountants to perform a particular  service,
the  Company's  board of  directors  obtains an  estimate  for the service to be
performed.  All of the services  described  above were  approved by the board of
directors in accordance with its procedures.














                                       27

<PAGE>


                                   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.

                                            PATCH INTERNATIONAL INC.



Date:  August 23, 2006                      By: /s/ JOHN THORNTON
                                               ---------------------------------
                                               John Thornton, Interim President

         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.

<TABLE>
<CAPTION>
              SIGNATURE                                    TITLE                              DATE
<S>                                   <C>                                                <C>

                                      Interim President and director
/s/ JOHN THORNTON                     (Principal Executive, Financial, and               August 23, 2006
-------------------------------       Accounting Officer)
John Thornton


/s/ WINSTON CABELL                    Director                                           August 23, 2006
-------------------------------
Winston Cabell

</TABLE>























                                       28
<PAGE>








                            PATCH INTERNATIONAL INC.


                        CONSOLIDATED FINANCIAL STATEMENTS


                                  MAY 31, 2006
                            (Stated in U.S. Dollars)













                                      F-1
<PAGE>
PATCH INTERNATIONAL INC.
May 31, 2006

                                                                         Index

Report of Independent Registered Public Accounting Firm                  F-3

Consolidated Balance Sheets                                              F-4

Consolidated Statements of Operations                                    F-5

Consolidated Statements of Cash Flows                                    F-6

Consolidated Statements of Stockholders' Equity (Deficit)                F-7

Notes to the Consolidated Financial Statements                           F-9
















                                      F-2




<PAGE>




                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders of
Patch International Inc.

We  have  audited  the  accompanying   consolidated   balance  sheets  of  Patch
International  Inc.  as of May 31, 2006 and 2005,  and the related  consolidated
statements of operations,  shareholders' equity (deficiency), and cash flows for
the  years  ended May 31,  2006 and 2005.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Patch International Inc. as of
May 31, 2006 and 2005, and the results of their  operations and their cash flows
for the  years  ended May 31,  2006 and  2005,  in  conformity  with  accounting
principles generally accepted in the United States of America

The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal  control over  financial  reporting as a basis for  designing  audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the  effectiveness  of the Company's  internal  control
over financial reporting. Accordingly, we express no such opinion.





Vancouver, B.C.

July 28, 2006                                               /s/ Morgan & Company

                                                           Chartered Accountants







                                      F-3

<PAGE>
PATCH INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(Stated in U.S. Dollars)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------

                                                                                          MAY 31,             MAY 31,
                                                                                            2006                2005
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                <C>

ASSETS

Current Assets
     Cash                                                                           $      4,473,444   $        128,872
     Accounts receivable                                                                      29,260             21,754
     Prepaid expenses and other                                                               70,603              1,230
-----------------------------------------------------------------------------------------------------------------------

Total Current Assets                                                                       4,573,307            151,856
Available-for-sale Securities (Note 5)                                                     7,241,000          6,007,000
Property and Equipment, Net                                                                    1,452              2,074
Oil and Gas Interests (successful efforts method) (Note 6)                                 2,964,017            198,284
-----------------------------------------------------------------------------------------------------------------------

Total Assets                                                                        $     14,779,776   $      6,359,214
=======================================================================================================================

LIABILITIES & STOCKHOLDERS' EQUITY

Current Liabilities
     Accounts payable and accrued liabilities                                       $        215,694   $        250,592
     Income taxes payable (Note 12)                                                        2,181,000                  -
     Due to related parties (Note 7)                                                          86,878            342,813
-----------------------------------------------------------------------------------------------------------------------

Total Current Liabilities                                                                  2,483,572            593,405
Asset retirement obligations (Note 8)                                                         34,379                  -

Total Liabilities                                                                          2,517,951            593,405
-----------------------------------------------------------------------------------------------------------------------

Minority Interest                                                                            570,862                  -

STOCKHOLDERS' EQUITY

Preferred Stock:
 1,000,000 preferred shares authorized with par value of $0.001 per share; none
 issued and outstanding                                                                            -                  -

Common Stock:
 24,801,250 common shares authorized with par value of $0.001 per share;
 15,163,112 shares issued and outstanding (May 31, 2005 - 12,753,341 shares)                  15,163             12,753

Additional Paid-in Capital                                                                 3,335,380          1,410,837

Stock Subscriptions Receivable                                                                     -             (4,000)

Accumulated Other Comprehensive Income                                                     7,352,558          6,006,999

Retained Earnings (Deficit)                                                                  987,862         (1,660,780)
-----------------------------------------------------------------------------------------------------------------------

Total Stockholders' Equity                                                                11,690,963          5,765,809
-----------------------------------------------------------------------------------------------------------------------

Total Liabilities and Stockholders' Equity                                          $     14,779,776   $      6,359,214
=======================================================================================================================
</TABLE>



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

                                      F-4
<PAGE>


PATCH INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in U.S. Dollars)

<TABLE>
<CAPTION>
                                                                                         FOR THE             FOR THE
                                                                                        YEAR ENDED          YEAR ENDED
                                                                                         MAY 31,             MAY 31,
                                                                                           2006                2005
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                 <C>
Revenue
     Oil and gas                                                                    $        178,594    $        97,415
------------------------------------------------------------------------------------------------------------------------

Expenses
     Consulting                                                                              848,681            462,590
     Depletion, depreciation, impairment and accretion                                       265,756             59,097
     Foreign exchange loss (gain)                                                            (42,820)               818
     Gain on relinquishment of oil and gas properties                                              -            (10,996)
     General and administrative                                                              230,471            141,243
     Investor relations                                                                      477,514            189,782
     Loss on sale of trading securities                                                            -             15,930
     Loss on write-off of proposed acquisition                                                     -             21,000
     Oil and gas production, royalties and other                                              56,851             26,904
     Professional fees                                                                       211,867             98,271
     Related party compensation (Note 7)                                                     198,677            115,239
------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses                                                                   2,246,997          1,119,878
------------------------------------------------------------------------------------------------------------------------
Operating Loss                                                                            (2,068,403)        (1,022,463)
------------------------------------------------------------------------------------------------------------------------

Other Income

     Interest                                                                                 83,557                  -
     Gain on dilution                                                                        101,664                  -
     Gain on sale of available-for-sale securities                                         6,962,937                  -
     Noncontrolling interest in net loss                                                      13,600                  -
------------------------------------------------------------------------------------------------------------------------
Total Other Income                                                                         7,161,758                  -
------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes                                                          5,093,355         (1,022,463)

Provisions For Income Taxes (Note 12)                                                     (2,406,243)                 -
------------------------------------------------------------------------------------------------------------------------
Net Income (Loss)                                                                   $      2,687,112    $    (1,022,463)

Other Comprehensive Income

     Available-for-sale securities:
         Reclassification adjustment - realized gain                                      (2,364,217)                 -
         Holding gain                                                                      3,598,217          6,006,999
------------------------------------------------------------------------------------------------------------------------
     Net gain on available-for-sale securities                                             1,234,000          6,006,999

     Foreign currency translation adjustment                                                 111,560                  -

Comprehensive Income                                                                $      4,032,672    $     4,984,536
========================================================================================================================

Net Income (Loss) Per Share
     Basic                                                                          $           0.19    $         (0.09)
     Diluted                                                                        $           0.10    $         (0.09)

Weighted Average Number Of Common Stock Outstanding
     Basic                                                                                13,854,000         11,143,000
     Diluted                                                                              14,508,000         11,143,000

</TABLE>


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

                                      F-5
<PAGE>
PATCH INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in U.S. Dollars)

<TABLE>
<CAPTION>
                                                                                            FOR THE             FOR THE
                                                                                           YEAR ENDED          YEAR ENDED
                                                                                            MAY 31,             MAY 31,
                                                                                              2006                2005
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                 <C>
Operating Activities
     Net income (loss)                                                                $    2,687,112      $   (1,022,463)
  Adjustments to reconcile net loss to net cash used
     by operating activities:
         Depletion, depreciation, impairment and accretion                                   265,756              59,097
         Stock-based compensation                                                            787,310             284,354
         Loss on sale of trading securities                                                        -              15,930
         Write-off of proposed acquisition                                                         -              21,000
         Gain on relinquishment of oil and gas                                                     -             (10,996)
         Gain on sale of available-for-sale securities                                    (6,962,937)                  -
         Gain on dilution                                                                   (101,664)                  -
         Minority interest in net loss                                                       (13,600)                  -
         (Increase) decrease in accounts receivable                                           (7,506)             13,573
         (Increase) decrease in prepaid expenses and other                                   (69,373)             39,474
         (Decrease) increase in accounts payable and accrued liabilities                     (36,359)            188,784
         Increase in income taxes payable                                                  2,181,000                   -
         (Decrease) increase in due to related parties                                      (255,935)            103,421
-------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities                                                     (1,526,196)           (307,826)
-------------------------------------------------------------------------------------------------------------------------

Investing Activities
     Cash paid for proposed acquisition                                                            -             (21,000)
     Oil and gas interests                                                                (2,436,705)            (68,536)
     Acquisition of equipment                                                                      -              (2,593)
     Acquisition of trading securities                                                             -              (1,655)
     Proceeds on sale of trading securities                                                        -              14,059
     Proceeds on sale of available-for-sale securities                                     6,962,937                   -
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities                                        4,526,232             (79,725)
-------------------------------------------------------------------------------------------------------------------------

Financing Activities
     Third party contribution to limited partnership                                         666,996                   -
     Common stock issued for cash                                                            743,750             477,810
     Acquisition of treasury stock                                                          (111,077)                  -
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                                  1,299,669             477,810
-------------------------------------------------------------------------------------------------------------------------

Effect of exchange rate changes on cash                                                       44,867                   -

Change in cash and cash equivalents for the year                                           4,344,572              90,259

Cash and cash equivalents, beginning of year                                                 128,872              38,613
-------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                                                $    4,473,444      $      128,872
=========================================================================================================================

NON-CASH ITEMS
     Common stock issued for debt                                                     $            -      $       52,164
     Common stock issued for working interest in oil sands property                          472,500                   -
     Stock options exercised for debt                                                              -             125,240

SUPPLEMENTAL CASH FLOW INFORMATION
     Taxes paid                                                                       $      225,243      $            -
     Interest paid                                                                            36,560                   -
</TABLE>


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

                                      F-6
<PAGE>
PATCH INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Stated in U.S. Dollars)

<TABLE>
<CAPTION>
                                                                                          ACCUMULATED
                                        COMMON STOCK        CAPITAL IN       STOCK          OTHER
                                  -----------------------   EXCESS OF     SUBSCRIPTIONS  COMPREHENSIVE
                                     SHARES      AMOUNT     PAR VALUE      RECEIVABLE       INCOME        DEFICIT        TOTAL
                                  ------------------------------------------------------------------------------------------------
<S>                               <C>          <C>          <C>           <C>            <C>           <C>            <C>

Balance, May 31, 2002                       1  $        -   $         -   $        -     $         -   $    (24,396)  $   (24,396)

Common stock issued for cash at
  $0.001                           11,669,999      11,670             -            -               -              -        11,670

Common stock issued for cash at
  $0.02                             5,000,000     100,000             -            -               -              -       100,000

Common stock issued for cash at
  $0.10                               667,000      66,700             -            -               -              -        66,700

Stock subscription receivable               -      (1,700)            -            -               -              -        (1,700)

Net loss for the year                       -           -             -            -               -        (79,049)      (79,049)
                                  ------------------------------------------------------------------------------------------------

Balance, May 31, 2003              17,337,000     176,670             -            -               -       (103,445)       73,225

Stock subscription received                 -       1,700             -            -               -              -         1,700

Common stock issued for cash at
  $0.08                               895,625      71,650             -            -               -              -        71,650

Adjustment to number of common
  stock issued and outstanding
  as a result of the acquisition
  of Patch Energy Inc.            (18,232,625)   (250,020)            -            -               -              -      (250,020)

Praxis Pharmaceuticals, Inc.        5,157,702       5,158       244,862            -               -              -       250,020

Fair value of shares issued in
  connection with the
  acquisition of Patch Energy
  Inc.                              4,558,156       4,558      (156,581)           -               -              -      (152,023)

Stock options exercised               356,250         356       178,269            -               -              -       178,625

Stock based compensation                    -           -       203,400            -               -              -       203,400

Net Loss for the year                       -           -             -            -               -       (534,872)     (534,872)
                                  ------------------------------------------------------------------------------------------------

Balance, May 31, 2004              10,072,108      10,072       469,950            -               -       (638,317)     (158,295)

Stock options exercised for cash    2,079,500       2,080       479,730       (4,000)              -              -       477,810

Stock options exercised for debt      471,392         471       124,769            -               -              -       125,240

Common stock issued for debt          130,410         130        52,034            -               -              -        52,164

Stock based compensation                    -           -       284,354            -               -              -       284,354

Accumulated other comprehensive
  income                                    -           -             -            -       6,006,999              -     6,006,999

Net loss for the year                       -           -             -            -               -     (1,022,463)   (1,022,463)
                                  ------------------------------------------------------------------------------------------------

Balance, May 31, 2005               12,753,410 $   12,753   $ 1,410,837   $   (4,000)    $ 6,006,999   $ (1,660,780)  $ 5,765,809
                                  ================================================================================================
</TABLE>

        All per share amounts have been retroactively restated to reflect
                   the 1 for 10 reverse common stock split on
  July 25, 2005 and the 2.5 for 1 forward common stock split on March 27, 2006.



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


                                      F-7
<PAGE>
PATCH INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Stated in U.S. Dollars)

<TABLE>
<CAPTION>
                                                                                          ACCUMULATED
                                        COMMON STOCK        CAPITAL IN       STOCK          OTHER
                                  -----------------------   EXCESS OF     SUBSCRIPTIONS  COMPREHENSIVE
                                     SHARES      AMOUNT     PAR VALUE      RECEIVABLE       INCOME        DEFICIT        TOTAL
                                  -------------------------------------------------------------------------------------------------
<S>                               <C>          <C>          <C>           <C>            <C>           <C>            <C>


Balance, May 31, 2005              12,753,410  $   12,753   $ 1,410,837   $   (4,000)    $ 6,006,999   $ (1,660,780)  $  5,765,809

Stock adjustments due to reverse
  and forward stock splits                653           -             -            -               -              -              -

Stock options exercised for cash    1,832,500       1,833       737,917            -               -              -        739,750

Common stock issued for working
  interest in oil sands property      437,500         438       472,062            -               -              -        472,500

Common stock issued for
  consulting and investor
  relations services                  337,799         338       266,162            -               -              -        266,500

Stock options issued for
  consulting services                       -           -       520,810            -               -              -        520,810

Stock subscriptions received                -           -             -        4,000               -              -          4,000

Acquisition of treasury stock        (198,750)       (199)      (72,408)           -               -        (38,470)      (111,077)

Accumulated other comprehensive
  income                                    -           -             -            -       1,345,559              -      1,345,559

Net income for the year                     -           -             -            -               -      2,687,112      2,687,112
                                 --------------------------------------------------------------------------------------------------

Balance, May 31, 2006              15,163,112  $   15,163   $ 3,335,380   $        -     $ 7,352,558   $    987,862   $ 11,690,963
                                 ==================================================================================================

</TABLE>


        All per share amounts have been retroactively restated to reflect
                   the 1 for 10 reverse common stock split on
  July 25, 2005 and the 2.5 for 1 forward common stock split on March 27, 2006.











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

                                      F-8
<PAGE>
                            PATCH INTERNATIONAL INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2006
                            (Stated in U.S. Dollars)

1.   ORGANIZATION AND NATURE OF OPERATIONS

     Patch International,  Inc. (the "Company") was incorporated in the State of
     Nevada on June 20, 1997.  Effective June 15, 2004, the Company  changed its
     domicile  from Utah to  Nevada.  Effective  March  15,  2004,  the  Company
     acquired all the issued and  outstanding  common stock of Patch Energy Inc.
     ("Energy"), a private company incorporated in British Columbia, Canada, and
     is involved  in the  exploration,  development  and  production  of oil and
     natural  gas.  Prior to the  acquisition,  the Company was a  non-operating
     corporation  with  nominal  net  assets.   The  acquisition  is  a  capital
     transaction  in  substance  and  therefore  has  been  accounted  for  as a
     recapitalization of the Company.  Accordingly,  because Energy is deemed to
     be the purchaser for  accounting  purposes,  these  consolidated  financial
     statements  are  presented  as a  continuation  of Energy and  include  the
     results of operations of Energy since  incorporation  on February 11, 2002,
     and the results of operations of the Company since the date of  acquisition
     on March 15, 2004. See Note 4.

     On  February  3,  2006,  the  Company,   through  its  subsidiary   Energy,
     incorporated in British Columbia, Canada, a wholly-owned subsidiary,  Patch
     Oilsands Ltd. ("Oilsands").  On February 27, 2006, the Company formed Patch
     Oilsands  Limited  Partnership  (the  "Partnership"),  a  Canadian  limited
     partnership,  of which  Energy  owns a 75%  interest  and  Oilsands  is the
     general  partner.   The  purpose  of  the  Partnership  is  to  pursue  the
     acquisition,   exploration  and  development  of  land  or  other  property
     interests  primarily  in the  Alberta  Oil  Sands.  Under  the  terms  of a
     Partnership  Agreement,  Energy can subscribe  for units at a  preferential
     rate to the current  minority  limited  partners,  Habanero  Resources Inc.
     ("Habanero"),  which owns 20.8333%,  and Micron Enviro Systems  ("Micron"),
     which owns 4.1667%.  Habanero and Micron have to pay a multiple of 1.285714
     of the base subscription  price for all subscription  funds raised,  except
     that  portion  which  applies  to cover  the cost of the  Company's  shares
     purchased by the  Partnership  and used as  consideration  in  transactions
     undertaken by the Partnership.  The difference in preferential subscription
     pricing  expires at the earlier of  $4,538,000  (CDN$5,000,000)  in capital
     raised or the date that the Partnership  accepts a new Limited Partner.  As
     at May 31, 2006, Energy has advanced $1,594,334 (CDN$1,873,279) in tranches
     representing  its share of the  initial  subscription  contribution  to the
     Partnership.

2.   SIGNIFICANT ACCOUNTING POLICIES

     a)  Basis of Presentation

         These  consolidated  financial  statements  include the accounts of the
         Company,  its subsidiaries and its investment in a limited partnership.
         All  significant  intercompany  balances  and  transactions  have  been
         eliminated.  These financial statements and related notes are presented
         in accordance  with  accounting  principles  generally  accepted in the
         United States,  and are expressed in US dollars.  The Company's  fiscal
         year-end is May 31.

     b)  Use of Estimates

         The  preparation of financial  statements in conformity  with generally
         accepted  accounting  principles  requires management to make estimates
         and  assumptions  that  affect the amounts  reported  in the  financial
         statements and accompanying  disclosures.  Although these estimates are
         based on management's  best knowledge of current events and actions the
         Company may undertake in the future, actual results may differ from the
         estimates.

     c)  Financial Instruments

         The carrying amounts of financial  instruments including cash, accounts
         receivable,  investments,  accounts  payable and  accrued  liabilities,
         income taxes payable and amounts due to related  parties,  approximated
         fair value at May 31, 2006 and 2005.


                                      F-9
<PAGE>
PATCH INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006
(Stated in U.S. Dollars)

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     d)  Investments

         The  Company  reports   investments  in  debt  and  marketable   equity
         securities  at fair value based on quoted  market  prices or, if quoted
         prices are not available,  discounted  expected cash flows using market
         rates  commensurate with credit quality and maturity of the investment.
         All  investment  securities  are  designated as available for sale with
         unrealized  gains and losses  included  in  stockholders'  equity.  The
         Company regularly reviews investment securities for impairment based on
         criteria  that  include the extent to which the  investment's  carrying
         value  exceeds its related  market  value,  the  duration of the market
         decline,  the  Company's  ability to hold to recovery and the financial
         strength  and  specific  prospects  of  the  issuer  of  the  security.
         Unrealized  losses  that are other than  temporary  are  recognized  in
         earnings.

     e)  Property and Equipment

         Property and equipment  consists of computer  hardware,  is recorded at
         cost and is being amortized using the declining balance method over its
         estimated useful life at the rate of 30% per annum.

     f)  Oil and Gas Interests

         The Company follows the successful efforts method of accounting for its
         oil  and  gas  producing  activities.  Under  this  method,  all  costs
         associated  with  productive   exploratory   wells  and  productive  or
         non-productive  development  wells are  capitalized  while the costs of
         non-productive  exploratory wells are expensed.  If an exploratory well
         finds oil and gas reserves,  but a determination that such reserves can
         be classified as proved is not made after one year following completion
         of drilling, the costs of drilling are charged to operations.  Indirect
         exploratory expenditures,  including geophysical costs and annual lease
         rentals, are expensed as incurred. Unproved oil and gas properties that
         are individually  significant are periodically  assessed for impairment
         of  value,  and a loss  is  recognized  at the  time of  impairment  by
         providing an impairment  allowance.  Capitalized costs of producing oil
         and gas properties and related  support  equipment,  after  considering
         estimated  dismantlement  and abandonment  costs and estimated  salvage
         values, are depreciated and depleted by the unit-of-production method.

         On the sale or retirement of a complete unit of a proved property,  the
         cost and related accumulated depreciation,  depletion, and amortization
         are eliminated  from the property  accounts,  and the resultant gain or
         loss is  recognized.  On the  retirement  or sale of a partial  unit of
         proved  property,  the  cost is  charged  to  accumulated  deprecation,
         depletion, and amortization with a resulting gain or loss recognized in
         income.  On the sale of an entire interest in an unproved  property for
         cash or cash equivalent, gain or loss on the sale is recognized, taking
         into  consideration  the  amount  of  any  recorded  impairment  if the
         property had been assessed  individually.  If a partial  interest in an
         unproved  property  is  sold,  the  amount  received  is  treated  as a
         reduction of the cost of the interest  retained.  In joint ventured oil
         and gas exploration  and production  activities,  the accounts  reflect
         only the Company's proportionate interest in such activities.

     g)  Asset Retirement Obligations

         The Company  accounts for asset  retirement  obligations  in accordance
         with the  provisions  of  Statement of  Financial  Accounting  Standard
         (SFAS) No. 143 "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS".  SFAS No.
         143  requires  the  Company  to  record  the  fair  value  of an  asset
         retirement obligation as a liability in the period in which it incurs a
         legal obligation  associated with the retirement of tangible long-lived
         assets  that  result from the  acquisition,  construction,  development
         and/or normal use of the assets.


                                      F-10
<PAGE>
PATCH INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006
(Stated in U.S. Dollars)


2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     h)  Long-lived Assets

         In  accordance  with SFAS No. 144,  "ACCOUNTING  FOR THE  IMPAIRMENT OR
         DISPOSAL OF LONG-LIVED ASSETS", the carrying value of intangible assets
         and other  long-lived  assets is  reviewed  on a regular  basis for the
         existence of facts or circumstances  that may suggest  impairment.  The
         Company   recognizes  an  impairment  when  the  sum  of  the  expected
         undiscounted  future cash flows is less than the carrying amount of the
         asset.  Impairment  losses,  if any,  are measured as the excess of the
         carrying amount of the asset over its estimated fair value.

     i)  Foreign Currency Translation

         The Company's  functional  and reporting  currency is the United States
         dollar.   Monetary  assets  and  liabilities   denominated  in  foreign
         currencies  are  translated  in  accordance  with SFAS No. 52  "FOREIGN
         CURRENCY  TRANSLATION",  using  the  exchange  rate  prevailing  at the
         balance sheet date.  Gains and losses  arising on settlement of foreign
         currency  denominated  transactions  or  balances  are  included in the
         determination of income. The functional currency of the Partnership and
         the  Company's  Canadian  subsidiary  is  the  Canadian  dollar.  Their
         financial  statements are translated to United States dollars under the
         current  rate  method  in  accordance  with  SFAS No.  52.  Assets  and
         liabilities  are translated  into U.S.  dollars at rates of exchange in
         effect at the balance  sheet date.  Average rates for the year are used
         to  translate  revenues  and  expenses.   The  cumulative   translation
         adjustment   is   reported  as  a  component   of   accumulated   other
         comprehensive income.

     j)  Comprehensive Income

         SFAS No. 130, "REPORTING  COMPREHENSIVE  INCOME," establishes standards
         for  the  reporting  and  display  of  comprehensive   income  and  its
         components  in  the  financial  statements.  As at  May  31,  2006  the
         components of comprehensive  income included  unrealized  holding gains
         and  losses  on  available-for-sale  securities  and  foreign  currency
         translation  adjustments.  As at  May  31,  2005,  the  Company's  only
         component of  comprehensive  income was  unrealized  holding  gains and
         losses on available-for-sale securities.

     k)  Minority Interest

         The Company  consolidated  its  investment  in Patch  Oilsands  Limited
         Partnership  (the  "Partnership").  The  Company  recorded  a  gain  on
         dilution,  which is the difference between Energy's contribution to the
         Partnership  (70%) and its equity interest (75%).  Minority interest on
         the consolidated  balance sheet represents the 25% minority interest in
         the net loss and 25% of the net assets of the Partnership.

     l)  Revenue Recognition

         The Company recognizes oil and gas revenue when production is sold to a
         purchaser at a fixed or determinable  price, when delivery has occurred
         and title has  transferred,  and if  collectibility  of the  revenue is
         probable.

     m)  Income Taxes

         The Company  uses the  liability  method to account  for income  taxes.
         Under this method,  deferred tax assets and  liabilities are determined
         based on  differences  between  financial  reporting  and tax  bases of
         assets  and  liabilities.  Deferred  tax  assets  and  liabilities  are
         measured  using  enacted tax rates and laws that will be in effect when
         the  differences  are  expected  to  reverse.  Deferred  tax assets are
         reduced by a valuation  allowance when, based upon currently  available
         information, it is more likely than not that some portion or all of the
         deferred  tax  assets  will not be  realized.  Deferred  tax assets and
         liabilities  are  adjusted  for the  effects of changes in tax laws and
         rates on the date of enactment.


                                      F-11
<PAGE>
PATCH INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006
(Stated in U.S. Dollars)


2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     n)  Stock-Based Compensation

         The Company accounts for stock based employee and director compensation
         arrangements  in accordance  with  provisions of Accounting  Principles
         Board  ("APB")  Opinion  No.  25 -  "ACCOUNTING  FOR  STOCK  ISSUED  TO
         EMPLOYEES",   and  related  interpretations,   and  complies  with  the
         disclosure  provisions  of SFAS No. 123 -  "ACCOUNTING  FOR STOCK BASED
         COMPENSATION".  Under APB No. 25, compensation  expense is based on the
         difference,  if any,  on the date the  number of shares  receivable  is
         determined, between the estimated fair value of the Company's stock and
         the  exercise  price of options to  purchase  that  stock.  Stock based
         compensation  arrangements  for others are recorded at their fair value
         as the services are provided and the compensation earned.

     o)  Basic and Diluted Income (Loss) Per Share

         The Company  computes  income (loss) per share in accordance  with SFAS
         No. 128 - "EARNINGS PER SHARE".  Under the  provisions of SFAS No. 128,
         basic income  (loss) per share is computed  using the weighted  average
         number of common stock outstanding  during the periods.  Diluted income
         (loss)  per share is  computed  using the  weighted  average  number of
         common and  potentially  dilutive common stock  outstanding  during the
         period.  As the Company  generated net losses in the year ended May 31,
         2005, the basic and diluted loss per share is the same for that year as
         any exercise of options or warrants would be anti-dilutive.

3.   RECENT PRONOUNCEMENTS

     In May 2005, the Financial  Accounting  Standards  Board (FASB) issued SFAS
     No. 154,  "ACCOUNTING  CHANGES AND ERROR CORRECTIONS - A REPLACEMENT OF APB
     OPINION NO. 20 AND SFAS NO. 3 ". SFAS No. 154 changes the  requirements for
     the  accounting  for and reporting of a change in accounting  principle and
     applies to all voluntary changes in accounting  principle.  It also applies
     to changes required by an accounting  pronouncement in the unusual instance
     that the  pronouncement  does not include specific  transition  provisions.
     SFAS No. 154 requires retrospective application to prior periods' financial
     statements of changes in accounting  principle,  unless it is impracticable
     to determine either the period-specific effects or the cumulative effect of
     the change.  The  provisions of SFAS No. 154 are  effective for  accounting
     changes and  correction  of errors  made in fiscal  years  beginning  after
     December 15, 2005.  The adoption of this standard is not expected to have a
     material  effect  on the  Company's  results  of  operations  or  financial
     position.

     In December 2004,  the FASB issued SFAS No. 153,  "EXCHANGES OF NONMONETARY
     ASSETS - AN  AMENDMENT OF APB OPINION NO. 29 ". The guidance in APB Opinion
     No.  29,  "ACCOUNTING  FOR  NONMONETARY  TRANSACTIONS",  is  based  on  the
     principle that exchanges of nonmonetary  assets should be measured based on
     the fair value of the  assets  exchanged.  The  guidance  in that  Opinion,
     however, included certain exceptions to that principle. SFAS No. 153 amends
     Opinion No. 29 to eliminate  the  exception  for  nonmonetary  exchanges of
     similar  productive  assets and  replaces it with a general  exception  for
     exchanges of nonmonetary  assets that do not have commercial  substance.  A
     nonmonetary  exchange has commercial  substance if the future cash flows of
     the  entity  are  expected  to  change  significantly  as a  result  of the
     exchange.  The  provisions of SFAS No. 153 are  effective  for  nonmonetary
     asset exchanges  occurring in fiscal periods beginning after June 15, 2005.
     Early  application  is  permitted  and  companies  must apply the  standard
     prospectively.  The  adoption of this  standard  is not  expected to have a
     material  effect  on the  Company's  results  of  operations  or  financial
     position.


                                      F-12
<PAGE>
PATCH INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006
(Stated in U.S. Dollars)


3.   RECENT PRONOUNCEMENTS (CONTINUED)

     In  December  2004,  the FASB  issued  Statement  of  Financial  Accounting
     Standard (SFAS) No. 123R, "SHARE BASED PAYMENT". SFAS 123R is a revision of
     SFAS No. 123 "ACCOUNTING FOR STOCK-BASED COMPENSATION",  and supersedes APB
     Opinion No. 25,  "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" and its related
     implementation guidance. SFAS 123R establishes standards for the accounting
     for  transactions in which an entity  exchanges its equity  instruments for
     goods or services. It also addresses transactions in which an entity incurs
     liabilities  in exchange  for goods or services  that are based on the fair
     value of the  entity's  equity  instruments  or that may be  settled by the
     issuance  of those  equity  instruments.  SFAS 123R  focuses  primarily  on
     accounting for transactions in which an entity obtains employee services in
     share-based  payment  transactions.  SFAS 123R  requires a public entity to
     measure the cost of employee  services received in exchange for an award of
     equity  instruments  based on the grant-date  fair value of the award (with
     limited  exceptions).  That cost will be recognized  over the period during
     which an employee is required to provide  service in exchange for the award
     - the requisite  service  period  (usually the vesting  period).  SFAS 123R
     requires  that  the  compensation  cost  relating  to  share-based  payment
     transactions  be  recognized  in  financial  statements.  That cost will be
     measured  based on the fair  value of the equity or  liability  instruments
     issued.  Public  entities  that  file as  small  business  issuers  will be
     required  to apply SFAS 123R in the annual  reporting  period  that  begins
     after  December 15, 2005. The adoption of this standard is expected to have
     a material  effect on the  Company's  results of  operations  or  financial
     position and the Company  continues to evaluate it to determine  the degree
     of significance.

     The FASB has also  issued  SFAS No.  155  "ACCOUNTING  FOR  CERTAIN  HYBRID
     FINANCIAL  INSTRUMENTS"  and SFAS No.  156  "ACCOUNTING  FOR  SERVICING  OF
     FINANCIAL  ASSETS",  but  they  will  not  have  any  relationship  to  the
     operations of the Company.  Therefore a description and its impact for each
     on the Company's operations and financial position have not been disclosed.

4.   ACQUISITION OF SUBSIDIARY

     Effective  March 15,  2004,  the  Company  acquired  100% of the issued and
     outstanding  shares of Patch Energy Inc.  ("Energy")  by issuing  4,558,156
     split-adjusted  shares of common  stock in a one for four  share  exchange.
     Energy  was  a  private  British  Columbia   corporation  involved  in  the
     exploration, development and production of oil and natural gas.

     The issued  and  outstanding  share  capital  of the  Company  prior to the
     acquisition was 5,157,702 split-adjusted shares of common stock. The issued
     and  outstanding  share  capital  of Energy  prior to the  acquisition  was
     18,232,625  shares  of  common  stock.  The  transaction  resulted  in  the
     Company's  shareholders  holding  53% of the total  issued and  outstanding
     split-adjusted common shares, and Energy shareholders having a total of 47%
     of the  total  issued  and  outstanding  split-adjusted  common  shares  of
     9,715,858  after the close of the  acquisition.  The  transaction  has been
     treated as a recapitalization of the Company,  with Energy being treated as
     the acquirer.  Accordingly the results of operations presented are those of
     Energy since  incorporation on February 11, 2002, together with the results
     of operations of the Company since March 15, 2004.

     Even though former  shareholders of the Company controlled 53% of the total
     issued and outstanding shares after the acquisition, former shareholders of
     Energy  effectively  controlled  the combined  entity as there are no other
     blocks of share  capital  equal to or greater  than 5% of the total  issued
     capital.  A former  majority  shareholder of Energy also had the ability to
     elect the majority of the board of the combined  entity,  and management of
     the combined  entity  comprised of that one former  Energy  shareholder  as
     President,  Chief  Executive  Officer  and  Director  until  April 7, 2006,
     whereby he resigned  and became a  consultant  for the  Company.  For these
     reasons, pursuant to paragraph 7 (b), (c) and (d) of Statement of Financial
     Accounting  Standards,  No. 141  "BUSINESS  COMBINATIONS",  Energy has been
     treated as the acquirer corporation.


                                      F-13
<PAGE>
PATCH INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006
(Stated in U.S. Dollars)


4.   ACQUISITION OF SUBSIDIARY (CONTINUED)

     The Company had net liabilities of $152,024 at the acquisition date and are
     included in the  consolidated  balance sheet at their  previously  recorded
     amounts.


     The acquisition is summarized as follows:

              Cash                                           $       1,034
              Investment                                                 1
              Accounts payable, and accrued liabilities           (115,216)
              Due to related parties                               (37,843)
                                                             --------------

              Net liabilities acquired                       $    (152,024)
                                                             ==============


5.   AVAILABLE-FOR-SALE SECURITIES

     At May 31, 2006,  the Company owned  6,791,937  (May 31, 2005 - 11,200,000)
     ordinary  shares of Pharmaxis  Ltd.  ("Pharmaxis"),  an Australian  company
     listed on the Australian  Stock Exchange.  The Company records the ordinary
     shares of  Pharmaxis  at market  value,  net of tax. At May 31,  2006,  the
     market value is recorded at $7,241,000, after tax of $3,103,000,  resulting
     in  an  unrealized   gain  of  $7,240,999,   which  is  recorded  as  other
     comprehensive income, a separate component of stockholders' equity.

     During the year ended May 31, 2006,  the Company sold  4,408,063  Pharmaxis
     shares for gross proceeds of $6,962,938, and realized a gain of $6,962,938,
     before applicable taxes.


                                                        May 31,
                                                         2006
                                                     -------------
         6,791,937 ordinary shares                   $   7,241,000
                                                     =============


                                                        May 31,
                                                         2005
                                                     -------------
         11,200,000 ordinary shares                  $   6,007,000
                                                     =============









                                      F-14
<PAGE>
PATCH INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006
(Stated in U.S. Dollars)


6.   OIL AND GAS INTERESTS
<TABLE>
<CAPTION>
                                                                                    May 31,          May 31,
                                                                                     2006             2005
                                                                                --------------   --------------
<S>                                                                             <C>              <C>
     OIL AND GAS INTERESTS - SUCCESSFUL EFFORTS METHOD

     Balance beginning of the year                                              $     198,284    $     130,440
     Expenditures                                                                   3,029,321          127,365
     Depletion and depreciation                                                      (193,888)         (25,136)
     Dry well and abandoned interests                                                 (69,700)         (34,385)
                                                                                --------------   --------------
     Balance end of the year                                                    $   2,964,017    $     198,284
                                                                                ==============   ==============

     Represented by:

     California, U.S.A
     Producing interests subject to depletion and amortization                  $           -    $      15,638
     Accumulated depletion                                                                  -          (15,638)
                                                                                --------------   --------------
                                                                                            -                -
     Alberta, Canada
     Non-producing interests                                                        2,846,147           68,155
     Producing interests subject to depletion and amortization                        150,739                -
     Accumulated depletion and depreciation                                          (121,060)               -
                                                                                --------------   --------------
                                                                                    2,875,826           68,155
     Saskatchewan, Canada
     Producing interests subject to depletion and amortization                        243,004          212,113
     Accumulated depletion and depreciation                                          (154,813)         (81,984)
                                                                                --------------   --------------
                                                                                       88,191          130,129
                                                                                --------------   --------------
                                                                                $   2,964,017    $     198,284
                                                                                ==============   ==============

     CAPITALIZED COSTS RELATING TO OIL AND
      GAS PRODUCING ACTIVITIES
                                                                                    May 31,          May 31,
                                                                                     2006             2005
                                                                                --------------   --------------

     Proved oil and gas properties and related equipment - California, U.S.A.   $           -    $      15,638
     Proved oil and gas properties and related equipment - Saskatchewan,              243,004          212,113
     Canada
     Proved oil and gas properties and related equipment - Alberta, Canada            150,739           68,155
     Non-producing oil and gas properties - Alberta, Canada                         2,846,147                -
                                                                                --------------   --------------
     Sub-total                                                                      3,235,199          295,906
     Accumulated depletion                                                           (275,873)         (97,622)
                                                                                --------------   --------------
                                                                                $   2,964,017    $     198,284
                                                                                ==============   ==============

     COSTS INCURRED IN OIL AND GAS ACQUISITION,
      EXPLORATION AND DEVELOPMENT ACTIVITIES
                                                                                    May 31,          May 31,
                                                                                     2006             2005
                                                                                --------------   --------------

     Exploration costs - Texas, U.S.A.                                          $           -    $      31,569
     Acquisition costs - Alberta, Canada                                            2,791,421                -
     Exploration costs - Alberta, Canada                                              207,009                -
     Development costs - Alberta, Canada                                                    -           68,155
     Development costs - Saskatchewan, Canada                                          30,891           27,641
                                                                                --------------   --------------
                                                                                $   3,029,321    $     127,365
                                                                                ==============   ==============
</TABLE>


                                      F-15
<PAGE>
PATCH INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006
(Stated in U.S. Dollars)


6.   OIL AND GAS INTERESTS (CONTINUED)

<TABLE>
<CAPTION>
     RESULTS OF OPERATIONS FROM PRODUCING ACTIVITIES -
     TEXAS, U.S.A.
                                                                                    May 31,          May 31,
                                                                                     2006              2005
                                                                                --------------   --------------
<S>                                                                             <C>              <C>
     Impairment of oil costs                                                    $           -    $     (34,385)
                                                                                --------------   --------------
     Net income (loss) from producing activities                                $           -    $     (34,385)
                                                                                ==============   ==============

     RESULTS OF OPERATIONS FROM PRODUCING ACTIVITIES -
     CALIFORNIA, U.S.A.
                                                                                    May 31,          May 31,
                                                                                     2006             2005
                                                                                --------------   --------------

     Oil and gas sales                                                          $           -    $         213
     Production costs                                                                       -             (356)
     Depletion                                                                              -             (540)
                                                                                --------------   --------------
     Net income (loss) from producing activities                                $           -    $        (683)
                                                                                ==============   ==============

     RESULTS OF OPERATIONS FROM PRODUCING ACTIVITIES -
     SASKATCHEWAN, CANADA
                                                                                    May 31,          May 31,
                                                                                      2006             2005
                                                                                --------------   --------------

     Oil and gas sales                                                          $     134,926    $      97,202
     Production costs                                                                 (37,375)         (25,224)
     Depletion and depreciation                                                       (72,829)         (24,596)
     Dry well costs                                                                         -           (1,324)
                                                                                --------------   --------------
     Net income (loss) from producing activities                                $      24,722    $      46,058
                                                                                ==============   ==============

     RESULTS OF OPERATIONS FROM PRODUCING ACTIVITIES -
     ALBERTA, CANADA
                                                                                    May 31,          May 31,
                                                                                      2006             2005
                                                                                --------------   --------------

     Oil and gas sales                                                          $      43,667    $           -
     Production costs                                                                 (19,476)               -
     Depletion and depreciation                                                      (121,059)               -
     Dry well costs                                                                   (69,700)               -
                                                                                --------------   --------------
     Net income (loss) from producing activities                                $    (166,568)   $           -
                                                                                ==============   ==============

</TABLE>




                                      F-16

<PAGE>
PATCH INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006
(Stated in U.S. Dollars)


6.   OIL AND GAS INTERESTS (CONTINUED)

     a)  Saskatchewan, Canada

         On May 1, 2002,  the Company  acquired a 12.5% working  interest in ten
         test wells located in Saskatchewan  by incurring  15.625% of the costs.
         The  Company  participated  in a  second  set of  nine  test  wells  in
         Saskatchewan, Canada, by agreeing to incur 15.625% of the costs to earn
         a 12.5% working interest.

         The Company entered into a  participation  agreement on the second nine
         test wells with Micron Enviro Systems Inc.  ("Micron")  dated March 27,
         2003 whereby  Micron  earned a 3.5% working  interest in those wells by
         incurring 5% of the associated  costs.  The Company also entered into a
         participation  agreement  on those same wells with  Butler  Development
         Corporation  ("Butler")  dated April 28, 2003 whereby  Butler  earned a
         3.5% working  interest by incurring 5% of the  associated  costs and by
         paying the Company $13,614 (CDN$15,000).

         On November 14, 2003, the Company  acquired a 12.5% working interest in
         a test well  located in  Saskatchewan  and 6.25% in the  balance of the
         farmout lands, by incurring 12.5% of the costs. A total of $nil (2005 -
         $1,324) in costs  related to this well has been charged to  operations,
         as the well was shut-in.

     b)  Alberta, Canada

         (i)   By a Participation  Agreement  dated March 10, 2005,  the Company
               acquired a 25% working interest  in the Bear Canyon gas  project.
               During the year  ended May 31,  2006,  the well was  drilled  and
               shut-in and  the  Company  recognized  an  impairment  charge  of
               $24,787.


         (ii)  On May 30, 2005, the Company acquired a 10% working interest in a
               test well (the "McLeod" project)  located in Alberta by incurring
               10% of the costs. The well was drilled in June 2005 and commenced
               operations in  November  2005.  A second test well was drilled in
               December 2005  and was  shut-in  January  2006  and  the  Company
               recognized an impairment charge of $44,913.


         (iii) The Company  entered into  Agreements  dated November 8, 2005, to
               acquire a  working  interest  in three  projects  located  in the
               Lloydminster,  Elnora and Atlee-Buffalo  areas of Alberta.  Under
               the  terms  of each of  these  Agreements,  a test  well is to be
               spudded  on each  property  no  later  than  December  31,  2005,
               extended by  agreement to June 30, 2006. . Since May 31, 2006 the
               Company  has made cash call  advances of  $281,176  and  $132,532
               respectively  on the  Lloydminster  and  Atlee-Buffalo  projects.
               Drill  preparation  is now underway for a test well and an option
               well at  Lloydminster  and a test well has been drilled and cased
               to a secondary target at  Atlee-Buffalo.  The Company has decided
               not to proceed with the Elnora  project at this time. The Company
               earns a 50% working interest in the test well and the option well
               at Lloydminster and in the test well at Atlee-Buffalo, subject to
               an  overriding  royalty  convertible  after pay-out such that, if
               converted,  the  Company's  interest  reverts  to a  30%  working
               interest in those wells and a 30% working interest in the balance
               of the farmout lands, by paying 50% of the costs of each well The
               lands are  subject  to a 1% gross  overriding  royalty  and Crown
               royalties.

         (iv)  The Company entered into an Agreement  dated  January 4, 2006, to
               acquire a 100% working interest in a test well project located in
               the  Halkirk  area of  Alberta.  The well has  been  spudded  and
               ifracture tested; flow results are pending. The Company will earn
               a 100% interest in the test well subject to an overriding royalty
               such that if converted after pay-out the Company will revert to a
               50% working  interest  in the well and a 50% working  interest in
               the balance of the farmout lands, by paying 100% of the cost of a
               test well. The lands are subject to a 1% gross overriding royalty
               and Crown royalties. Since May 31, 2006 the Company has made cash
               call advances of $255,062 in respect of this project.

                                      F-17
<PAGE>
PATCH INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006
(Stated in U.S. Dollars)


6.   OIL AND GAS INTERESTS (CONTINUED)

     b)  Alberta, Canada (continued)

         (v)   The  Company entered into a Farmout and  Participation  Agreement
               dated January 19, 2006, to acquire a working  interest in oil and
               gas leases ("Block A" and "Block B") in the Peace River arch area
               of Alberta. Under the terms of the Agreement,  the Company made a
               payment of $678,943 to the title-holder of the farmout lands. The
               Company  will  earn a 90%  working  interest  in a test  well and
               spacing  unit,  subject  to  a  convertible   overriding  royalty
               exercisable  after  payout  such that if  exercised  reduces  the
               Company's  interest  to 54%,  and a 54%  working  interest in the
               balance of Block A lands, by incurring 90% of the costs of a test
               well to be spudded on the Block A lands no later than February 1,
               2007. The Company will earn a 90% working  interest in the second
               test well and spacing unit,  subject to a convertible  overriding
               royalty  exercisable  after payout that if exercised  reduces the
               Company's  interest  to 54%,  and a 54%  working  interest in the
               balance of Block B lands by incurring  90% of the costs of a test
               well to be spudded on the Block B lands no later than February 1,
               2007. The lands are subject to a 1% gross overriding  royalty and
               Crown  royalties.  To-date cash call payments  totalling  $46,521
               have been made towards the two test wells.

         (vi)  On February 28, 2006, the  Partnership  entered into an agreement
               for the acquisition of an Alberta oil sands property located just
               south of Fort McMurray in the area of Leismer,  Alberta,  Canada.
               The property is divided into two half sections called Block A and
               Block B. On March 2, 2006,  the  Partnership  paid  $726,080  and
               issued  437,500  shares  of the  Company  at a price of $1.08 per
               share,  for a 40% working  interest in Block A. On March 30, 2006
               the Partnership paid an additional $453,800 to earn a further 40%
               working  interest  in Block A. The  Partnership  has the  option,
               exercisable  on or  before  April  1,  2007,  to  acquire  an 80%
               interest in Block B for the payment of $1,179,880 (CDN$1,300,000)
               and 100,000 additional shares of the Company.  Both Block A and B
               are subject to a 5% overriding  royalty and crown royalties.  The
               Partnership  must fund 80% of the costs of a 3D  seismic  program
               covering  approximately  1.2  square  miles  over the Block A and
               Block B lands on or before March 1, 2007.  The  Partnership  must
               also fund a Test Well on the Block A lands  which must be spudded
               by March 1, 2007. The  Partnership is required to fund 80% of the
               total cost of the test well.

         (vii) On April 5, 2006, Energy  acquired  three crown oil sands leases,
               comprising  four sections  (1,024  hectares) at the Alberta Crown
               Oil Sands sale for  $405,143.  The  initial  lease term is for 15
               years with annual  rental  payable to the Alberta  Crown of $3.18
               (CDN$3.50)  per hectare and Crown  royalties  on  production.  On
               April 13, 2006 Energy sold these  leases to the  Partnership  for
               $641,370.   The   inter-company   profit  of  $236,227  has  been
               eliminated upon consolidation.

     c)  California, USA

         The  Company has 0.75 of 1% of an interest in four test wells in Tehama
         County, California. The Company relinquished its interest in these test
         wells in fiscal 2005.

     d)  Texas, USA

         The Company entered into a participation  agreement dated September 30,
         2003 with PB Energy USA Inc.,  where the  Company was granted the right
         to earn a 3.75%  working  interest  in a Test Well and a 3.75%  working
         interest  in 3 tracts of land  totalling  856 acres  lying  within  the
         Goliad  County  of  Texas,  USA  (the  "Program  Lands")  known  as the
         Manahuilla  Creek  Project,  by paying 5% of the  Prospect  Acquisition
         Costs (being  US$15,000  (paid)),  5% of the Test Well  Operations  and
         3.75% of the costs of development  of Program Lands.  The test well has
         been shut-in and the Company recognized an impairment charge of $34,385
         in 2005.


                                      F-18
<PAGE>
PATCH INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006
(Stated in U.S. Dollars)


6.   OIL AND GAS INTERESTS (CONTINUED)

     e)  Ukraine

         The Company does not intend to proceed at this time with drilling wells
         identified in a signed  Memorandum of  Understanding  with Firma HAS in
         the  oil  and  gas  fields  of  Chernigivska,  Sumska,  Poltavaska  and
         Kharkivska  regions  of  Ukraine,  which  have  been  approved  by  the
         Ukrainian government.

     f)  Bolivia

         The Company has decided not to proceed with an  agreement  entered into
         dated November 1, 2005, to acquire a 30% working interest in the Warnes
         Field project, Santa Cruz, Bolivia.


7.   DUE TO RELATED PARTIES

     a)  Related  parties  include  directors  and officers and  companies  with
         common  management  and  directorships.   Related  party  accounts  are
         unsecured  with no fixed  terms of interest  or  repayment.  At May 31,
         2006, $86,878 (2005 - $342,813) was due to related parties.

     b)  On May 1, 2005, the Company entered into a management  agreement with a
         director and the former  President of the Company for a term of 5 years
         with  payments  of  $175,000  per annum.  On May 1, 2006,  the  Company
         entered into a management  agreement  with the President of the Company
         for a term of 1 year with payment of $60,000 per annum. On December 16,
         2005, the Company  entered into a management  agreement with a director
         of the Company with payments of $5,446 (CDN$6,000) per quarter.  During
         the year  ending  May 31,  2006,  the  Company  paid  $198,677  (2005 -
         $115,239) in related party compensation.


8.   ASSET RETIREMENT OBLIGATIONS

                                                   For the Year    For the Year
                                                   Ended May 31,   Ended May 31,
                                                       2006            2005
                                                   -------------   -------------
        Beginning asset retirement obligations     $          -    $          -
        Additions related to new properties                   -               -
        Liabilities incurred                             32,834               -
        Deletions related to property disposals               -               -
        Accretion                                         1,545               -
                                                   ------------    -------------
                                                   $     34,379    $          -
                                                   ============    =============


9.   COMMON STOCK

     On July 25, 2005,  the Company  effected a reverse stock split on the basis
     of the issue of one new common share for the  cancellation of 10 old common
     shares.  On March 27, 2006,  the Company  effected a forward stock split on
     the  basis of the  issue of two and  one-half  new  common  shares  for the
     cancellation   of  1  old  common  share.   All  share  amounts  have  been
     retroactively adjusted for all periods presented.

     The Company is proposing the  distribution of a cash dividend on a pro-rata
     basis of 50% of the net proceeds of the sale of its investment in Pharmaxis
     Ltd. (the "Pharmaxis  Shares").  Net proceeds includes the costs associated
     with the sale of the Pharmaxis  shares and related taxes.  The directors of
     the Company have fixed July 30, 2004 as the record date.  The  distribution
     is subject to the Company receiving all required regulatory approvals.


                                      F-19
<PAGE>
PATCH INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006
(Stated in U.S. Dollars)


9.   COMMON STOCK (CONTINUED)

     On September 22, 2005, the Company filed a form S-8 Registration  Statement
     in  connection  with a 2005 Stock Option Plan  allowing for the granting of
     options to acquire up to a total of 2,250,000 shares.

     On May 15, 2006,  the Company  adopted the 2006 Stock Option Plan approving
     the granting of options to acquire up to a total of 1,500,000 shares.

     A summary of the Company's stock option activity is as follows:

<TABLE>
<CAPTION>
                                                   May 31, 2006                        May 31, 2005
                                        -------------------------------     -------------------------------
                                                              Weighted                            Weighted
                                                 Number        Average               Number        Average
                                                     of       Exercise                   of       Exercise
                                                Options          Price              Options          Price
                                        ---------------- --------------     ---------------- --------------
<S>                                     <C>              <C>                <C>              <C>
       Balance, beginning of year             1,370,000          $0.28            1,101,250          $0.48
       Granted                                2,735,000          $0.75            3,069,643          $0.24
       Cancelled                                      -              -             (250,000)         $0.52
       Exercised                             (1,832,500)         $0.40           (2,550,893)         $0.24
                                        ---------------- --------------     ---------------- --------------
       Balance, end of year                   2,272,500          $0.75            1,370,000          $0.28
                                        ================ ==============     ================ ==============
</TABLE>

     As at May 31, 2006, the following options are outstanding:

<TABLE>
<CAPTION>
                                               OUTSTANDING                               EXERCISABLE
                               ---------------------------------------------     ---------------------------
                                                   Weighted
                                                    Average        Weighted                        Weighted
                                      Number      Remaining         Average            Number       Average
                                          of    Contractual        Exercise                of      Exercise
               Exercise Price         Shares   Life (years)           Price            Shares         Price
     -----------------------------------------------------------------------     ---------------------------
<S>                                <C>                 <C>            <C>           <C>               <C>
               $  0.26 - 0.79      1,275,000           2.54           $0.43         1,275,000         $0.43
               $  0.80 - 1.54        997,500           1.57           $1.16           512,500         $0.80
                               ---------------------------------------------     ---------------------------
                                   2,272,500                                        1,787,500
                               =============================================     ===========================
</TABLE>

     The Company  accounts for stock based  employee  and director  compensation
     arrangements in accordance with provisions of Accounting  Principles  Board
     ("APB")  Opinion No. 25 - "ACCOUNTING  FOR STOCK ISSUED TO EMPLOYEES",  and
     related  interpretations,  and complies with the  disclosure  provisions of
     SFAS No. 123 - "ACCOUNTING FOR STOCK BASED COMPENSATION". Under APB No. 25,
     compensation  expense is based on the  difference,  if any, on the date the
     number of shares receivable is determined, between the estimated fair value
     of the Company's  stock and the exercise  price of options to purchase that
     stock.  Stock based  compensation  arrangements  for others are recorded at
     their fair value as the services are provided and the compensation  earned.
     During  the  year  ended  May  31,  2006,   stock-based   compensation  for
     consultants   amounting  to  $787,310  was  recorded.   Stock  options  for
     stock-based  compensation  were issued as follows:  250,000  stock  options
     priced at $0.40 per share,  75,000 stock options priced at $0.44 per share,
     250,000  stock  options  priced at $0.48 per share,  562,500  stock options
     priced at $0.56 per share, 512,500 stock options priced at $0.80 per share,
     and 285,000 stock options priced at $1.54 per share. Shares for stock-based
     compensation  were issued as follows:  75,000 shares of common stock priced
     at $0.43,  150,000 shares of common stock priced at $0.52, 75,299 shares of
     common  stock  priced at $1.32 and 37,500  shares of common stock priced at
     $1.52.


                                      F-20
<PAGE>
PATCH INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006
(Stated in U.S. Dollars)


9.   COMMON STOCK (CONTINUED)

     Had compensation cost been recognized on the basis of fair value,  pursuant
     to SFAS No. 123,  net income  (loss) and net income  (loss) per share would
     have been as follows:

<TABLE>
<CAPTION>
                                                                                     For the Year Ended
                                                                                           May 31,
                                                                                    2006               2005
                                                                             -----------------------------------
<S>                                                                          <C>                 <C>
Net income (loss) - as reported                                              $    2,687,112      $   (1,022,463)
    Add: Stock-based compensation expense included in net loss - as
    reported                                                                        787,310             284,354
    Deduct: Stock-based compensation expense determined under fair value
    method                                                                       (1,063,128)           (327,444)
                                                                             -----------------------------------

Net income (loss) - pro forma                                                $    2,411,294      $   (1,065,553)
                                                                             ===================================

Basic net income (loss) per share - as reported                                    $ 0.19             $ (0.09)
Basic net income (loss) per share - pro forma                                      $ 0.17             $ (0.10)

Diluted net income (loss) per share - as reported                                  $ 0.19             $ (0.09)
Diluted net income (loss) per share - pro forma                                    $ 0.17             $ (0.10)
</TABLE>

     The fair value of each  option  granted  during the year ended May 31, 2006
     was $0.39 and was estimated  using the  Black-Scholes  option pricing model
     using the following weighted-average assumptions: a dividend yield of 0.0%;
     expected  volatility of 147%; risk free interest rate of 4.1%; and expected
     life of 1.31 years.

     The fair value of each  option  granted  during the year ended May 31, 2005
     was $0.11 and was estimated  using the  Black-Scholes  option pricing model
     using the following weighted-average assumptions: a dividend yield of 0.0%;
     expected  volatility of 216%; risk free interest rate of 2.4%; and expected
     life of .73 years.


10.  TAX EFFECTS OF OTHER COMPREHENSIVE INCOME

     Components of comprehensive income are as follows:

<TABLE>
<CAPTION>
                                                                              For the Year Ended
                                                                                 May 31, 2006
                                                           -----------------------------------------------------------
                                                                Before-Tax         Tax (Expense)        Net-of-Tax
                                                                  Amount             Or Benefit           Amount
                                                           -----------------------------------------------------------
<S>                                                            <C>                  <C>                 <C>
Available-for-sale securities:
    Reclassification adjustment - realized gain                $ (3,582,147)        $  1,217,930        $ (2,364,217)
    Holding gain                                                  5,451,844           (1,853,627)          3,598,217
                                                           -----------------------------------------------------------
Net gain on available-for-sale securities recognized in
    other comprehensive income                                    1,869,697             (635,697)          1,234,000

Foreign currency translation adjustment                             111,560                    -             111,560
                                                           -----------------------------------------------------------
Other comprehensive income                                      $ 1,981,257         $   (635,697)       $  1,345,560
                                                           ===========================================================
</TABLE>


                                      F-21
<PAGE>
PATCH INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006
(Stated in U.S. Dollars)


10.  TAX EFFECTS OF OTHER COMPREHENSIVE INCOME (CONTINUED)

<TABLE>
<CAPTION>
                                                                              For the Year Ended
                                                                                 May 31, 2005
                                                           ----------------------------------------------------------
<S>                                                             <C>                 <C>                  <C>
                                                                Before-Tax          Tax (Expense)        Net-of-Tax
                                                                  Amount              Or Benefit           Amount
                                                           ----------------------------------------------------------
Available-for-sale securities:
    Holding gain                                                $ 9,101,513         $ (3,094,514)        $ 6,006,999
                                                           ----------------------------------------------------------
Other comprehensive income                                      $ 9,101,513         $ (3,094,514)        $ 6,006,999
                                                           ==========================================================
</TABLE>

11.  COMMITMENTS

     a)  The Company entered into a management  agreement dated May 1, 2005 with
         a Director  and Former  President  of the Company for the  provision of
         management  services  for a term of 5 years  at a rate of  $14,583  per
         month.

     b)  The Company entered into a consulting  agreement  dated May 1, 2005 for
         the provision of consulting services for a term of 5 years at a rate of
         $6,250 per month.

     c)  The Company  entered into a consulting  agreement  effective  April 15,
         2006,  for the  provision of  consulting  services for a term of twelve
         months at a rate of $10,000 per month.

     d)  The Company entered into a consulting  agreement  effective December 1,
         2005,  with a director of the Company for the  provision of  consulting
         services at a rate of $1,815 (CDN$2,000) per month.

     e)  The Company entered into an agreement with the President of the Company
         dated May 1, 2006 for the provision of services for a term of one year,
         thereafter renewable on a monthly basis, at a rate of $5,000 per month.

     f)  The Company entered into a consulting  agreement dated May 12, 2006 for
         the provision of consulting services for a term of 6 months, thereafter
         renewable  on a  monthly  basis,  at a rate of $3,630  (CDN$4,000)  per
         month.

     g)  The Company entered into a consulting  agreement dated May 12, 2006 for
         the provision of consulting services for a term of 6 months, thereafter
         renewable on a monthly basis, $4,084 (CDN$4,500) per month.

12.  INCOME TAX

     The Company provides deferred income taxes for differences  between the tax
     reporting   basis  and  the  financial   reporting   basis  of  assets  and
     liabilities.   The  Company   follows  the  provisions  of  SFAS  No.  109,
     "ACCOUNTING FOR INCOME TAXES". Pursuant to SFAS 109 the Company is required
     to compute tax asset benefits for net operating losses carried forward.  At
     May 31,  2006,  the  Company  did not have any net  U.S.  operating  losses
     carried forward. The potential benefit of net U.S. foreign tax credit carry
     forward has not been  recognized  in the financial  statements  because the
     Company  cannot be  assured  that it is more  likely  than not that it will
     utilize the net U.S.  foreign tax credit carry forward in future years.  At
     May 31, 2006,  the Company had capital  gains for  Australian  income taxes
     purposes of $7,270,801,  net operating  income for U.S.  federal income tax
     purposes of $2,758,004, and had non-capital loss carryforwards for Canadian
     income tax purposes of $487,000,  which begin  expiring in fiscal 2011. All
     U.S.  federal  income taxes  payable were offset by a foreign tax credit or
     losses brought forward.  When the future utilization of some portion of the
     carryforwards  is determined  not to be "more likely than not," a valuation
     allowance is provided to reduce the recorded tax benefits from such assets.
     At May 31, 2006,  a valuation  allowance of $634,000 was provided to reduce
     deferred tax assets to nil.


                                      F-22
<PAGE>
PATCH INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006
(Stated in U.S. Dollars)


12.  INCOME TAX (CONTINUED)

     The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
                                                                              May 31,              May 31,
                                                                               2006                 2005
                                                                                 $                    $
<S>                                                                        <C>                   <C>
     Current
        Foreign                                                             2,181,000                     -
        United States                                                         225,243                     -

     Deferred:
        Foreign                                                                     -                     -
        United States                                                               -                     -
     --------------------------------------------------------------------------------------------------------
     Total income tax expense                                               2,406,243                     -
     ========================================================================================================


     Effective tax rate reconciliation:

                                                                              May 31,              May 31,
                                                                               2006                 2005
                                                                                 $                    $

     Income tax expense at statutory rate                                   1,731,740                     -
     Nonresident capital gains tax                                          2,181,000                     -
     Foreign tax credit                                                    (1,731,740)                    -
     Federal tax                                                              225,243                     -
     --------------------------------------------------------------------------------------------------------
     Total income tax expense                                               2,406,243                     -
     ========================================================================================================
     Effective tax rate                                                          47.2%                    -
     ========================================================================================================



     The deferred tax liabilities and assets were as follows:

                                                                              May 31,              May 31,
                                                                               2006                 2005
                                                                                 $                    $

     Deferred tax assets
      - Net operating loss carryforwards                                      166,000             1,011,000
      - Excess tax basis over book basis for oil and gas properties            50,000                     -
     --------------------------------------------------------------------------------------------------------
      - Less valuation allowance                                             (216,000)           (1,011,000)
     --------------------------------------------------------------------------------------------------------
     Net deferred tax assets                                                        -                     -
     ========================================================================================================

</TABLE>


                                      F-23
<PAGE>
PATCH INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006
(Stated in U.S. Dollars)


13.  SUBSEQUENT EVENTS

     a)  Subsequent to May 31, 2006, the Company issued 330,000 shares of common
         stock  and  received  $210,000 in cash proceeds from  the  exercise  of
         330,000 stock options.

     b)  On June 23, 2006, the Company purchased 3,598 of its shares on the open
         market at an average price of $1.32 per share.

     c)  The Company  entered into a  Participation   Agreement   with  Highview
         Resources  Ltd.  ("Highview")  dated  June 6, 2006,  to acquire  50% of
         Highview's  majority  interest in two  sections of land located near to
         the City of Red Deer in Central Alberta, Canada. Under the terms of the
         Agreement,  the Company paid 50% of past land  acquisition  and seismic
         costs  incurred  by Highview  of $48,963  and has  incurred  $38,169 in
         respect  of its share of a new  seismic  program.  Under the terms of a
         Pooling and Seismic Option  Agreement  with a third party,  the Company
         and  Highview  can  elect to drill a test well in and earn 100% in each
         section  subject to a 12% non  convertible  overriding  royalty of 12%,
         reduced  proportionately by the acreage contribution of the Company and
         Highview in each section. Crown royalties will apply on any production.

     d)  The Company entered into an Agreement with Vanguard  Exploration  Corp.
         dated July 7, 2006,  to acquire a 26.25%  working  interest  in certain
         mineral  rights  on  a  quarter  section  of  land  and  the  right  to
         participate  as to 35% in a test  well  and an  option  well  over  two
         sections,  convertible  by a third party after  payout to a 21% working
         interest, in the Rich / Rumsey area of Alberta, Canada. Under the terms
         of the Agreement, the Company paid a prospect fee of $60,182 to cover a
         share of seismic and land  acquisition  costs.  The  Company  also paid
         $462,548  towards its share of the  drilling and casing costs of a test
         Well,  which has been  drilled  and cased back to a  secondary  target.
         Crown royalties will apply on any production.

     e)  On July 26, 2006,  the Company issued 222,250 shares of common stock at
         a price of $1.25 per share for investor relation services

14.  GEOGRAPHIC AND SEGMENTED INFORMATION

     The  Company  has  one  reportable   segment  consisting  of  oil  and  gas
     operations,  except for the Company's investment in Pharmaxis.  The Company
     derives revenues from the oil and gas operations from the sale of petroleum
     products. The Company's operations are in Canada and the United States.

     GEOGRAPHIC:

                                                     May 31,        May 31,
     Long-lived assets:                               2006           2005
                                                --------------  --------------

     Canada                                     $   2,937,326   $     200,358
     Australia                                      7,241,000       6,007,000
                                                --------------  --------------

     Total long-lived assets                    $  10,178,326   $   6,207,358
                                                ==============  ==============


                                                     May 31,        May 31,
     Revenues from external customers:                2006           2005
                                                --------------  --------------

     United States                              $           -   $         213
     Canada                                           178,594          97,202
                                                --------------  --------------

     Total revenues from external customers     $     178,594   $      97,415
                                                ==============  ==============


                                      F-24
<PAGE>
PATCH INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006
(Stated in U.S. Dollars)


15.  SCHEDULE OF SUPPLEMENTARY INFORMATION ON OIL AND GAS OPERATIONS

     RESERVE QUANTITY INFORMATION (UNAUDITED)

     The estimated  quantities  of proved oil and gas reserves  disclosed in the
     table  below  are  based  upon  estimates   prepared  for  the  Company  by
     independent  petroleum  engineers.  Such estimates are inherently imprecise
     and may be subject to substantial revisions. The Company bears the ultimate
     responsibility for proved reserves estimates.

     Revisions may occur because current prices of oil and gas and current costs
     of operating are subject to  fluctuations.  Past  performance of wells does
     not  necessarily  guarantee  future  performance and rates used to estimate
     decline of reserves could vary from that which is projected.

     All  quantities  shown in the table are  proved  reserves  and are  located
     within the United States and Canada.

<TABLE>
     STANDARDIZED MEASURE OF DISCOUNTED FUTURE
     NET CASH FLOWS RELATING TO PROVED OIL
     AND GAS RESERVES (UNAUDITED)
<CAPTION>
                                                                                      May 31,           May 31,
                                                                                       2006              2005
                                                                                ----------------  ----------------

                                                                                        GAS               GAS
                                                                                       (mcf)             (mcf)
<S>                                                                             <C>               <C>

     Proved, developed and undeveloped reserves (United States)

     Balance beginning of the year                                                            -           136,000
     Production                                                                               -                 -
     Sales of minerals in place                                                               -          (136,000)
                                                                                ----------------  ----------------
     Balance end of the year                                                                  -                 -
                                                                                ================  ================


                                                                                       OIL                OIL
                                                                                      (bbls)            (bbls)
     Proved, developed and undeveloped reserves (Canada)

     Balance beginning of the year                                                       11,000            12,000
     Discoveries                                                                          1,000                 -
     Revision to estimates                                                               (4,000)            2,000
     Production                                                                          (3,000)           (3,000)
                                                                                ----------------  ----------------
     Balance end of the year                                                              5,000            11,000
                                                                                ================  ================

     Standardized Measure of Discounted Future Net Cash Flows (Canada)

     Future cash flows                                                          $       353,964   $       523,000
     Future operating expenses                                                         (199,672)         (229,000)
                                                                                ----------------  ----------------
                                                                                        154,292           294,000
     10% annual discount for estimated timing of cash flows                             (19,060)          (60,000)
                                                                                ----------------  ----------------
     Standardized measure of discounted future net cash flows                   $       135,232   $       234,000
                                                                                ================  ================

</TABLE>


                                      F-25

<PAGE>
PATCH INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2006
(Stated in U.S. Dollars)


15.  SCHEDULE OF SUPPLEMENTARY INFORMATION ON OIL AND GAS OPERATIONS
     (CONTINUED)

     RESERVE QUANTITY INFORMATION (UNAUDITED)

     Future  cash flows are  computed by  applying  fiscal  period end prices of
     natural gas and oil to period end  quantities of proved natural gas and oil
     reserves.  Future  operating  expenses and  development  costs are computed
     primarily  by  the  Company's   petroleum   engineers  by  estimating   the
     expenditures  to be incurred in  developing  and  producing  the  Company's
     proved  natural gas and oil  reserves  at the end of the  period,  based on
     period end costs and assuming continuation of existing economic conditions.

     Future income taxes are based on period end statutory  rates,  adjusted for
     tax basis and applicable tax credits.  A discount factor of ten percent was
     used to  reflect  the  timing of future net cash  flows.  The  standardized
     measure of  discounted  future net cash flows is not  intended to represent
     the  replacement  cost of fair value of the  Company's  natural gas and oil
     properties.  An estimate of fair value would also take into account,  among
     other things, the recovery of reserves not presently  classified as proved,
     anticipated  future changes in prices and costs, and a discount factor more
     representative of the time value of money and the risks inherent in reserve
     estimate of natural gas and oil producing operations.

















                                      F-26