**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-KSB**
 
 x  ANNUAL
        REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
        1934
 
 For
        the
        fiscal year ended May 31, 2007
 
  ̈  TRANSITION
        REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
        1934
 
 For
        the
        transition period from _______ to _______
 
 Commission
        File No. **0-28627**
 
 **Patch
        International Inc.**
 (Name
        of
        small business issuer in its charter)
 
 **Nevada**
              **87-0393257**(State
                  or other jurisdiction of incorporation or organization)
              (I.R.S.
                  Employer Identification No.)
 
 **Suite
                  300, 441 – 5th
                  Avenue,
                  Calgary, Alberta, Canada**
              **T2P
                  2V1**(Address
                  of principal executive offices)
              (Zip
                  Code)
 
 Issuer’s
        telephone number: **(403) 441-4390**
 
 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 is not required to file reports pursuant to Section 13
        or
        15(d) of the Exchange Act.   ̈
 
 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.  Yes   ̈  No  x
 
 State
        issuer’s revenues for its most recent fiscal year:  **$15,581
        (excludes revenue of $99,722 from discontinued operations)**
 
 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:  **$27,504,902 as of
        August 17, 2007**
 
 State
        the
        number of shares outstanding of each of the issuer’s classes of common equity,
        as of the latest practicable date:  **20,239,774 shares of
        common stock as of August 17, 2007**
 
 Transitional
        Small Business Disclosure Format:  Yes   ̈  No  x
  
  **SPECIAL
        NOTE REGARDING FORWARD-LOOKING STATEMENTS**
 
 This
        annual report includes “forward-looking statements.”  All statements
        other than statements of historical facts included or incorporated by reference
        in this report, including, without limitation, statements regarding our future
        financial position, business strategy, budgets, projected costs and plans
        and
        objectives of management for future operations, are forward-looking
        statements.  In addition, forward-looking statements generally can be
        identified by the use of forward-looking terminology such as “may,” “will,”
“expect,” “intend,” “project,” “estimate,” “anticipate,” “believe,” or
“continue” or the negative thereof or variations thereon or similar
        terminology.  Although we believe that the expectations reflected in
        such forward-looking statements are reasonable, we cannot give any assurance
        that such expectations will prove to have been correct.  Important
        factors that could cause actual results to differ materially from our
        expectations (“Cautionary Statements”) include, but are not limited
        to:
 
 ·
              our
                  ability to generate sufficient capital to complete planned
                  acquisitions;
 ·
              the
                  lack of liquidity of our common
                  stock;
 ·
              the
                  availability of capital;
 ·
              the
                  strength and financial resources of our
                  competitors;
 ·
              general
                  economic conditions; and
 ·
              the
                  securities or capital markets and other factors disclosed under
                  “Management’s Discussion and Analysis or Plan of Operation,” “Business”
                  and elsewhere in this prospectus.
 
 All
        subsequent written and oral forward-looking statements attributable to us,
        or
        persons acting on our behalf, are expressly qualified in their entirety by
        the
        cautionary statements.  We assume no duty to update or revise our
        forward-looking statements based on changes in internal estimates or
        expectations or otherwise.
 
 
 **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.
 
 *Bbl*.  One
        stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference
        to
        oil or other liquid hydrocarbons.
 
 *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.
 
 *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.”
 
 2
 *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.
 
 *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.
 
 *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.
 
 *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.
 
 *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.
 
  3
  **PATCH
        INTERNATIONAL INC.**
 
 **FORM
        10-KSB**
 **FOR
        THE FISCAL YEAR ENDED**
 **MAY
        31, 2007**
 
 **INDEX**
 
 
 **Page****PART
                  I**Item
                  1.
              Description
                  of Business
              5Item
                  2.
              Description
                  of Property
              10Item
                  3.
              Legal
                  Proceedings
              12Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              12**PART
                  II**Item
                  5.
              Market
                  for Common Equity and Related Stockholder Matters and Small Business
                  Issuer Purchases of Equity Securities
              13Item
                  6.
              Management’s
                  Discussion and Analysis or Plan of Operation
              14Item
                  7.
              Financial
                  Statements
              22Item
                  8.
              Changes
                  In and Disagreements With Accountants on Accounting and Financial
                  Disclosure
              22Item
                  8A.
              Controls
                  and Procedures
              23Item
                  8B.
              Other
                  Information
              23**PART
                  III**Item
                  9.
              Directors,
                  Executive Officers, Promoters, Control Persons and Corporate Governance;
                  Compliance with Section 16(a) of the Exchange Act
              24Item
                  10.
              Executive
                  Compensation
              28Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              31Item
                  12.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              35Item
                  13.
              Exhibits
              38Item
                  14.
              Principal
                  Accountant Fees and Services
 
 
  4
  **PART
        I.**
 
 **ITEM
        1.      DESCRIPTION OF BUSINESS.**
 
 **History
        and Overview**
 
 Unless
        the context otherwise requires, the terms “we,” “our,” “us” and the “Company”
refers to Patch International Inc. and its subsidiaries.
 
 We
        were
        incorporated as Praxis Pharmaceuticals, Inc. on June 20, 1997 under the laws
        of
        the State of Nevada (“Praxis-Nevada”).  Our 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.  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
        stockholders of Praxis-Nevada gained control over
        Micronetics.  Micronetics then changed its name to Praxis
        Pharmaceuticals Inc. (“Pharmaceuticals”).  Immediately after the
        reverse acquisition transaction, the stockholders 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.
 
 ***Pharmaxis
        Ltd***.  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.  Pharmaxis is listed on the Australian Stock Exchange
        under the symbol “PXS.”  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.  We have sold all of
        our shares in Pharmaxis to fund our business and the purchase of oil sands
        properties in Alberta, Canada, described below.
 
 ***Patch
        Energy Inc***.  We did not generate any revenues from
        product sales, royalties or license fees in our pharmaceutical
        business.  Due to our inability of to obtain funding and/or partners
        to pursue our pharmaceutical projects, we decided to seek other business
        opportunities.  On October 20, 2003, we entered into an arrangement
        agreement to acquire Patch Energy Inc., which at the time was a privately-held
        company existing under the *Canada Business Corporations Act*(“Energy”).  Energy’s principal business was the exploration,
        development and production of oil and natural gas reserves through participation
        in farmout arrangements.  Energy’s main focus had been on its assets
        located in the Kerrobert area in the Province of Saskatchewan,
        Canada.
 
 As
        of
        March 15, 2004, we consummated the arrangement agreement with Energy under
        which
        we acquired Energy in a stock-for-stock transaction.  As a result of
        the acquisition, Energy became our wholly owned subsidiary.  On June
        15, 2004, we changed our domicile to Nevada and changed our name to Patch
        International Inc.  The acquisition has been treated for accounting
        purposes as an acquisition by Energy of our net assets and
        liabilities.  Because Energy has been 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.
 
  5
  ***Patch
        Oilsands Ltd.***  On February 3, 2006, we, through Energy,
        formed a wholly owned subsidiary, Patch Oilsands Ltd. (“Oilsands”) in the
        Province of British Columbia.  On February 27, 2006, we formed a
        Canadian limited partnership, Patch Oilsands Limited Partnership (the
“Partnership”), of which we owned a 75% interest and Oilsands was the general
        partner.  The minority limited partners of the Partnership were
        Habanero Resources Inc. (“Habanero”), owning 20.833%, and Micron Enviro Systems
        (“Micron”), owning a 4.1667% interest.  The purpose of the Partnership
        was to pursue the acquisition, exploration and development of land or other
        property interests primarily in the Alberta Oil Sands area of
        Canada.  On March 8, 2007, we sold our interest in Oilsands and the
        Partnership to Great Northern Oilsands Inc.  For more discussion of
        the sale, see ***Sale of Properties to Great Northern***
        below.
 
 ***Damascus
        Energy Inc.***  On December 15, 2006, we entered into a
        share exchange agreement with Damascus Energy Inc., a private Alberta
        corporation and related party (“Damascus”), the stockholders of Damascus, and
        Energy, providing for the acquisition of Damascus.  Damascus was a
        related party because Michael S. Vandale, our then President, Chief Executive
        Officer and a director, was the president of Damascus and was a director
        of
        Energy.  We acquired all of the issued and outstanding common shares
        of Damascus in consideration for one share of our Class A Preferred Voting
        Stock
        and 9,426,489 shares of Series A Preferred Stock of Energy (the “Exchangeable
        Shares”).  The share of Class A Preferred Voting Stock entitles its
        holder to vote that number of shares of our common stock into which the
        Exchangeable Shares issued in conjunction with the preferred share and at
        that
        time outstanding are then exchangeable on any matter to be voted upon by
        the
        holders of our common stock.  The Exchangeable Shares are exchangeable
        without further consideration for 9,426,489 shares of our common
        stock.  As a result of the share exchange, we acquired Damascus as a
        wholly owned subsidiary.
 
 By
        acquiring Damascus, we received the right to earn up to an 80% working interest
        in land located in the Fort McMurray area of central Alberta, Canada (the
“Dover
        Oil Sands Project”) under a farmout agreement between Damascus and Bounty
        Developments Ltd. (“Bounty”).  The Dover Oil Sands Project consists of
        32 contiguous square miles of land approximately 40 miles northwest of Fort
        McMurray, representing 20,840 acres.  We earned an initial 30%
        undivided working interest in the Dover Oil Sands Project in exchange for
        payment of $6,479,915 (CAD$7,581,500) to Bounty, reimbursement to Bounty
        for all
        expenditures made to date on the project totalling $522,650 (CAD $611,500),
        and
        issuance of 4,341,489 Exchangeable Shares to Bounty.  All of the
        shares were issued to Bounty.
 
 Under
        the
        agreement, to earn an additional 50% in the project, we were required to
        spud 16
        evaluation wells and complete of a 2D seismic program on or before March
        31,
        2007.  As of April 16, 2007, we satisfied all the conditions required
        under the farmout agreement, earning an 80% working interest in the Dover
        Oil
        Sands Project.
 
 ***1289307
        Alberta Ltd.***  On January 16, 2007, we entered into a
        share exchange agreement with 1289307 Alberta Ltd. (“1289307”), a private
        corporation incorporated under the laws of Alberta, the stockholders of 1289307,
        and Energy, providing for the acquisition of 1289307.  We acquired all
        of the issued and outstanding common shares of 1289307 in consideration for
        one
        share of our Class B Preferred Voting Stock and 500,000 Exchangeable
        Shares.  The share of Class B Preferred Voting Stock entitles its
        holder to vote that number of shares of our common stock into which the
        Exchangeable Shares issued in conjunction with the preferred share and at
        that
        time outstanding are then exchangeable on any matter to be voted upon by
        the
        holders of our common stock.  The Exchangeable Shares are exchangeable
        without further consideration for 500,000 shares of our common
        stock.  We also assumed 1289307’s $1,000,000 promissory note payable
        to 1286664 Alberta Ltd., a related party.  In addition, under the
        terms of the Firebag Oil Sands agreement, 1289307 assumed an obligation of
        $4,393,140 (CAD$5,100,000).  Since 1289307 had an obligation for this
        payment prior to our acquisition, the costs have been recorded as part of
        the
        initial purchase price of 1289307.  As a result of the share exchange,
        we acquired 1289307 as a wholly owned subsidiary.
 
  6
  By
        acquiring 1289307, we received the right to earn up to a 75% working interest
        in
        18 square miles of land, representing 11,520 acres, located in Townships
        91-92,
        Range 2 W4M (the “Firebag Oil Sands Project”), in the Fort McMurray area of
        central Alberta, Canada, pursuant to a farmout agreement with
        Bounty.  We earned an initial 25% working interest in the Firebag Oil
        Sands Project by making payments to Bounty in the amount $4,393,140
        (CAD$5,100,000).  Under the agreement we had the right to earn an
        additional 50% working interest by (i) spudding 8 evaluation wells and
        completing a 2D seismic program on the property on or before March 31, 2007,
        (ii) paying Bounty $2,153,500 (CAD$2,500,000) on or before April 1, 2007,
        (ii)
        spudding 4 additional evaluation wells on or before April 1, 2008, and (iv)
        and
        completing another 2D seismic program on the property on or before March
        31,
        2008.  We were able to spud 3 evaluation wells before March 31, 2007
        and we paid Bounty the $2,153,500 (CAD$2,500,000).  We negotiated a
        compromise with Bounty and the remaining requirements to earn the additional
        50%
        working interest were waived.  In exchange for the waiver of the
        remaining requirements under the farmout agreement, we agreed that Bounty’s 25%
        working interest in the Firebag Oil Sands Project would be a carried interest
        until we have spent an additional $1,500,000 on exploration (drilling and
        seismic evaluation) expenses.  As of April 16, 2007, we earned the
        full 75% working interest in the Firebag Oil Sands Project.
 
 Effective
        June 1, 2007, Damascus and 1289307 were merged into Energy and ceased to
        exist
        as separate entities.
 
 ***Sale
        of Properties to Great Northern.***On March 8, 2007, we
        executed an Asset Purchase Agreement (the “Agreement”) with Great Northern
        Oilsands Inc. (“Great Northern”), whereby we sold the majority of our inventory
        of conventional oil and gas assets (the “Assets”).
 
 On
        March
        8, 2007, prior to the execution of the Agreement, Oilsands, as general partner
        for the Partnership, executed an Assignment of Lease (the “Assignment”) in our
        favor.  Under the Assignment, the Partnership distributed three Crown
        oil sands leases in the Muskwa area of Alberta, comprising four sections
        (1,024
        hectares) under a 15-year lease with annual rental payable to the Alberta
        Crown
        of CAD$3.50 per hectare and Crown royalties on production, to the Partnership’s
        members in proportion to their partnership interests.  As a result of
        the pro-rata distribution, we received a 75% interest in the Muskwa
        property.
 
 In
        connection with the Assignment, we entered into two Declarations of Trust
        with
        Habanero and Micron under which we hold the 20.833% and 4.167% interests
        in the
        Muskwa property held by Habanero and Micron, respectively, in trust for
        them.  We plan to continue to develop the Muskwa properties according
        to the plans for development that existed previously.
 
 We
        received $86,510 (CAD$100,000) as a non-refundable deposit, $1,816,710
        (CAD$2,100,000) (1,000,000 restricted shares) in Great Northern common stock,
        and $692,080 (CAD$800,000) on the closing date as payment from Great Northern
        pursuant to the Agreement.  The Agreement provided for adjustment of
        the sales price at June 30, 2007 for any of the following: (i) all revenues
        and
        expenses accrued prior to March 8, 2007 were paid to and borne by us; (ii)
        all
        revenues and expenses accrued after March 8, 2007 will paid to and borne
        by
        Great Northern; and (iii) all mineral taxes, surface and mineral lease rental
        payments, or similar payments made by us prior to March 8, 2007 were
        apportioned, according to the respective holding periods, between us and
        Great
        Northern as of March 8, 2007.   However, the dollar amount of the
        adjustment was determined to be insignificant and no adjustment was
        made.
 
 The
        Agreement provided for the sale of the majority of our conventional petroleum
        and natural gas rights and all other tangible property and assets used in
        connection with these petroleum and natural gas rights, and other miscellaneous
        interests associated with the petroleum and natural gas rights.
 
  7
  The
        properties sold consisted of all of our holdings in the following
        areas:
 ·
              Kerrobert,
                  Saskatchewan, Canada;
 ·
              Cecil,
                  Alberta, Canada
 ·
              Lloydminster,
                  Alberta, Canada;
 ·
              Medicine
                  Hat, Alberta, Canada;
 ·
              Eight
                  Mile, British Columbia, Canada; and
 ·
              Certain
                  assets in the Leismer Area, Alberta,
                  Canada.
 
 We
        retained the following: (i) all petroleum substances produced by the Assets
        prior to the sale; (ii) all accounts receivables accruing or attributable
        to the
        activity of the Assets prior the sale; (iii) all assets held by our wholly
        owned
        subsidiaries, including the Dover Oil Sands Project and the Firebag Oil Sands
        Project; and (iv) the Muskwa property distributed to us, Habanero, and Micron
        prior to the closing of the Agreement.
 
 ***Recent
        Financing Activity.***  In December 2006, we completed a
        financing of 3,240,000 common shares at CAD$1.00 per share on a flow-through
        basis resulting in gross proceeds of approximately $2,798,400, and in February
        2007, we completed a private placement of 8,302,000 Non-Flow-Through Special
        Warrants at $1.50 per Special Warrant and 4,653,750 Flow-Through Special
        Warrants at $1.65 per Flow-Through Special Warrant for gross proceeds of
        $20,131,687.  We used the proceeds to fund development of the Dover
        Oil Sands Project, Firebag Oil Sands Project, and the Muskwa Leases and intend
        to continue to develop those properties with the remaining funds.  We
        fulfilled our earning obligations and have an 80% working interest in the
        Dover
        Oil Sands Project and a 75% working interest in the Firebag Oil Sands
        Project.
 
 In
        February 2007, we sold 4,653,750 “Flow-Through Special Warrants” and 8,302,000
“Non-Flow-Through Special Warrants.”  Each Flow-Through Special
        Warrant entitles the holder to acquire, for no additional consideration,
        one
        share of our common stock.  Each Non-Flow-Through Special Warrant
        entitles the holder to acquire, for no additional consideration, one
        Unit.  Each Unit consists of one share of our common stock and one
        common share Bonus Warrant (the “Bonus Warrants”).  Each Bonus Warrant
        entitles the holder to receive, without additional consideration, up to 0.10
        shares of our common stock, if we do not complete certain filings on or before
        April 28, 2007 and we do not: (i) become a “reporting issuer” in any province or
        territory of Canada; (ii) have a registration statement declared effective
        in
        the United States; and (iii) have our common stock listed on the TSX Venture
        Exchange or Toronto Stock Exchange on or before September 25,
        2007.  As of August 17, 2007, the Bonus Warrants can be
        converted  without additional consideration into 166,040 shares of our
        common stock.
 
 Also
        in
        February 2007, we issued non-transferable warrants to purchase up to 762,645
        shares of our common stock to our sales agents that participated in the sale
        of
        the Flow-Through Special Warrants and the Non-Flow-Through Special Warrants
        (the
“Agents’ Warrants”).  The Agents’ Warrants are exercisable at $1.50
        per share on the later of: (i) February 27, 2008; and (ii) six months from
        the
        date the securities issued under the private placement are free from trading
        restrictions in the United States and Canada but no later than February 27,
        2009
        (the “Warrants”).
 
 **The
        Oil Sands Industry**
 
 Our
        main
        focus is on producing oil through oil sands leases, located in Alberta,
        Canada.  Oil sands are a geological formation in the Athabasca region
        of northern Alberta, Canada.  Oil sands are a viscous mixture of sand,
        bitumen, clay and water with the consistency of cold molasses and according
        to
        the Alberta Economic Development Authority,  Alberta’s oil sands are
        believed to contain the equivalent of 315 billion barrels of oil, of which
        175
        billion have already been established as commercially viable using today’s
        extraction methods.  Alberta’s oil sands currently account for about
        39% of Canada’s total petroleum production of approximately 1 million barrels
        per day and production is expected to grow to 4 million barrels per day by
        2020.  Surface mining methods account for approximately two-thirds of
        current production in the oil sands region
 
  8
  Bitumen-bearing
        geologic formations, typically containing up to 18 percent bitumen saturation
        by
        weight, can be situated near the surface or hundreds of feet
        below.  Recovery of oil sands from formations up to 75 meters is by
        open-pit mining; for deeper formations, in-situ recovery techniques such
        as
        steam-assisted gravity drainage (“SAGD”) are used.  With SAGD, pairs
        of horizontal wells (an upper well and a lower well) are drilled into an
        oil
        sands formation and steam is injected continuously into the upper
        well.  As the steam heats the oil sands formation, the bitumen softens
        and drains into the lower well, from which it is produced to the
        surface.
 
 Development
        in the oil sands industry in Canada to date has been focused primarily in
        Alberta.  The Alberta Energy Utilities Board estimates that there are
        1.6 trillion barrels of bitumen resource in place in Alberta, of which 315
        billion barrels are thought to be recoverable.  Exploration for
        commercially viable oil sands deposits has traditionally focused on Alberta,
        resulting in the establishment of mining and in-situ projects in the Athabasca
        oil sands region and in-situ projects in Cold Lake and Peace River
        deposits.  The lead-time for production from an oil sands project is
        generally a minimum of seven to ten years from initial exploration.
 
 **Competition**
 
 Oil
        sands
        exploration and acquisition of undeveloped properties is a highly competitive
        and speculative business.  We compete with a number of other
        companies, including major oil companies and other independent operators
        which
        are more experienced and which have greater financial resources.  We
        do not hold a significant competitive position in the oil and gas
        industry.
 
 **Governmental
        Approval, Regulation and Environmental Issues**
 
 Our
        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 our results of operations.  The
        requirements imposed by such laws and regulations are frequently changed
        and
        subject to interpretation, and we are unable to predict the ultimate cost
        of
        compliance with these requirements or their effect on our
        operations.
 
 In
        Alberta, oil sands activities are legislated under the *Mines & Minerals
        Act*that governs the management and disposition of rights in Crown owned
        mines and minerals, including the levying and collecting of bonuses, rental
        and
        royalties.  Future legislative changes pertaining to the royalty
        structure, under the *Mines & Mineral Act,*could have a material
        impact on the energy sector including oil sands companies.  The
*Oil Sands Conservation Act*establishes a regulatory regime and scheme
        of approvals administered by the Alberta Energy Utilities Board for the
        development oil sands resources and related facilities in
        Alberta.  The Acts are supported by the following
        regulations:  *Oil Sands Tenure Regulation*, *Oil Sands
        Royalty Regulation 1984*, *Oil Sands Royalty Regulation 1997*,
*Experimental Oil Sands Royalty Regulation*, *Oil**Sands
        Conservation Regulation*, and *Mines and Minerals Administration
        Regulation*.  Each provincial jurisdiction also maintains specific
        royalty regimes that will be applied to all oil sands and oil shale development
        projects consistent with other resource developments.
 
  9
  We
        are
        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, we may be liable for damages and the costs of removing hydrocarbon
        spills for which we 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 us liable for environmental damage without regard to actual negligence
        or fault.  Such laws and regulations may expose us to liability for
        the conduct of, or conditions caused by, others or for our own
        acts.  We believe that we have complied in all material respects with
        applicable environmental laws and regulations.
 
 **Employees**
 
 As
        of May
        31, 2007, we had 5 full-time employees.
 
 Our
        opportunity for success depends largely upon the efforts, abilities, and
        decision-making of our directors and executive officers.  The loss any
        of our key personnel could, to varying degrees, have an adverse effect on
        our
        operations and research and development efforts.  The loss of any one
        of them would have a material adverse effect on our business and
        us.  We do not currently maintain “key-man” life insurance on our
        executive officers.
 
 
 **ITEM
        2.   DESCRIPTION OF PROPERTY.**
 
 **Fort
        McMurray Oil Sands Area**
 
 Our
        Fort
        McMurray oil sands area leases consist of 32 gross sections (25.6 net sections)
        in the Ells River area (formerly referred to as Dover) and 18 gross sections
        (13.5 net sections) in the Firebag Oil Sands Project.  The Ells River
        Oil Sands Project comprises three separate parcels:  Ells North (12
        gross sections), Ells Central (15 gross sections), and Ells South (5 gross
        sections).  The Firebag Oil Sands Project comprises a single
        parcel.
 
 During
        this past winter, we shot a collective 64 miles of seismic and drilled 19
        holes
        in the Ells River area, consisting of 15 holes in Ells North, and 4 holes
        in
        Ells Central.  No exploration was done over the Ells South
        parcel.  In Firebag, 3 core holes were drilled.  Upon
        conclusion of the drilling and seismic program, we used the obtained data
        and
        engaged Kade Technologies to perform reservoir modeling to ascertain the
        feasibility of an SAGD project with the acquired geologic and reservoir
        data.  The results of the Kade Tecnhologies reservoir model were used
        in our independent engineering appraisal performed by McDaniel &
Associates.
 
 We
        also
        concluded an environmental baseline study over a 6 square mile area to ascertain
        the current status of the water, vegetation, soil and air
        quality.  This study will be incorporated in our environmental impact
        discussion as part of our planned SAGD pilot application.
 
 Going
        forward, we will continue to focus on the development of our oil sands lease
        within the Ells River area.  The activity will focus on further
        exploration, delineation and development of the Ells River land in preparation
        for a comprehensive SAGD pilot application to be submitted to the Alberta
        Energy
        and Utilities Board and Alberta Environment as early as summer
        2008.  In addition to the exploration, we will also perform a series
        of tests to ascertain a viable source for water as part of the SAGD pilot
        application and development plans.
 
 We
          require significant additional financing to facilitate our 2007-2008 exploration
          program, which will likely include drilling of additional core holes and
          a
          seismic program which may consist of a combination of 2D and 3D seismic
          data.  Management believes that obtaining a listing on the TSX Venture
          exchange will improve the visibility of the company and its chances for
          obtaining additional financing.  We do not have any commitments or
          developed plans for additional financing as of this date.
 
  10
  **Muskwa
        Oil Sands Area**
 
 In
        townships 85/86 and ranges 24/25W4, we have 10 gross sections (7.5 net) of
        oil
        sands leases in the Muskwa area.  This property has not yet been
        assessed.  The bitumen viscosity here is lower and therefore
“conventional” production technology may be amenable.  Operators to
        the southeast have had success utilizing horizontal wells and polymer-water
        flooding to produce the bitumen.  Five existing wells confirm the
        presence of bitumen-saturated sand on the lease.  Geoscience and
        reservoir engineering work will be conducted to assess the potential for
        development.  We intend to conduct further exploration of the Muskwa
        property, which may include drilling and testing oil samples for viscosity
        and
        pressure transient analysis.
 
 **Principal
        Products and Distribution Methods**
 
 We
        were
        involved in exploration activities to locate natural gas and crude
        petroleum.  We produced light crude oil in Saskatchewan and Alberta,
        Canada for properties that were sold to Great Northern in March
        2007.  Such products were generally sold at the wellhead to purchasers
        in the immediate area where the products are produced.
 
 Currently,
        we are involved in oil sands development and oil production in Alberta,
        Canada.  We have not yet produced or sold any oil from our oil sands
        operations.
 
 **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.
 
 **Volume,
        Prices and Operating Expenses**
 
 We
        generated a majority of our production from the properties sold to Great
        Northern.  As of May 31, 2007, we retained less than 15% of any active
        oil producing properties.  The following table presents information
        regarding the production volumes, average sales prices received, and average
        production costs associated with our sales of oil for the periods
        indicated:
 
 **For
                  the Years Ended May 31,****2007**
              
              
              **2006**
              
              
              **2005**Oil
                  production (Bbl)
              
              
              2,275
              
              
              
              3,515.5
              
              
              
              3,558.4Average
                  sales price per Bbl
              
              $
              50.68
              
              
              $
              58.75
              
              
              $
              45.34Average
                  production costs per Bbl
              
              $
              20.50
              
              
              $
              14.18
              
              
              $
              12.76
 
 **Oil
        and Gas Acreage**
 
 The
        following table sets forth the undeveloped and developed leasehold acreage,
        by
        area, held by us as of May 31, 2007.  The table does not include
        acreage in which we have a contractual right to acquire or to earn through
        drilling projects, or any other acreage for which we have not yet received
        leasehold assignments.
 
 **Undeveloped
                  Acres**
              
              **Developed
                  Acres****Area**
              **Gross**
              **Net**
              
              **Gross**
              **Net**Alberta
              40,000
              32,320
              
              -
              -
 
 **Previous
        Drilling Activity**
 
 ***Oil
        Sands Properties.***  Drilling activity was concentrated at
        the Ells River area with the drilling of 15 new core holes on the Ells North
        parcel.  Based on the results of this data combined with recent land
        sale activity and drilling activity on adjacent lands, management believes
        early
        indications support the assertion that there is both adequate resource potential
        and a high probability for commercial development at Ells North.
 
  11
  Drilling
        at Ells Central consisted of 4 new core holes on this parcel.  Based
        on the preliminary oil sands observed in these core holes, management believes
        there is additional delineation and development potential in the 2007-2008
        drilling program.
 
 ***Properties
        Sold to Great Northern.***  During the fiscal year ended
        May 31, 2005, we relinquished our rights to our 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, we 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.
 
 During
        the fiscal year ended May 31, 2007, we participated in several projects that
        were 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; the drilling of a well at Atlee-Buffalo and casing it back
        to
        a secondary target; the drilling and logging of a well in a Medicine Hat
        area of
        Alberta, Canada; the evaluation of a drilled core hole in the Liesmer area
        of
        Alberta, Canada; and the drilling of two tight gas wells in the Eight Mile
        area
        of Alberta, Canada, the first of which was abandoned and second well was
        cased.
 
 **Present
        and Planned Activities**
 
 We
        intend
        to continue to focus on the oil sands lease development within the Ells River
        area as described above.  The activity will focus on further
        exploration, delineation and development of the Ells River asset in preparation
        for a comprehensive SAGD pilot plant application to the Alberta Energy and
        Utilities Board and Alberta Environment as early as summer 2008.  In
        addition to the exploration, we will also need to perform a series of tests
        to
        ascertain the viable source for water as part of the SAGD application and
        development plans.  Also, we intend to do exploration within the Muskwa
        property that may include drilling and testing of oil samples for viscosity
        and
        pressure transient analysis.
 
 **Office
        Space**
 
 Our
        executive offices are located at Suite 300, 441 – 5th Avenue, Calgary, Alberta
        Canada T2P 2V1.  This space accommodates all of its executive and
        administrative offices.  We pay rent monthly in the amount of $12,201
        (CAD$13,866).
 
 
 **ITEM
        3.   LEGAL PROCEEDINGS.**
 
 There
        are
        no legal proceedings pending and, to the best of our knowledge, there are
        no
        legal proceedings contemplated or threatened that are deemed material to
        our
        business or us.
 
 
 **ITEM
        4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY
        HOLDERS.**
 
 None.
  12
  **PART
        II**
  **ITEM
          5.      MARKET FOR COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES**
 **OF EQUITY** **SECURITIES.**
 Our
        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 fiscal years
        ended
        May 31, 2006 and 2007.  These quotations reflect inter-dealer prices
        without retail mark-up, markdown, or commissions and may not necessarily
        represent actual transactions.
 
 **Bid
                  Prices ($)****High**
              **Low****Quarter
                  Ended:**August
                  31, 2005
              $0.70
              $0.02November
                  30, 2005
              $0.69
              $0.32February
                  28, 2006
              $1.67
              $0.38May
                  31, 2006
              $2.58
              $0.46August
                  31, 2006
              $1.85
              $0.81November
                  30, 2006
              $1.02
              $0.58February
                  28, 2007
              $2.74
              $0.84May
                  31, 2007
              $2.56
              $1.50
 
 On
        August
        17, 2007, the closing bid price for the common stock was $1.46.  The
        number of record holders of the common stock as of August 17, 2007, was 426
        according to our transfer agent.
 
 **Dividend
        Policy**
 
 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.  To
        date, we have not declared or paid any dividends on our common
        stock.  We do not intend to declare or pay any dividends on our common
        stock in the foreseeable future, but rather to retain any earnings to finance
        the growth of our business.  Any future determination to pay dividends
        will be at the discretion of our board of directors and will depend on our
        results of operations, financial condition, contractual and legal restrictions
        and other factors the board of directors deems relevant.
 
 **Recent
        Sales of Unregistered Securities**
 
 During
        the quarter ended May 31, 2007, we sold unregistered securities in transactions
        as follows:
 
 **Date**
              **Persons
                  or Class of Persons**
              **Securities**
              **Consideration**May
                  17, 2007
              Directors,
                  Officers and Employees
              Options
                  to purchase 1,175,000 of the Company’s common stock at $1.75 per
                  share
              Services
 
 No
        underwriters were used in this stock transaction.  The registrant
        relied upon the exemption from registration contained in Section 4(2) and/or
        Rule 506 as to the transaction, as the investors were either deemed to be
        sophisticated with respect to the investment in the securities due to their
        financial condition and involvement in the registrant’s business or accredited
        investors.  Restrictive legends were placed on the certificates
        evidencing the securities issued in the transaction.
  13
  **ITEM
        6.    MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION.**
 
 The
        following discussion should be read in conjunction with the financial statements
        and the related notes included in this annual report.  This discussion
        contains forward-looking statements that involve risks and
        uncertainties.  Our actual results could differ significantly from
        those projected in the forward-looking statements as a result of many factors,
        including those discussed in “Risk Factors,”  “Business” and elsewhere
        in this report.
 
 **Overview**
 
 Our
        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.  We did not generate any revenues from product sales,
        royalties or license fees.  Due to our inability to obtain funding
        and/or partners to pursue our pharmaceutical projects, we decided to seek
        other
        business opportunities.  We retained minority ownership in a former
        subsidiary, Pharmaxis Ltd.  Pharmaxis Ltd. conducted an initial public
        offering in November 2003 and its shares are listed on the Australian Stock
        Exchange.  In 2005, we began selling our shares of Pharmaxis Ltd. to
        fund our operations.  At February 28, 2007, we no longer owned any
        shares of Pharmaxis Ltd.
 
 In
        March
        2004, we consummated an arrangement agreement with Patch Energy Inc. (“Energy”)
        through which we acquired Energy, then 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 became our wholly
        owned subsidiary.  In the arrangement, each issued common share of
        Energy was exchanged for one share of our common stock.
 
 The
        acquisition was treated for accounting purposes as an acquisition by Energy
        of
        our net assets and liabilities.  Because Energy was deemed to be the
        purchaser for accounting purposes, the consolidated financial statements
        have
        been presented as a continuation of Energy and include the results of operations
        of Energy since incorporation on February 11, 2002, and our results of
        operations since the date of acquisition on March 15, 2004.
 
 In
        February 2006, we, through Energy, formed a new subsidiary, Patch Oilsands
        Ltd.
        (“Oilsands”), and Patch Oilsands Limited Partnership (“Partnership”) in which we
        owned 75% of the Limited Partnership units.  Oilsands managed the
        Partnership in its capacity as general partner.
 
 On
        December 15, 2006, we completed our acquisition of Damascus Energy Inc.,
        a
        private Alberta corporation (“Damascus”) and related party.  By
        acquiring Damascus, we received the right to earn up to an 80% working interest
        in 32 contiguous square miles of land located in the Fort McMurray area of
        central Alberta, Canada (the “Dover Oil Sands Project”) under a farmout
        agreement between Damascus and Bounty Developments Ltd. (“Bounty”).
 
 On
        January 16, 2007, we completed our acquisition of 1289307 Alberta Ltd.
        (“1289307”), a private corporation incorporated under the laws of
        Alberta.  By acquiring 1289307, we received the right to earn up to a
        75% working interest in 18 square miles of 100% owned land, representing
        11,520
        acres, located in Townships 91-92, Range 2 W4M (the “Firebag Oil Sands
        Project”), in the Fort McMurray area of central Alberta, Canada, pursuant to a
        farmout agreement with Bounty.   We also assumed a $1,000,000
        Promissory Note payable to 1286664 Alberta Ltd., a company wholly owned by
        Michael S. Vandale, our then President and our current Chairman of the Board
        of
        Directors.  In addition, under the terms of the Firebag Oil Sands
        agreement, 1289307 assumed an obligation of $4,393,140
        (CAD$5,100,000).  Since 1289307 had an obligation for this payment
        prior to our acquisition, the costs have been recorded as part of the initial
        purchase price of 1289307.
 
  14
  In
        December 2006, we completed a financing of 3,240,000 common shares at CAD$1.00
        per share on a flow-through basis resulting in gross proceeds of approximately
        $2,798,400, and in February 2007, we completed a private placement of 8,302,000
        Non-Flow-Through Special Warrants at $1.50 per Special Warrant and 4,653,750
        Flow-Through Special Warrants at $1.65 per Flow-Through Special Warrant for
        gross proceeds of $20,131,687.  We used the proceeds to fund
        development of the Dover Oil Sands Project, Firebag Oil Sands Project, and
        the
        Muskwa Leases and intend to continue to develop those properties with the
        remaining funds.  We fulfilled our earning obligations and have an 80%
        working interest in the Dover Oil Sands Project and a 75% working interest
        in
        the Firebag Oil Sands Project.
 
 Also
        in
        February 2007, we issued non-transferable warrants to purchase up to 762,645
        shares of our common stock to our sales agents that participated in the sale
        of
        the Flow-Through Special Warrants and the Non-Flow-Through Special Warrants
        (the
“Agents’ Warrants”).  The Agents’ Warrants are exercisable at $1.50
        per share on the later of: (i) February 27, 2008; and (ii) six months from
        the
        date the securities issued under the private placement are free from trading
        restrictions in the United States and Canada but no later than February 27,
        2009
        (the “Warrants”).
 
 On
        March
        8, 2007, we disposed of the majority of our conventional oil and gas assets
        together with our entire interest in Oilsands and the Partnership in exchange
        for $778,590 (CAD$900,000) and 1,000,000 restricted shares of Great Northern
        Oilsands Inc. common stock, which were valued at $1,816,710 (CAD$2,100,000)
        at
        the date the agreement to sell the assets was struck.
 
 The
        properties sold consist of our interests in the following areas:
 ·
              Kerrobert,
                  Saskatchewan, Canada;
 ·
              Cecil,
                  Alberta, Canada
 ·
              Lloydminster,
                  Alberta, Canada;
 ·
              Medicine
                  Hat, Alberta, Canada;
 ·
              Eight
                  Mile, British Columbia, Canada;
 ·
              Certain
                  assets in the Leismer Area, Alberta,
                  Canada
 
 Effective
        June 1, 2007, Damascus and 1289307 were merged into Energy.
 
 **Plan
        of Operation**
 
 Going
        forward, Patch’s mandate is to continue to focus on the oil sands lease
        development within the Ells River area in this fashion. The activity will
        focus
        on further exploration, delineation and development of the Ells River asset
        in
        preparation for a comprehensive SAGD pilot plant application to the Alberta
        Energy and Utilities Board and Alberta Environment as early as summer
        2008.  In addition to the exploration, Patch will also need to perform a
        series of tests to ascertain the viable source for water as part of the SAGD
        application and development plans.
 
 Also,
        Patch intends to do exploration within the Muskwa property that may include
        drilling and testing of oil samples for viscosity and pressure transient
        analysis.
 
 As
        part
        of our focus, we have disposed of our minority working interest properties
        holding conventional oil and gas assets.  These conventional assets
        were sold to Great Northern in March 2007, as we believe the greater return
        on
        investment can be realized on our oil sands properties.
 
 We
        require significant additional financing to facilitate our 2007-2008 exploration
        program, which will likely include drilling of additional core holes and
        a
        seismic program which may consist of a combination of 2D and 3D.  We
        believe that obtaining a listing on the TSX Venture exchange will improve
        the
        visibility of the company and our chances for obtaining additional
        financing.  We do not have any commitments for additional financing as
        of this date.  We also have a $7.7 million flow-through share
        commitment, which if not met by January 2009, will require the Company to
        reimburse the subscribers for any tax payable as a result of its failure
        to meet
        its flow-through share commitments.
  15
  **Summary
        of Significant Accounting Policies**
 
 ***Basis
        of Presentation***.  Our consolidated financial statements
        include the accounts of the Company and our subsidiaries.  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.  Our fiscal year-end
        is May 31.
 
 ***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
        we may undertake in the future, actual results may differ from the
        estimates.
 
 ***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, 2007 and 2006.
 
 ***Investments***.  We
        report 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.  We regularly review 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,
        our
        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.  Realized gains and losses are
        accounted for on the specific identification method.
 
 We
        periodically review these investments for other-than-temporary declines in
        fair
        value based on the specific identification method and write down investments
        to
        their fair value when an other-than-temporary decline has
        occurred.  When determining whether a decline is other-than-temporary,
        we examine (i) the length of time and the extent to which the fair value
        of an
        investment has been lower than its carrying value: (ii) the financial condition
        and near-term prospects of the investee, including any specific events that
        may
        influence the operations of the investee such as changes in technology that
        may
        impair the earnings potential of the investee: and (iii) our intent and ability
        to retain the investment in the investee for a sufficient period of time
        to
        allow for any anticipated recovery in market value.
 
 ***Property
        and Equipment***.  Property and equipment consists of
        computer hardware, is recorded at cost.  Amortization is calculated at
        the rate of 30% per annum using the declining balance method.
 
 ***Oil
        and Gas Interests***.  We follow the successful efforts
        method of accounting for our 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.
 
  16
  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 our
        proportionate interest in such activities.
 
 ***Asset
        Retirement Obligations***.  We account 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 us to record the fair value
        of an asset retirement obligation as a liability in the period in which we
        incur
        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.
 
 ***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.  We recognize 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.
 
 ***Foreign
        Currency Translation***.  Our 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 our Canadian
        subsidiaries 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.
 
 ***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, 2007 and 2006, the components of
        comprehensive income included unrealized holding gains and losses on
        available-for-sale securities and foreign currency translation
        adjustments.
 
 ***Minority
        Interest***.  On February 3, 2006, we formed a new
        subsidiary, Patch Oilsands Ltd. (“Oilsands”), and on February 27, 2006, we
        formed Patch Oilsands Limited Partnership (“Partnership”), in which we own 75%
        of the Partnership units, with Habanero Resources Inc. owning 20.8333% and
        Micron Enviro Systems Inc. owning 4.1667%.  Under the terms of the
        Partnership Agreement, we subscribed for units, where proceeds were for other
        than the purchase of our stock by the Partnership for consideration in
        transactions undertaken by the Partnership, at a preferential price compared
        to
        the two minority limited partners.  The two limited partners paid a
        multiple of our subscription price of 1.28571 for Partnership units, up to
        the
        earlier of $4,359,000 (CAD$5,000,000) in capital contributions or the
        introduction of a third party limited partner.  Oilsands managed the
        Partnership in its capacity as General Partner.
 
 We
        consolidated our investment in Partnership.  We recorded a gain on
        dilution, which is the difference between our contribution to the Partnership
        (70%) and our equity interest (75%).  For the year ended May 31, 2006
        this gain totalled $101,664 (May 31, 2007- Nil). Non-controlling interest
        on the
        consolidated balance sheet at May 31, 2006 represents the 25% minority interest
        in the net loss and 25% of the net assets of the Partnership.  On
        March 8, 2007, the Company sold its entire interest in the Partnership, as
        part
        of the disposition of assets to Great Northern Oilsands Inc, therefore there
        is
        no minority interest or non-controlling interest recorded for the year ended
        May
        31, 2007.
 
  17
  ***Revenue
        Recognition***.  We recognize 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.
 
 ***Income
        Taxes***.  We use 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.
 
 ***Flow-Through
        Shares***.  A portion of our exploration activities has
        been financed through the issue of flow-through common shares.  Under
        the terms of the flow-through share issuance, the related resource expenditure
        deductions are renounced to the shareholder in accordance with income tax
        legislation.  Upon issuance of the flow-through shares, the proceeds
        are allocated between the offering of shares and the sale of tax benefits
        to
        investors.  The allocation is made based on the difference between the
        quoted price of our shares and the amount received for the flow-through shares,
        with a liability being recognized for the difference.  The liability
        is reversed when tax benefits are renounced and a deferred tax liability
        is
        recognized at that time.  Income tax expense is recognized for the
        difference between the amount of the deferred tax liability and the liability
        recognized on issuance.
 
 ***Stock-Based
        Compensation***.  Effective June 1, 2006, we account for
        stock based compensation arrangements in accordance with SFAS No. 123(R)
        “*Share-Based Payment*” using the modified prospective transition
        method.  Under the modified prospective transition method,
        compensation cost recognized for the year ended May 31, 2007, includes: (i)
        compensation cost for all share-based payments granted prior to, but not
        yet
        vested as of June 1, 2006, based on the grant date fair value estimated in
        accordance with the original provisions of SFAS No. 123 “*Accounting for
        Stock-Based Compensation*”, and (ii) compensation cost for all share-based
        payments granted after June 1, 2006, based on the grant date fair value
        estimated in accordance with SFAS No. 123(R).  In accordance with the
        modified prospective transition method, results for prior periods have not
        been
        restated.
 
 ***Basic
        and Diluted Income (Loss) Per Share***.  We compute 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 we generated net
        losses in the years ended May 31, 2007, the basic and diluted loss per share
        are
        the same for that year as any exercise of options or warrants would be
        anti-dilutive.
 
 **Recently
        Issued Accounting Pronouncements**
  In
        February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
        159, *“The Fair Value Option for Financial Assets and Financial
        Liabilities—Including an Amendment of FASB Statement No.
        115*.”  This pronouncement permits entities to use the fair value
        method to measure certain financial assets and liabilities by electing an
        irrevocable option to use the fair value method at specified election
        dates.  After election of the option, subsequent changes in fair value
        would result in the recognition of unrealized gains or losses as period costs
        during the period the change occurred.  SFAS No. 159 becomes effective
        as of the beginning of the first fiscal year that begins after November 15,
        2007, with early adoption permitted.  However, entities may not
        retroactively apply the provisions of SFAS No. 159 to fiscal years preceding
        the
        date of adoption.  We are currently evaluating the impact that SFAS
        No. 159 may have on our financial position, results of operations and cash
        flows.
 
  18
  In
        September 2006, the FASB issued SFAS No. 158, *“Employers’ Accounting for
        Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB
        Statements No. 87, 88, 106, and 132(R).”*  This statement requires
        employers to recognize the overfunded or underfunded status of a defined
        benefit
        postretirement plan (other than a multiemployer plan) as an asset or liability
        in its statement of financial position and to recognize changes in that funded
        status in the year in which the changes occur through comprehensive income
        of a
        business entity or changes in unrestricted net assets of a not-for-profit
        organization.  This statement also requires an employer to measure the
        funded status of a plan as of the date of its year-end statement of financial
        position, with limited exceptions.  The provisions of SFAS No. 158 are
        effective for employers with publicly traded equity securities as of the
        end of
        the fiscal year ending after December 15, 2006.  The adoption of this
        statement is not expected to have a material effect on our future reported
        financial position or results of operations.
 
 In
        September 2006, the FASB issued SFAS No. 157, “*Fair Value
        Measurements*.”  The objective of SFAS 157 is to increase
        consistency and comparability in fair value measurements and to expand
        disclosures about fair value measurements.  SFAS 157 defines fair
        value, establishes a framework for measuring fair value in generally accepted
        accounting principles, and expands disclosures about fair value
        measurements.  SFAS 157 applies under other accounting pronouncements
        that require or permit fair value measurements and does not require any new
        fair
        value measurements.  The provisions of SFAS No. 157 are effective for
        fair value measurements made in fiscal years beginning after November 15,
        2007.  The adoption of this statement is not expected to have a
        material effect on our future reported financial position or results of
        operations.
 
 In
        June
        2006, the FASB issued FASB Interpretation No. 48, *“Accounting for
        Uncertainty in Income Taxes, an interpretation of FASB Statements No.
        109.”*  FIN 48 clarifies the accounting for uncertainty in income
        taxes by prescribing a two-step method of first evaluating whether a tax
        position has met a more likely than not recognition threshold and second,
        measuring that tax position to determine the amount of benefit to be recognized
        in the financial statements.  FIN 48 provides guidance on the
        presentation of such positions within a classified statement of financial
        position as well as on derecognition, interest and penalties, accounting
        in
        interim periods, disclosure, and transition.  FIN 48 is effective for
        fiscal years beginning after December 15, 2006.  The adoption of this
        statement is not expected to have a material effect on our future reported
        financial position or results of operations.
 
 In
        March
        2006, the FASB issued SFAS No. 156, “*Accounting for Servicing of Financial
        Assets, an amendment of FASB Statement No. 140, Accounting for Transfers
        and
        Servicing of Financial Assets and Extinguishments of
        Liabilities*.”  This statement requires all separately recognized
        servicing assets and servicing liabilities be initially measured at fair
        value,
        if practicable, and permits for subsequent measurement using either fair
        value
        measurement with changes in fair value reflected in earnings or the amortization
        and impairment requirements of Statement No. 140.  The subsequent
        measurement of separately recognized servicing assets and servicing liabilities
        at fair value eliminates the necessity for entities that manage the risks
        inherent in servicing assets and servicing liabilities with derivatives to
        qualify for hedge accounting treatment and eliminates the characterization
        of
        declines in fair value as impairments or direct write-downs.  SFAS No.
        156 is effective for an entity’s first fiscal year beginning after September 15,
        2006.  The adoption of this statement is not expected to have a
        material effect on our future reported financial position or results of
        operations.
 
 In
        February 2006, the FASB issued SFAS No. 155, “*Accounting for Certain Hybrid
        Financial Instruments-an amendment of FASB Statements No. 133 and 140,”* to
        simplify and make more consistent the accounting for certain financial
        instruments.  SFAS No. 155 amends SFAS No. 133, “*Accounting for
        Derivative Instruments and Hedging Activities*,” to permit fair value
        re-measurement for any hybrid financial instrument with an embedded derivative
        that otherwise would require bifurcation, provided that the whole instrument
        is
        accounted for on a fair value basis.  SFAS No. 155 amends SFAS No.
        140, “*Accounting for the Impairment or Disposal of Long-Lived Assets*,”
to allow a qualifying special-purpose entity to hold a derivative
        financial
        instrument that pertains to a beneficial interest other than another derivative
        financial instrument.  SFAS No. 155 applies to all financial
        instruments acquired or issued after the beginning of an entity’s first fiscal
        year that begins after September 15, 2006, with earlier application
        allowed.  The adoption of this statement is not expected to have a
        material effect on our future reported financial position or results of
        operations.
 
  19
  **Results
        of Operations**
 
 On
        March
        8, 2007, we sold the majority of our conventional oil and gas properties
        (see
        section titled “***Sale of Properties to Great Northern
        Oilsands***” above).  As a result, net operating revenue
        derived from the properties disposed of in this transaction were reclassified
        into Discontinued Operations.  We retained one minor producing
        property, at Macleod, Alberta, Canada, and during the fiscal year ended May
        31,
        2007 this property generated revenue of $15,581 and incurred oil and gas
        production, royalties and other expenditures of $30,179 for a net operating
        loss
        of $14,598.  This compared to net operating income of $24,192 in the
        fiscal year ended May 31, 2006.
 
 General
        and administrative costs for the fiscal year ended May 31, 2007 totaled
        $6,621,338 compared to $1,967,210 for the fiscal year ended May 31,
        2006.  The increase in general and administrative costs primarily
        related to non-cash charges, increased activity levels and severance
        charges.  The non-cash component of the total general and
        administrative costs totaled $3,796,343 for fiscal year ended May 31, 2007
        relative to $787,310 for fiscal year ended May 31, 2006.  Of this
        amount, we recorded stock-based compensation charges of $3,136,343 for the
        fiscal year ended May 31, 2007 compared to $787,310 during the year ended
        May
        31, 2006.  At May 31, 2007, we have a total of 3,225,000 stock options
        issued and outstanding with a weighted average exercise price of $1.40 and
        a
        weighted average remaining contractual life of 4.7 years.  At May 31,
        2007, none of the issued and outstanding stock options had
        vested.  The balance of the increase in general and administrative
        costs is attributed to increased activity levels associated with the acquisition
        and development of the assets acquired in the Damascus and 1289307 transactions,
        combined with one-time severance costs of $415,000 which were paid to previous
        management of the company, contributed to the increase in general and
        administrative expenses for the year.
 
 Interest
        expense during the fiscal year ended May 31, 2007 amounted to $53,038 compared
        to Nil during the fiscal year ended May 31, 2006.
 
 Depletion,
        depreciation and impairment of oil and gas property, dry hole costs and
        geological and geophysical costs totaled $13,220,687 for the fiscal year
        ended
        May 31, 2007 compared with $196,646 during the fiscal year ended May 31,
        2006.  In accordance with the guidelines surrounding successful
        efforts method of accounting (as described above) we have expensed all
        geological and geophysical costs incurred and dry hole costs (primarily
        associated with the Firebag Oil Sands Project).  In addition, all
        unproved properties were assessed for impairment as at the balance sheet
        date
        with an impairment allowance of $5,036,371 recorded as part of depletion,
        depreciation and impairment of oil and gas property.
 
 We
        earned
        interest and other income of $206,749 in 2007 as compared to $83,557 in
        2006.  Interest income was earned primarily through the short-term
        investment of available cash balances.
 
 We
        recorded a holding loss of $14,161,373 resulting from the difference between
        the
        values of the Exchangeable Shares ($1.32 per share), the Flow Through Special
        Warrants ($1.65 per share) and the Non Flow-Through Special Warrants ($1.50
        per
        share) at the time of the transactions and the fair market value of these
        securities at May 31, 2007 ($2.03 per Exchangeable share and Non Flow-Through
        Special Warrants and $2.23 for Flow-Through Special Warrants).
 
 We
        recorded a gain on foreign exchange of $2,620,571 during the year ended May
        31,
        2007 as a result of the appreciation in the value of the Canadian dollar
        in
        comparison to the United States dollar.
 
 As
        a
        result of the previously described sale of properties to Great Northern Oilsands
        Inc., we recorded a gain on sale of $612,937.
 
 We
        realized a gain, before applicable taxes, of $13,684,318 from the sale of
        6,791,937 Pharmaxis shares in 2007.  At May 31, 2007, we do not hold
        any shares of Pharmaxis.  During 2006, we recorded a gain, before
        applicable taxes, of $6,962,937 from the sale of 4,408,063 Pharmaxis
        shares.
 
  20
  Loss
        before taxes for the year ended May 31, 2007, after including the loss from
        discontinued operations of $424,379 from the disposal of the properties included
        in the sales transaction with Great Northern Oilsands Inc. and the holding
        loss
        on fair valuing the exchangeable shares and special warrants, was
        $19,050,022.  This compares to net income before tax of $5,093,355 for
        the year ended May 31, 2006.
 
 A
        current
        income tax expense of $2,785,763 was recorded for the year ended May 31,
        2007 as
        compared to $2,406,243 for the prior year.  The current tax payable is
        a result of the gain from the sale of the Pharmaxis shares during both 2007
        and
        2006.
 
 A
        deferred income tax reduction of $3,213,573 has been recorded for the year
        ended
        May 31, 2007 (compared to Nil in 2006).
 
 Net
        loss
        for the year ended May 31, 2007 was $18,622,212 ($1.05 per share basic and
        diluted) compared to net income for the year ended May 31, 2006 of $2,687,112
        ($0.19 per share basic and diluted).
 
 Other
        comprehensive loss in 2007 was comprised of a decrease in unrealized gain
        on
        available for sale Pharmaxis securities of $7,240,999.  In 2006, we
        recorded other comprehensive income of $1,234,000, comprised of a decrease
        in
        unrealized gain on available for sale Pharmaxis securities of $2,364,217
        and a
        holding gain of $3,598,217 associated with the remaining shares of Pharmaxis
        held at May 31, 2006.
 
 Comprehensive
        loss for the current year was $25,136,900 compared to comprehensive income
        for
        the prior year of $4,032,672.
 
 **Liquidity
        and Capital Resources**
 
 For
        the
        fiscal year ended May 31, 2007, we used cash of $24,290,924 from our operating
        activities as compared to $1,526,196 used during the comparable fiscal year
        ended May 31, 2006.  Investing activities used cash of $3,937,470 in
        2007 as compared to $4,526,232 provided by investing activities in
        2006.  We expended $10,123,071 on our oil and gas interests in 2007 as
        compared to $2,436,705 in 2006.  We realized gross proceeds on the
        sale of available-for-sale Pharmaxis securities of $13,684,318 in 2007 as
        compared to $6,962,937 in 2006.
 
 Financing
        activities, net of expenses, provided $22,368,080 from the sale of special
        warrants and common stock in 2007 as compared to $1,410,746 in
        2006.  We used $6,309 to acquire shares of our common stock under our
        stock repurchase plan in 2007 compared to $111,077 in 2006.
 
 At
        May
        31, 2007, we had working capital of $1,148,501as compared to $2,089,735 as
        at
        May 31, 2006.  We no longer own any available-for-sale securities,
        having sold the remainder of our Pharmaxis shares.
 
 While
        we
        have not yet formally approved our 2007-2008 budget, we are planning a winter
        program which includes up to 60 core holes and 38 square miles of
        seismic.  Additional financing will be required for this program to
        commence and to pay our corporate obligations over the next 12
        months.  The planned program will deal with a $7.7 million
        flow-through share commitment we have, which if not met by January 2009,
        will
        require the Company to reimburse the subscribers for any tax payable as a
        result
        of its failure to meet its flow-through share commitment.
 
 The
        financial statements have been prepared on a going concern
        basis.  However, the ultimate development of the Company’s oil and gas
        projects, if proven commercial, will require significant additional
        funding.  The Company’s future operations are dependent upon its
        ability to obtain additional funding and ultimately achieve profitable
        operations.  The outcome of these matters cannot be predicted with
        certainty at this time.  The financial statements do not include any
        adjustments to the amounts and classification of assets and liabilities that
        may
        be necessary should the Company be unable to secure additional funding or
        obtain
        profitable operations.
 
 
  21
  **ITEM
        7.   FINANCIAL STATEMENTS.**
 
 See
        pages
        beginning with page F-1.
 
  ITEM 8.   CHANGES IN AND
          DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
          DISCLOSURE.
 On
        March
        5, 2007, weappointed KPMG LLP (“KPMG”) in Calgary, Canada as our registered
        independent public accountant for the fiscal year ended May 31,
        2007.  On March 5, 2007, we dismissed Morgan &
Company  (“Morgan”) as our registered independent public
        accountant.  The decisions to appoint KPMG and dismiss Morgan were
        approved by our Board of Directors on March 5, 2007.
 
 During
        the fiscal years ended May 31, 2006 and 2005 and through the subsequent interim
        period up through the date of dismissal (March 5, 2007), there were no
        disagreements with Morgan on any matter of accounting principles or practices,
        financial statement disclosure or auditing scope or procedure, which
        disagreements, if not resolved to the satisfaction of Morgan, would have
        caused
        Morgan to make reference thereto in its report on our financial statements
        for
        such years.  Further, there were no reportable events as described in
        Item 304(a)(1)(iv)(B) of Regulation S-B occurring within our two most recent
        fiscal years and the subsequent interim period up through the date of dismissal
        (March 5, 2007).
 
 The
        audit
        report of Morgan for Patch’s financial statements as of May 31, 2005, contained
        a separate paragraph stating:
 
 “These
        financial statements have been prepared assuming that the Company will continue
        as a going concern.  As discussed in Note 1 to the financial
        statements, unless the Company attains future profitable operations and/or
        obtains additional financing, there is substantial doubt about the Company’s
        ability to continue as a going concern.  Management’s plans in regards
        to these matters are discussed in Note 1.  The financial statements do
        not include any adjustments that might result from the outcome of the
        uncertainty.”
 
 During
        our two most recent fiscal years and the subsequent interim period up through
        the date of engagement of KPMG (March 5, 2007), neither we nor anyone on
        our
        behalf consulted KPMG regarding the application of accounting principles
        to a
        specific completed or contemplated transaction, or the type of audit opinion
        that might be rendered on our financial statements.  Further, KPMG has
        not provided us with written or oral advice that was an important factor
        that we
        considered in reaching a decision as to any accounting, auditing or financial
        reporting issues.
 
 Morgan
        furnished us with a letter addressed to the Securities and Exchange Commission
        stating that it agreed with the above statements.  A copy of the
        letter furnished in response to that was filed as an exhibit to our Form
        8-K
        dated March 5, 2007.
  **ITEM
          8A.   CONTROLS AND PROCEDURES.**
  We
            have
            adopted an internal control system that is designed to provide reasonable
            assurance to management and the board of directors that the financial
            statements
            present fairly its financial position and activities.  The system was
            designed by management, which is responsible for establishing and maintaining
            adequate internal controls over the Company’s financial reporting.
  22
 The
          Company’s Chief Operating Officer and Chief Financial Officer evaluated the
          overall design of internal control procedures during the year ended May
          31,
          2007, and concluded that, because of its recent growth and the inherent
          complexity of the accounting for some of its transactions, the Company
          does not
          have sufficient specialized knowledge to address certain technical and
          complicated accounting issues.  As a result, the Company’s
          consolidated financial statements for 2007 contain recorded year end material
          adjustments.   Going forward, the Company will from time-to-time
          augment the consultants used, which will provide specialized financial
          reporting
          and taxation skills (who are independent of management and the Company’s
          auditors) to assist the Company with its financial reporting of complex
          accounting issues and with its tax provision
          calculations.    We have identified conditions as of May 31,
          2007 that we believe are material weaknesses in internal controls due to
          a lack
          of segregation of duties in accounting and financial reporting activities
          as a
          result of the limited number of Company employees engaged in the authorization,
          recording, processing and reporting of transactions.  As a remedy to
          these deficiencies the Chief Operating Officer and Chief Financial Officer
          perform periodic reviews of financial information to ensure that transactions
          are properly recorded.   We have taken a number of steps to
          establish a stronger control environment which will reduce the opportunity
          to
          override internal controls.  Dual signatures are now required for all
          cheques issued and we have implemented a more formal process for the approval
          of
          all disbursements.  The implementation of these internal controls,
          combined with our recently strengthened management and employee base has
          resulted in improved internal control over financial reporting for the
          Company.  Management believes that the delay in filing of these
          financial statements was primarily due to the change in direction, recent
          growth
          and implementation of new management by the Company.
 
 Under
          the
          supervision and with the participation of our management, including our
          Principal Executive Officer and Principal Financial Officer, we conducted
          an
          evaluation of the effectiveness of the design and operation of our disclosure
          controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
          the
          Securities Exchange Act of 1934) as of May 31, 2007 (the “Evaluation
          Date”).  Based on this evaluation, our Principal Executive Officer and
          Principal Financial Officer concluded as of the Evaluation Date that our
          disclosure controls and procedures were adequate and effective to ensure
          that
          our management is alerted to material information required to be included
          in our
          periodic filings.  Our management has determined that all matters to
          be disclosed in this report have been fully and accurately
          reported.
 **ITEM
        8B.   OTHER INFORMATION.**
 
 None.
 
  23
 **PART
        III**
  **ITEM
                    9.**
                **DIRECTORS,
                    EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
                    GOVERNANCE;
                    COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
                    ACT.**
  Our
          executive officers and directors are as follows:
 
 **Name**
              **Age**
              **Position**Michael
                  S. Vandale
              48
              Chairman
                  of the Board of DirectorsJason
                  G. Dagenais
              36
              Chief
                  Operating OfficerThomas
                  K. Rouse
              50
              Chief
                  Financial OfficerDonald
                  B. Edwards
              46
              Corporate
                  SecretaryTerry
                  R. Buchanan
              55
              Vice
                  President of Exploration, Geoscience and ReservoirMark
                  L. Bentsen
              47
              DirectorRoderick
                  D. Maxwell
              44
              DirectorGreg
                  L. Belzberg
              38
              Director
 
 The
        term
        of office of each director ends at the next annual meeting of our 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 our 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.
 
 There
        are
        no family relationships between any of our directors and
        officers.  During the last five years, none of the officers or
        directors have (i) had any bankruptcy petition filed by or against any business
        of which such person was an officer; (ii) had any conviction in a criminal
        proceeding or been subject to a pending criminal proceeding (excluding traffic
        violations and other minor offenses); (ii) been subject to any order, judgment,
        or decree, not subsequently reversed, suspended or vacated, of any court,
        permanently or temporarily enjoining, barring, suspending or otherwise limiting
        his involvement in any type of business, securities or banking activities;
        or
        (iv) been found by a court of competent jurisdiction (in a civil action),
        the
        SEC or the Commodity Futures Trading Commission to have violated a federal
        or
        state securities or commodities law.
 
 The
        last
        annual meeting was held on August 30, 1999, in Vancouver, British
        Columbia.
 
 ***Michael
        S. Vandale - Chairman of the Board of Directors.***  Mr.
        Vandale has been a director since December 2006.  Mr. Vandale served
        as our President and Chief Executive Officer from December 2006 to May
        2007.  He has been an officer and director of Patch Energy since May
        2006.  Mr. Vandale has been the Chairman, and a director of Arsenal
        Energy Inc., a public energy corporation listed on the TSX and Frankfurt
        Stock
        Exchange, since January 2001.  Mr. Vandale was President and Chief
        Executive Officer of Arsenal Energy Inc. from January 2001 to April
        2006.  He was President of Sundance Resources Inc. listed on the
        Toronto Stock Exchange, and was a director of its successor company, True
        Energy
        Inc. listed on the Toronto Stock Exchange from June 1997 until the fall of
        2002
        when he started Arsenal Energy Inc.  From 1997 to 1999, Mr. Vandale
        was a director and major shareholder of Mutual Fund Direct Inc. until it
        was
        sold to Altamira Investment Services Inc.  Mr. Vandale is a founding
        shareholder and has been a director of Cold Creek Capital Inc., listed on
        the
        TSX Venture Exchange, since February 2006.  Mr. Vandale was a founding
        shareholder and has been a director of Sahara Energy Ltd. (formerly Battleford
        Capital Inc.), listed on the TSX Venture Exchange, since January
        2005.  Mr. Vandale has more than 20 years experience in upstream oil
        and gas exploration and midstream operations in Canada, the United States
        and
        South America.
 
  24
  ***Jason
        G. Dagenais - Chief Operating Officer.***  Mr. Dagenais has
        been our Chief Operating Officer since May 2007.  Mr. Dagenais
        previously served as our Vice President of Operations since December
        2006.  From May 2004 to August 2006, he was President and CEO of Dyno
        Energy Ltd, a private oil and gas in Calgary, Alberta.  From August
        2001 to January 2004, Mr. Dagenais was a senior engineer at Delphi Energy
        Corp.,
        an oil and gas company traded on the Toronto Stock
        Exchange.  Previously, he has also held positions with Schlumberger,
        Ulster Petroleum, Pinnacle Resources and McAllister Petroleum.  He is
        a member of the Association of Professional Engineers, Geologists, and
        Geophysicists of Alberta.  Mr. Dagenais is a graduate of the
        University of Regina with a degree in Industrial Systems Engineering in
        1995.
 
 ***Thomas
        K. Rouse - Chief Financial Officer***.  Mr. Rouse has been
        our Chief Financial Officer since April 2007.  From May 2004 to March
        2007, he was the Vice President of Finance, Chief Financial Officer and
        Co-founder of Great Plains Exploration Inc. where he played a key role in
        securing that company’s listing on the Toronto Stock Exchange.  From
        November 1996 to May 2004, Mr. Rouse served as the Vice President, Finance
        and
        Chief Financial Officer and was a consultant to Rider Resources
        Inc.  His experience prior to 1996 includes various accounting
        positions with Petrorep Resources Ltd., Greyhound Lines of Canada Ltd., Coseka
        Resources Limited, and Amoco Canada Petroleum Company Ltd.  In 1980,
        Mr. Rouse obtained a Bachelor of Commerce, Accounting degree from the University
        of Saskatchewan.  In 1986, he became a Certified Management
        Accountant.
 
 ***Donald
        B. Edwards - Corporate Secretary.***  Mr. Edwards has been
        our Corporate Secretary since the acquisition of Damascus in December
        2006.  He is a partner with the law firm of Borden Ladner Gervais LLP
        in Calgary, Alberta and practices in the areas of securities, corporate finance,
        commercial transactions, natural resources and mergers and
        acquisitions.  Mr. Edwards was a lawyer and subsequently a partner of
        Armstrong Perkins Hudson LLP, and its predecessors, from 1994 until July
        2002
        when the firm merged with Borden Ladner Gervais LLP.  Mr. Edwards has
        practiced in the areas of securities, corporate finance and venture capital
        matters since 1990 and has acted for a broad range of domestic and foreign
        issuers, investment banks and securities dealers, with a particular emphasis
        on
        venture capital and mergers and acquisitions and both domestic and cross
        border
        transactions.  He has served as the corporate secretary for Cold Creek
        Capital Inc., a company whose stock is listed on the TSX Venture Exchange,
        since
        February 2006, and for Arsenal Energy Inc. since January 2003.  From
        May 1996 to May 2004, he was a director of Deloro Resources Ltd., a company
        whose stock was listed on the TSX Venture Exchange.  He also served as
        corporate secretary for Sahara Energy Ltd. (formerly Battleford Capital Inc.),
        a
        TSX Venture Exchange-listed company, from January 205 to February
        2006.  Mr. Edwards is a member of the Law Society of Alberta and the
        Canadian Bar Association.
 
 ***Terry
        R. Buchanan - Vice President of Exploration, Geoscience and
        Reservoir.***  Mr. Buchanan has been our Vice President of
        Exploration, Geoscience and Reservoir since January 2007.  He was
        employed with Imperial Oil Limited from January 1983 to December 2006, most
        recently he was the Geoscience Advisor, conducting geotechnical and reservoir
        engineering studies of mature to conceptual plays for prospect generation,
        assessment, development and productivity enhancement.  He is a member
        of the Association of Professional Engineers, Geologists, and Geophysicists
        of
        Alberta, the Canadian Society of Petroleum Geologists and the Canadian Well
        Logging Society.  Mr. Buchanan graduated from the University of
        Alberta in 1974 with a Bachelor of Science in Electrical
        Engineering.
 
 ***Mark
        L. Bentsen - Director.***  Mr. Bentsen has been a director
        since January 2007.  Since 1998, he has been the Founder, President
        and CEO of Cathedral Energy Services Income Trust, a drilling services company
        that has grown to a market capitalization over CAD$300 million, revenues
        over
        CAD$100 Million and over 650 employees.  Mr. Bentsen was the
        Vice-President of Corporate Development for Akita Drilling from 1993 to 1998
        and
        has over 20 years of oilfield experience.
 
  25
  ***Roderick
        D. Maxwell - Director.***  Mr. Maxwell has been a director
        since January 2007.  Since January 1997, he has been with StoneBridge
        Merchant Capital Corp., most recently as Managing Director. StoneBridge Merchant
        Capital Corp. is a private equity investment firm, located in Calgary, Alberta,
        that invests in both growing private companies and private or public companies
        interested in pursuing a corporate restructuring.  Mr. Maxwell is
        actively involved in a number of the StoneBridge investee
        companies.  Mr. Maxwell is currently the lead Trustee of Cathedral
        Energy Services Income Trust, a director of Cathedral Energy Services Ltd.
        and
        has served as a member of the board of directors of a number of other private
        and public companies.  Since January 2007, Mr. Maxwell has also been
        the interim President and CEO of KDC Energy Ltd., an energy exploration,
        development and services corporation.  Since June 2007, Mr. Maxwell
        has also been the interim President and CEO of SND Energy Ltd., an energy
        exploration, development and services corporation.  Mr. Maxwell holds
        a Bachelor of Commerce degree from the University of Calgary and is a Chartered
        Accountant and is a member of both the Alberta and Canadian Institute of
        Chartered Accountants.  In addition Mr. Maxwell is a Chartered
        Business Valuator and is a member of the Canadian Institute of Chartered
        Business Valuators.
 
 ***Greg
        L. Belzberg - Director.***  Mr. Belzberg has been a
        director since January 2007.  Since June 2003, he has worked for
        Veritas Real Estate Investments, a real estate development and investment
        company, located in Los Angeles, California.  Mr. Belzberg is
        currently a director and member of the Audit Committee of Arsenal Energy
        Inc., a
        resource company listed on the TSX Exchange under the symbol AEI and has
        served
        as a member of the board of directors of a number of other private and public
        companies.  Mr. Belzberg is an independent
        businessman.  From August 2001 to June 2003, Mr. Belzberg was the
        Chief Operating Officer of Richter Furniture Manufacturing (a furniture
        manufacturing company) based in Vernon, California.  He is a graduate
        from Georgetown University with a B.A. in Business Administration.
 
 Mr.
        Vandale may be deemed to be a “promoter” and “control person” of the Company, as
        that term in defined in the Securities Act of 1933.
 
 **Committees**
 
 ***Audit
        Committee.***Our audit committee members are Roderick D.
        Maxwell, Mark L. Bentsen and Greg L. Belzberg, where Roderick D. Maxwell
        acts as
        Chair of the Committee.  The Audit Committee has the sole authority to
        appoint our independent accountants, subject to any shareholder
        ratification.
 
 ***Audit
        Committee Financial Expert.***  Roderick D. Maxwell serves
        as our financial expert and is independent.
 
 ***Corporate
        Governance Committee.***  We have formed a Corporate
        Governance Committee comprised of members of the Board of
        Directors.  The current members of the Corporate Governance Committee
        are Mark L. Bentsen and Greg L. Belzberg, where Mark L. Bentsen acts as Chair
        of
        the Committee.
 
 ***Reserves
        Committee.***Our reserve committee members are Roderick
        D. Maxwell, Mark L. Bentsen and Michael S. Vandale, where Michael S. Vandale
        acts as Chair of the Committee.
 
 No
        mandates of the Committees or Chairs has been adopted as of yet, but we expect
        the adoption of the formal policies for the Committees and the Chairs to
        occur
        within the next six months.
 
 **Code
        of Ethics**
 
 We
        have
        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 we have been focusing
        our efforts on obtaining financing for the company.  We expect to
        adopt a code by the end of the current fiscal year.
 
  26
  **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**Bounty
                  Developments Ltd.
              Form
                  3 due December 26, 2006
              December
                  27, 2006David
                  A. Stadnyk
              Form
                  4 due October 16, 2006
              November
                  30, 2006David
                  A. Stadnyk
              Form
                  4 due September 14, 2006
              September
                  15, 2006David
                  A. Stadnyk
              Form
                  4 due September 1, 2006
              September
                  14, 2006Donald
                  B. Edwards
              Form
                  4 due January 2, 2007
              January
                  10, 2007Greg
                  L. Belzberg
              Form
                  4 due May 21, 2007
              Not
                  yet filedJason
                  G. Dagenais
              Form
                  4 due May 21, 2007
              Not
                  yet filedJason
                  G. Dagenais
              Form
                  4 due January 12, 2007
              February
                  6, 2007Jason
                  G. Dagenais
              Form
                  3 due January 12, 2007
              February
                  6, 2007John
                  Thornton
              Form
                  4 due November 8, 2006
              November
                  15, 2006John
                  Thornton
              Form
                  4 due September 1, 2006
              September
                  5, 2006Mark
                  L. Bentsen
              Form
                  4 due May 21, 2007
              Not
                  yet filedMichael
                  S. Vandale
              Form
                  4 due May 21, 2007
              Not
                  yet filedRoderick
                  D. Maxwell
              Form
                  4 due May 21, 2007
              Not
                  yet filedMichael
                  S. Vandale
              Form
                  3 due December 26, 2006
              December
                  27, 2006Terry
                  R. Buchanan
              Form
                  4 due May 21, 2007
              Not
                  yet filedTerry
                  R. Buchanan
              Form
                  3 due January 11, 2007
              February
                  6, 2007Thomas
                  K. Rouse
              Form
                  4 due May 21, 2007
              Not
                  yet filedThomas
                  K. Rouse
              Form
                  3 due April 12, 2007
              May
                  9, 2007Winston
                  Cabell
              Form
                  4 due October 2, 2006
              November
                  6, 2006Winston
                  Cabell
              Form
                  4 due September 1, 2006
              September
                  7, 2006Winston
                  Cabell
              Form
                  4 due August 11, 2006
              August
                  29, 2006Winston
                  Cabell
              Form
                  4 due July 12, 2006
              July
                  27, 2006Winston
                  Cabell
              Form
                  4 due June 15, 2006
              June
                  21, 2006Winston
                  Cabell
              Form
                  4 due June 5, 2006
              June
                  8, 2006
 
  27
  **ITEM
        10.   EXECUTIVE COMPENSATION.**
 
 The
        following table sets forth information regarding the remuneration of our
        executive officers that earned in excess of $100,000 per annum during any
        part
        of the last two completed fiscal years:
 
 **SUMMARY
        COMPENSATION TABLE**
 **Name
                  and Principal Position**
              **Fiscal
                  Year**
              **Salary**
                **($)**
              **Bonus**
                **($)**
              **Option
                  Awards (1)**
                **($)**
              **All
                  Other Compensation**
                **($)**
              **Total**
                **($)**Jason
                  G. Dagenais (2)
              2007
              $66,036
              -
              $152,252
              -
              $218,288Chief
                  Operating Officer
              2006
              -
              -
              -
              -
              -Terry
                  R. Buchanan (3)
              2007
              $74,841
              -
              $212,494
              -
              $287,335VP
                  of Exploration, Geoscience and Reservoir
              2006
              -
              -
              -
              -
              -Donald
                  B. Edwards (4)
              2007
              -
              -
              $212,239
              -
              $212,239Secretary
              2006
              -
              -
              -
              -
              -Michael
                  S. Vandale (5)
              2007
              -
              -
              $1,173,208
              $359,268
              $1,532,476Chairman
                  of Board of Directors
              2006
              -
              -
              -
              -
              -John
                  Thornton (6)
              2007
              $120,000
              -
              $12,500
              -
              $132,5002006
              $10,000
              -
              $49,750
              -
              $59,750David
                  Stadnyk (7)
              2007
              $224,220
              -
              $25,000
              -
              $249,2202006
              $175,000
              -
              $625,500
              -
              $800,500
 
 (1)
              All
                  options were valued using the Black-Scholes option pricing model
                  using
                  various assumptions as listed in the footnotes to the Outstanding
                  Equity
                  Awards at 2007 Fiscal Year-End
                  Table.
 (2)
              Mr.
                  Dagenais has been the Chief Operating Officer since May 17,
                  2007.
 (3)
              Mr.
                  Buchanan was appointed Vice President of Exploration, Geoscience
                  and
                  Reservoir on January 1, 2007.
 (4)
              Mr.
                  Edwards has been the Secretary since December 15,
                  2007.
 (5)
              Mr.
                  Vandale was the President from December 15, 2006 through May 17,
                  2007.
 (6)
              Mr.
                  Thornton was the interim President effective April 8, 2006 through
                  December 15, 2006.
 (7)
              Mr.
                  Stadnyk was the President from August 31, 2002 to April 7,
                  2006.
 
 As
        of May
        31, 2006, we had a management services agreement with David
        Stadnyk.  The agreement was for a term of five years, ending April 30,
        2010.  We agreed to pay Mr. Stadnyk $175,000 per annum for his
        services.  We also had a change of control agreement that provided Mr.
        Stadnyk the greater of (i) the remaining base compensation due to him for
        the
        remaining term of the management services agreement or (ii) $175,000 in the
        event of a change of control.  Under the agreement, change of control
        was defined as:
 ·
              the
                  acquisition of 20% or more of the voting
                  power;
 ·
              a
                  consolidation or merger with or into any person whereby our outstanding
                  shares are changed in any way (other than a transaction which has
                  been
                  approved our board of directors);
 ·
              a
                  change in a majority of our board of directors;
                  or
 ·
              the
                  resignation or removal of a majority of our board of
                  directors
 other
        than a transaction or series of transactions which involves a sale of our
        securities or assets with which Mr. Stadnyk is involved as a purchaser in
        any
        manner.
 
 During
        the fiscal year ended May 31, 2007, we completed the Damascus and 1289307
        acquisitions, which effected a change of control, as defined
        above.  Prior to the acquisition of Damascus and 1289307, Winston
        Cabell resigned as a director.  Upon the closing of the Damascus
        acquisition, John P. Thornton resigned as a director and appointed Michael
        S.
        Vandale, to serve as a our sole director.  Pursuant to the acquisition
        of 1289307, Michael S. Vandale appointed Rod Maxwell, Mark L. Bentsen, and
        Greg
        Belzberg to the Board of Directors.  As a result of the change of
        control, we paid $525,298 in severance and management fees to former directors
        and officers of the Company as follows:
  28
  
 **Name**
              **Severance**
              **Management
                  Fees**David
                  Stadnyk
              $175,000
              $49,220John
                  Thornton
              $75,000
              $45,000George
                  Tsafalas
              $75,000
              -David
                  Clark
              $30,000
              -Winston
                  Cabell
              $60,000
              $16,078
 
 Also,
        in
        connection with the Damascus and 1289307 acquisitions, Michael Vandale received
        payment of $244,840, and we assumed a $1,000,000 debt owed to Mr. Vandale’s
        company when we acquired 1289307.  Mr. Vandale also received $114,428
        as finder’s fees pursuant to our private placement offering of 3,240,000 shares
        of common stock completed in December 2006.
 
 As
        at May
        31, 2007, there were no formal employment agreements with the current executive
        officers.
 
 During
        the fiscal year ended May 31, 2007, we repriced 485,000 stock options from
        an
        exercise price $1.54 per share to $0.90 per share.  We recognized
        $121,250 of compensation expense in relation to the fair value of the repriced
        options.  Mr. Thornton’s 100,000 options and Mr. Stadnyk’s 50,000
        options exercisable at $1.54 per share were repriced to $0.90 per share
        resulting in $25,000 and $12,500 of compensation expense attributed to Mr.
        Thornton and Mr. Stadnyk, respectively.  These options were valued
        using the following assumptions: expected option life: 0.75 years; risk-free
        interest rate: 4.93%; annual rate of quarterly dividends: 0.00%; and volatility:
        117%.
 
 On
        December 15, 2006, we initially granted 2,850,000 options exercisable at
        $1.20
        per share to various individuals including our new officers and
        directors.  The options were exercisable for 5 years and vested 6
        months after the date of grant.  The following table sets forth the
        options granted to our officers and directors on December 15, 2006:
 
 **Name**
              **Number
                  of Options**Michael
                  S. Vandale
              1,250,000Terry
                  Buchanan
              350,000Jason
                  Dagenais
              250,000Rod
                  Maxwell
              250,000Mark
                  Bentsen
              250,000Don
                  Edwards
              200,000
 
 
 On
        May
        17, 2007, 750,000 options, initially granted on December 15, 2006, were
        cancelled and 50,000 were forfeited from various individuals including a
        director and the vesting time period was adjusted to equally vest over 3
        years
        on the anniversary date.  In addition, 1,175,000 new options
        exercisable at $1.75 per share were granted to officers, directors and employees
        that are exercisable over 5 years and vest equally over 3 years on the
        anniversary date.  The following table summarizes the total options
        granted to our officers and directors as of May 31, 2007, reflecting the
        cancellation and issuance described above:
  29
  
 **Name**
              **Number
                  of Options**
              **Value
                  of Options (1)**Terry
                  Buchanan
              600,000
              $212,494Michael
                  S. Vandale
              500,000
              $1,173,208Jason
                  Dagenais
              450,000
              $152,252Tom
                  Rouse
              350,000
              $7,697Rod
                  Maxwell
              350,000
              $150,053Mark
                  Bentsen
              350,000
              $150,053Greg
                  Belzberg
              350,000
              $150,053Don
                  Edwards
              200,000
              $212,239
 (1)
                These
                    options granted to Mark Bentsen, Roderick Maxwell, and Greg Belzberg
                    were
                    valued using the following assumptions: expected option life:
                    4.7 years;
                    risk-free interest rate: 4.60%; annual rate of quarterly dividends:
                    0.00%;
                    and volatility: 148%.
 The
        following table sets forth information concerning unexercised options and
        equity
        incentive plan awards on a grant by grant basis for our executive officers
        that
        earned in excess of $100,000 per annum as of the end of the last completed
        fiscal year:
 
 **OUTSTANDING
          EQUITY AWARDS AT 2007 FISCAL YEAR-END TABLE**
 **Option
                    Awards****Name**
                **Number
                    of Securities Underlying Unexercised Options**
                  **(#)
                    Exercisable**
                **Number
                    of Securities Underlying Unexercised Options**
                  **(#)
                    Unexercisable**
                **Equity
                    Incentive Plan Awards: Number of Securities Underlying Unexercised
                    Unearned Options**
                  **(#)**
                **Option
                    Exercise Price**
                  **($)**
                **Option
                    Expiration Date**Jason
                    G. Dagenais
                200,000
                -
                -
                $1.75
                5/17/2012250,000
                -
                -
                $1.20
                12/15/2011Terry
                    R. Buchanan
                250,000
                -
                -
                $1.75
                5/17/2012350,000
                -
                -
                $1.20
                12/15/2011Michael
                    S. Vandale
                500,000
                -
                -
                $1.20
                12/15/2011Donald
                    B. Edwards
                200,000
                -
                -
                $1.20
                12/15/2011
  30
  The
        following table sets forth information regarding the remuneration of our
        directors, other than those already mentioned in the Summary Compensation
        Table,
        during the last completed fiscal year:
 
 **DIRECTOR
          COMPENSATION TABLE**
 **Name**
                **Fees
                    Earned or Paid in Cash**
                  **($)**
                **Stock
                    Awards**
                  **($)**
                **Option
                    Awards**
                  **($)**
                **Non-Equity
                    Incentive Plan Compensation**
                  **($)**
                **Nonqualified
                    Deferred Compensation Earnings**
                  **($)**
                **All
                    Other Compensation**
                  **($)**
                **Total**
                  **($)**Mark
                    L. Bentsen
                -
                -
                $150,053
                -
                -
                -
                $150,053Roderick
                    D. Maxwell
                -
                -
                $150,053
                -
                -
                -
                $150,053Greg
                    L. Belzberg
                -
                -
                $150,053
                -
                -
                -
                $150,053Winston
                    Cabell
                $76,078
                -
                $27,000
                -
                -
                -
                $103,078
 
 (1)
                These
                    options granted to Mark Bentsen, Roderick Maxwell, and Greg Belzberg
                    were
                    valued using the following assumptions: expected option life:
                    4.7 years;
                    risk-free interest rate: 4.60%; annual rate of quarterly dividends:
                    0.00%;
                    and volatility: 148%.
 During
        the fiscal year ended May 31, 2007, we granted Winston Cabell an option to
        purchase 50,000 shares of our common stock for $0.90 per share exercisable
        until
        July 1, 2008.  The fair value of the option grant was
        $27,000.  Also, as disclosed above, Mr. Cabell received $76,078 as
        severance and management fees in relation to the Damascus and 1289307
        acquisitions.  These options were valued using the Black-Scholes
        option pricing model with the following assumptions: expected option life:
        2
        years; risk-free interest rate: 4.45%; annual rate of quarterly dividends:
        0.00%; and volatility: 138%.
  
 **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 common
        stock
        after giving effect to the issuances of common stock upon conversion or
        exercise, without further consideration, of the Exchangeable Shares,
        Flow-Through Special Warrants, Non-Flow-Through Special Warrants and Bonus
        Warrants.
  **Name
                  and address of owner**
              **Shares
                  beneficially owned (1)**
              **Percent
                  beneficially owned (1)**Bounty
                  Developments Ltd.
                1250,
                  340-12th
                  Avenue SW
                Calgary,
                  Alberta, Canada  T2R 1L5
              4,778,989
                  (2)
              11.0%Investors
                  Group Trust Co.
                447
                  Portage Avenue
                Winnipeg,
                  Manitoba, Canada  R3C 3B6
              3,825,000
                  (3)
              8.8%Citadel
                  Equity Fund Ltd
                131
                  S. Dearborn Street
                Chicago
                  Illinois,  60603
              3,400,680
                  (4)
              7.9%Michael
                  S. Vandale
                Suite
                  300, 441 – 5th
                  Avenue
                  S.W.
                Calgary,
                  Alberta, Canada  T2P 2V1
              2,175,000
                  (5)
              5.0%









31




**Name
                and address of owner**
            **Shares
                beneficially owned (1)**
            **Percent
                beneficially owned (1)**Mark
                L. Bentsen
              Suite
                300, 441 – 5th
                Avenue
                S.W.
              Calgary,
                Alberta, Canada  T2P 2V1
            780,300
                (6)
            1.8%Greg
                Belzberg
              Suite
                300, 441 – 5th
                Avenue
                S.W.
              Calgary,
                Alberta, Canada  T2P 2V1
            550,000
                (7)
            1.3%Roderick
                D. Maxwell
              Suite
                300, 441 – 5th
                Avenue
                S.W.
              Calgary,
                Alberta, Canada  T2P 2V1
            375,000
                (8)
            0.9%Terry
                Buchanan
              Suite
                300, 441 – 5th
                Avenue
                S.W.
              Calgary,
                Alberta, Canada  T2P 2V1
            170,000
                (9)
            0.4%Donald
                B. Edwards
              Suite
                300, 441 – 5th
                Avenue
                S.W.
              Calgary,
                Alberta, Canada  T2P 2V1
            170,000
                (10)
            0.4%Jason
                G. Dagenais
              Suite
                300, 441 – 5th
                Avenue
                S.W.
              Calgary,
                Alberta, Canada  T2P 2V1
            56,200
                (11)
            0.1%Thomas
                K. Rouse
              Suite
                300, 441 – 5th
                Avenue
                S.W.
              Calgary,
                Alberta, Canada  T2P 2V1
            -
            -Officers
                and directors as a group (8 persons)
            4,276,500
                (12)
            9.9%


___________


(1)
            Where
                persons listed on this table have the right to obtain additional
                shares of
                common stock through the exercise or conversion of other securities
                within
                60 days from August 17, 2007, 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 43,288,053 shares of common
                stock that may be outstanding after conversion or exercise, without
                further consideration, of our other outstanding
                securities.  This amount includes 166,040 shares of common stock
                issuable upon exercise of the Bonus
                Warrants.


(2)
            Includes
                4,341,489 Exchangeable Shares.


(3)
            Includes
                3,750,000 Non-Flow-Through Special Warrants and 75,000 shares issuable
                upon exercise of 3,750,000 Bonus Warrants held by Investors Group
                Corporate Class Inc. For Investor Mergers & Acquisitions Class and
                Investors Group Trust Co. Ltd As Trustee For Investors Mergers &
                Acquisitions Fund.


(4)
            Includes
                3,334,000 Non-Flow-Through Special Warrants and 66,680 shares issuable
                upon exercise of 3,333,400 Bonus
                Warrants.


(5)
            Includes
                2,075,000 Exchangeable Shares.


(6)
            Includes
                250,000 Exchangeable Shares, 100,000 Flow-Through Special Warrants,
                and
                230,300 common shares and 100,000 Flow-Through Special Warrants owned
                by
                Teresa Bentsen.


(7)
            Includes
                250,000 Exchangeable Shares and 200,000 shares owned by Bel Cal Holdings
                Ltd.


(8)
            Includes
                250,000 Exchangeable Shares, and 50,000 Flow-Through Special Warrants
                owned by 707106 Alberta Ltd.


(9)
            Includes
                70,000 Flow-Through Special
                Warrants.


(10)
            Includes
                150,000 Exchangeable Shares.


(11)
            Includes
                18,200 Flow-Through Special
                Warrants.


(12)
            Includes
                2,975,000 Exchangeable Shares, and 338,200 Flow-Through Special
                Warrants.




32
  **Changes
        in Control**


As
      a
      result of the acquisition of Damascus Energy Inc. (“Damascus”) and 1289307
      Alberta Ltd. (“1289307”), the stockholders of Damascus and 1289307 acquired
      voting control as to 33.3%. of which 31.6% is attributable to Damascus and
      1.7%
      to 1289307,  of the then outstanding voting stock through the issuance
      of the Class A and Class B Preferred Voting Stock.





Prior
      to
      the acquisition of Damascus and 1289307, Winston Cabell resigned as a director
      of the Company.  Upon the closing of the Damascus acquisition, John P.
      Thornton resigned as a director and appointed Michael S. Vandale, to serve
      as a
      director of the Company.  Pursuant to the acquisition of 1289307,
      Michael S. Vandale appointed Rod Maxwell, Mark L. Bentsen, and Greg Belzberg
      to
      the Board of Directors.





Except
      as
      disclosed above with respect to the appointment of officers and directors,
      there
      are no arrangements or understandings among members of the former officers
      and
      directors and their associates and the new officers and directors and their
      associates with respect any matter.





**Equity
      Compensation Plan Information**





The
      following table sets forth information as of the end of the most recently
      completed fiscal year, May 31, 2007:





Plan
                category
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            Weighted
                average exercise price of outstanding options, warrants and
                rights
            Number
                of securities remaining available for future issuanceEquity
                compensation plans approved by security holders
            -0-
            -0-
            -0-Equity
                compensation plans not approved by security holders
            3,225,000
            $1.40
            1,103,805Total
            3,225,000
            $1.40
            1,103,805





***2004
      Stock Option Plan.***On October 29, 2004, our 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.








33





***2005
      Stock Option Plan.***On August 22, 2005, our 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, our 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 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.





***2007
      Stock Option Plan.***On July 17, 2007, our Board of
      Directors adopted a 2007 Stock Option Plan under which incentive stock options
      and non-qualified stock options to purchase an adjustable number of shares
      equal
      to 10% of the issued and outstanding shares of common stock may be granted
      to
      employees, directors, officers, and non-employees.





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.  Options granted under the Plan shall vest in according to the
      terms established by the board of directors.  The Plan will remain in
      effect until the board of directors terminates it.





Options
      may only be exercised by payment of the option price in cash or certified funds
      for the full exercise price.








**ITEM
        12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
        INDEPENDENCE.**




**Michael
      Vandale**





At
      the
      time of the acquisition of Damascus, Michael Vandale, the president and director
      of Damascus, was a director of Energy.  In connection with the
      acquisition transaction, Mr. Vandale received $244,840.





In
      connection with our private placement of 3,240,000 flow-through common stock
      completed in January 2007, we paid finder’s fees equal to 7% of the amount
      raised.  Michael Vandale received $114,428 in this
      regard.








34





On
      December 12, 2006, 1286664 Alberta Ltd. (“1286664”), a private Alberta
      corporation wholly owned by Michael Vandale, entered into a Farmout Agreement
      with Bounty Developments Ltd relating to the Petroleum and Natural Gas Rights
      of
      the Firebag Oil Sands Project.  On December 21, 2006, under the
      general conveyance agreement, 1286664 conveyed all rights, title and interest
      in
      the Firebag Oil Sands Project farmout agreement to 1289307, who issued a
      promissory note in the amount of $1,000,000 to 1286664.  On December
      21, 2006, pursuant to the acquisition of 1289307, we assumed the promissory
      note
      issued by 1289307 to 1286664.  .





In
      addition, Michael Vandale owes the Company a net amount of $5,729, which
      includes a payable to Mr. Vandale of $1,000,000 and a receivable from Mr.
      Vandale of $1,000,000.





**David
      Stadnyk**





David
      Stadnyk and/or companies under his control have advanced sums to us from time
      to
      time for working capital needs.  Mr. Stadnyk was formerly one of our
      officers and directors.  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.  We paid Mr. Stadnyk in equal installments of $10,594 per
      month during the fiscal year ending May 31, 2006.  The balance due at
      May 31, 2006 was paid in three installments of $15,794, $21,864 and
      $49,220.  The last installment was paid as part of the closing
      conditions of the Damascus acquisition.





As
      a
      condition to closing the acquisition of Damascus, we were required to terminate
      our management agreement with David Stadnyk.  We paid $175,000 to Mr.
      Stadnyk as a result of such termination.  We also paid Mr. Stadnyk
      $49,220 of management fees due and owing at the time of such
      termination.





At
      May
      31, 2007, David Stadnyk owes the Company $1,075 for miscellaneous
      items.





**Future
      Transactions**





All
      future affiliated transactions will be made or entered into on terms that are
      no
      less favorable to us than those that can be obtained from any unaffiliated
      third
      party.  A majority of the independent, disinterested members of our
      board of directors will approve future affiliated transactions.





**Director
      Independence**





Mark
      L.
      Bentsen, Roderick D. Maxwell, and Greg L. Belzberg are considered independent
      directors.  We define director independence in accordance with Rule
      4200(a)(15) of the NASD.








**ITEM
      13.   EXHIBITS.**




**Regulation**
                **S-B
                  Number**
              **Exhibit**2.1
              Arrangement
                  Agreement made among Praxis Pharmaceuticals Inc. and Patch Energy
                  Inc.
                  dated as of October 20, 2003 (1)2.2
              Articles
                  of Merger Merging Praxis Pharmaceuticals Inc., a Utah Corporation,
                  into
                  Patch International Inc., a Nevada Corporation (2)2.3
              Share
                  Exchange Agreement among the shareholders of Damascus Energy Inc.,
                  Patch
                  Energy Inc., Patch International Inc., and Damascus Energy Inc.
                  dated
                  December 15, 2006 (3)2.4
              Share
                  Exchange Agreement among the shareholders of 1289307 Alberta Ltd.,
                  Patch
                  Energy Inc., Patch International Inc., and 1289307 Alberta Ltd.
                  dated
                  January 16, 2007 (4)
  35
  
 **Regulation**
                **S-B
                  Number**
              **Exhibit**3.1
              Articles
                  of Incorporation, as amended (5)3.2
              Bylaws
                  (5)3.3
              Certificate
                  of Change Pursuant to NRS 78.209 (6)3.4
              Certificate
                  of Change Pursuant to NRS 78.209 (7)3.5
              Certificate
                  of Amendment to Articles of Incorporation (8)4.1
              Certificate
                  of Designation of Class A Preferred Voting Stock (3)4.2
              Certificate
                  of Designation of Class B Preferred Voting Stock (4)4.3
              Form
                  of Non-Flow-Through Special Warrant Certificate (9)4.4
              Form
                  of Flow-Through Special Warrant Certificate (9)4.5
              Form
                  of Bonus Warrant Certificate (9)4.6
              Form
                  of Agent Warrant Certificate (9)10.1
              Management
                  services agreement with David Stadnyk dated May 1, 2005
                  (5)10.2
              Change
                  of Control Agreement with David Stadnyk dated May 1, 2005
                  (5)10.3
              2006
                  Stock Option Plan (10)10.4
              Exchange
                  and Voting Trust Agreement among Patch International Inc., Patch
                  Energy
                  Inc., 1286664 Alberta Ltd., and the shareholders of Damascus Energy
                  Inc.
                  dated December 15, 2006 (3)10.5
              Support
                  Agreement among Patch International Inc., Patch Energy Inc., and
                  1286664
                  Alberta Ltd. dated December 15, 2006 (3)10.6
              Farmout
                  Agreement Between Damascus Energy Inc. and Bounty Developments
                  Ltd. dated
                  November 30, 2006 (11)10.7
              Exchange
                  and Voting Trust Agreement among Patch International Inc., Patch
                  Energy
                  Inc., 1286664 Alberta Ltd., and the shareholders of 1289307 Alberta
                  Ltd.
                  dated January 16, 2007 (4)10.8
              Support
                  Agreement among Patch International Inc., Patch Energy Inc., and
                  1286664
                  Alberta Ltd. dated January 16, 2007 (4)10.9
              Farmout
                  Agreement dated December 12, 2006 (4)10.10
              Conveyance
                  Agreement among 1289307 Alberta Ltd and 1286664 Alberta Ltd. dated
                  December 21, 2006 (4)10.11
              Demand
                  Promissory Note issued by 1289307 Alberta Ltd to 1286664 Alberta
                  Ltd.
                  dated December 21, 2006 (4)
  36
  
 **Regulation**
                **S-B
                  Number**
              **Exhibit**10.12
              Amending
                  Agreement between Bounty Developments Ltd., 1286664 Alberta Ltd.,
                  and
                  Damascus Energy Inc. dated January 22, 2007 (4)10.13
              Agency
                  Agreement among Patch International Inc., Canaccord Capital Corporation
                  and Wellington West Capital Markets Inc. dated February 27, 2007
                  (9)10.14
              Amending
                  Agreement between Bounty Developments Ltd., 1286664 Alberta Ltd.,
                  and
                  Damascus Energy Inc. dated February 20, 2007 (11)10.15
              Amending
                  Agreement between Bounty Developments Ltd. and 1286664 Alberta
                  Ltd., dated
                  April 16, 2007 (11)10.16
              Confirmation
                  of Earning between Damascus Energy Inc. and Bounty Developments
                  Ltd. dated
                  April 16, 2007 (11)16
              Letter
                  from Morgan & Company dated March 8, 2007 (12)21
              Subsidiaries
                  of the registrant (13)31.1
              Certification
                  of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley
                  Act of 2002 (“Sarbanes-Oxley”).31.2
              Certification
                  of Principal Financial Officer pursuant to Section 302 of
                  Sarbanes-Oxley32.1
              Certification
                  of Principal Executive Officer pursuant to 18 U.S.C. Section 1350,
                  as
                  adopted pursuant to Section 906 of Sarbanes-Oxley.32.2
              Certification
                  of Principal Financial Officer pursuant to 18 U.S.C. Section 1350,
                  as
                  adopted pursuant to Section 906 of
                  Sarbanes-Oxley


(1)
            Incorporated
                by reference to the exhibits filed with the registrant’s current report on
                Form 8-K dated March 15, 2004, filed March 19,
                2004.


(2)
            Incorporated
                by reference to the exhibit filed with the registrant’s current report on
                Form 8-K dated June 15, 2004, filed June 15,
                2004.


(3)
            Incorporated
                by reference to the exhibits filed with the registrant’s current report on
                Form 8-K dated December 15, 2006, filed December 26,
                2006.


(4)
            Incorporated
                by reference to the exhibits filed with the registrant’s current report on
                Form 8-K dated January 16, 2007, filed February 6,
                2007.


(5)
            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, filed September
                14,
                2005.


(6)
            Incorporated
                by reference to the exhibits filed with the registrant’s current report on
                Form 8-K dated July 8, 2005, filed July 19,
                2005.


(7)
            Incorporated
                by reference to the exhibits filed with the registrant’s current report on
                Form 8-K dated March 14, 2006, filed March 14,
                2006.


(8)
            Incorporated
                by reference to the exhibit filed with the registrant’s current report on
                Form 8-K dated September 14, 2007, filed September 17,
                2007.


(9)
            Incorporated
                by reference to the exhibits filed with the registrant’s current report on
                Form 8-K dated February 27, 2007, filed March 1,
                2007.


(10)
            Incorporated
                by reference to the exhibits filed with the registrant’s annual report on
                Form 10-KSB for the fiscal year ended May 31, 2006, filed August
                24,
                2006.


(11)
            Incorporated
                by reference to the exhibits filed with the registrant’s quarterly report
                on Form 10-QSB for the quarter ended February 28, 2007, filed April
                30,
                2007.


(12)
            Incorporated
                by reference to the exhibits filed with the registrant’s current report on
                Form 8-K dated March 3, 2007, filed March 9,
                2007.


(13)
            Incorporated
                by reference to the exhibits filed with the registrant’s registration
                statement on Form SB-2 filed May 9,
                2007.





37






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





Morgan
      & Company audited our financial statements for the fiscal year ended May 31,
      2006 and reviewed our quarterly financial statements for periods ended August
      31, 2006 and November 30, 2006.  On March 5, 2007, weappointed KPMG
      LLP (“KPMG”) in Calgary, Canada as our registered independent public accountant
      to perform an audit for the fiscal year ended May 31, 2007 and to perform a
      review for fiscal quarter ended February 28, 2007.





**Audit
      Fees**





For
      the
      fiscal years ended May 31, 2007 and 2006, the principal accountants for the
      Company billed $107,000 and $14,500, 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, 2007 and 2006, the principal accountants for the
      Company billed $83,700 and $16,830, 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, 2007 and 2006, the principal accountants for the
      Company billed $14,300 and $8,700 for tax compliance, tax advice, and tax
      planning work for fiscal years 2007 and 2006.





**All
      Other Fees**





There
      were fees billed by the principal accountants for the Company of $15,000 for
      services other than those disclosed above for the fiscal year 2007.





**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.











38





**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:  September
                24, 2007
            /s/
                Jason G. DagenaisJason
                G. Dagenais, Chief Operating
                Officer





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





**Signature**
            **Title**
            **Date**/s/
                Jason G. Dagenais
            Chief
                Operating Officer
            September
                24, 2007Jason
                G. Dagenais
            (Principal
                Executive Officer)/s/
                Thomas K. Rouse
            Chief
                Financial Officer
            September
                24, 2007Thomas
                K. Rouse
            (Principal
                Financial Officer)/s/
                Michael S. Vandale
            Director
            September
                24, 2007Michael
                S. Vandale/s/
                Mark L. Bentsen
            Director
            September
                24, 2007Mark
                L. Bentsen/s/
                Roderick D. Maxwell
            Director
            September
                24, 2007Roderick
                D. Maxwell/s/
                Greg L. Belzberg
            Director
            September
                24, 2007Greg
                L. Belzberg








39







































**PATCH
      INTERNATIONAL INC.**

















**CONSOLIDATED
      FINANCIAL STATEMENTS**








MAY
      31,
      2007


(Stated
      in U.S. Dollars)























**Patch
                International Inc.**May
                31, 2007IndexReport
                of Independent Registered Public Accounting Firm
            F-1Consolidated
                Balance Sheets
            F-2Consolidated
                Statements of Operations
            F-3Consolidated
                Statements of Cash Flows
            F-4Consolidated
                Statements of Stockholders’ Equity (Deficit)
            F-5Notes
                to the Consolidated Financial Statements
            F-6














Independent
      Auditors’ Report




The
      Board
      of Directors




Patch
      International Inc.




We
      have
      audited the accompanying consolidated balance sheet of Patch International
      Inc.
      as of May 31, 2007, and the related consolidated statements of operations,
      stockholders’ equity (deficit) and cash flows for the year then ended. These
      consolidated financial statements are the responsibility of the Company’s
      management.  Our responsibility is to express an opinion on these
      consolidated financial statements based on our audit.The
      consolidated financial statements of Patch International Inc. as at May 31,
      2006
      and for the year ended May 31, 2006 were audited by other auditors whose report
      dated July 28, 2006 expressed an unqualified opinion on those
      statements.





We
      conducted our audit in accordance with generally accepted auditing
      standards as established by the Auditing Standards Board (United States) and
      in
      accordance with the auditing 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.  The Company is not
      required to have, nor were we engaged to perform, an audit of its internal
      control over financial reporting.  Our audit included consideration of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the Company’s internal control
      over financial reporting.  Accordingly, we express no such
      opinion.  An audit also includes examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements, assessing
      the accounting principles used and significant estimates made by management,
      as
      well as evaluating the overall financial statement presentation.  We
      believe that our audit provides a reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Patch International Inc.
      as
      of May 31, 2007, and the results of its operations and its cash flows for the
      yearthen ended in
      conformity with U.S. generally accepted accounting principles.




As
      discussed in Note 13 to the consolidated financial statements, as of June 1,
      2006, the Company adopted Statement of Financial Accounting Standards No. 123R,
      *Share-Based Payment*.




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern.  As discussed in Note 2 to the
      consolidated financial statements, the Company has suffered recurring losses
      from operations and has a net capital deficiency that raise substantial doubt
      about its ability to continue as a going concern.  Management’s plans
      in regard to these matters are also described in Note 2.  The
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.










KPMG
      LLP


Calgary,
      Canada


September
      21, 2007








F-1


**PATCH
        INTERNATIONAL INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
 (Stated
        in U.S. Dollars)
 
  **May
                  31,**
                **2007**
              
              
              
              
              
              **May
                  31,**
                **2006**$
              
              
              
              
              
              
              
              $**ASSETS**Current
                  AssetsCash
                  and cash equivalents
              
              
              6,590,466
              
              
              
              
              
              
              
              4,473,444Accounts
                  receivable
              
              
              18,966
              
              
              
              
              
              
              
              29,260Due
                  from related parties (Note
                  5)
              
              
              1,009,697
              
              
              
              
              
              
              
              -Prepaid
                  expenses and
                  other
              
              
              71,480
              
              
              
              
              
              
              
              70,603Total
                  Current Assets
              
              
              7,690,609
              
              
              
              
              
              
              
              4,573,307Marketable
                  securities (Note 6)
              
              
              850,000
              
              
              
              
              
              
              
              7,241,000Joint
                  venture receivable (Note 7)
              
              
              323,394
              
              
              
              
              
              
              
              -Property
                  and equipment
              
              
              98,916
              
              
              
              
              
              
              
              1,452Oil
                  and gas interests (successful efforts method) (Note 8)
              
              
              37,658,925
              
              
              
              
              
              
              
              2,964,017Total
                  Assets
              
              
              46,621,844
              
              
              
              
              
              
              
              14,779,776**LIABILITIES
                  & STOCKHOLDERS’ EQUITY**Current
                  LiabilitiesAccounts
                  payable and accrued liabilities
              
              
              2,756,345
              
              
              
              
              
              
              
              215,694Income
                  taxes payable (Note 15)
              
              
              2,785,763
              
              
              
              
              
              
              
              2,181,000Due
                  to related parties (Note 5)
              
              
              1,000,000
              
              
              
              
              
              
              
              86,878Total
                  Current Liabilities
              
              
              6,542,108
              
              
              
              
              
              
              
              2,483,572Exchangeable
                  shares (Note 9)
              
              
              20,150,772
              
              
              
              
              
              
              
              -Special
                  warrants (Note 10)
              
              
              26,505,862
              
              
              
              
              
              
              
              -Asset
                  retirement obligations (Note 11)
              
              
              129,959
              
              
              
              
              
              
              
              34,379Total
                  Liabilities
              
              
              53,328,701
              
              
              
              
              
              
              
              2,517,951Non-controlling
                  Interest
              
              
              -
              
              
              
              
              
              
              
              570,862STOCKHOLDERS’
                  EQUITYClass
                  A Preferred Voting Stock (Note 12):
                1
                  share authorized with par value of $0.01 per share;
                1
                  share issued and outstanding
              
              
              -
              
              
              
              
              
              
              
              -Class
                  B Preferred Voting Stock (Note 12):
                10,000
                  shares authorized with par value of $0.01 per share;
                1
                  share issued and outstanding
              
              
              -
              
              
              
              
              
              
              
              -Common
                  Stock:
                25,000,000
                  common shares authorized with par value of $0.001 per share (Note
                  20)
                20,239,774
                  shares issued and outstanding (May 31, 2006 – 15,163,112 shares) (excludes
                  2,000 shares held in treasury (Note 13))
              
              
              20,240
              
              
              
              
              
              
              
              15,163Additional
                  paid-in capital
              
              
              10,111,507
              
              
              
              
              
              
              
              3,335,380Stock
                  subscriptions receivable
              
              
              (38,500
              )
              
              
              
              
              
              
              -Accumulated
                  other comprehensive (loss) income
              
              
              837,870
              
              
              
              
              
              
              
              7,352,558Retained
                  earnings (deficit)
              
              
              (17,637,974
              )
              
              
              
              
              
              
              987,862Total
                  Stockholders’ Equity
              
              
              (6,706,857
              )
              
              
              
              
              
              
              11,690,963Total
                  Liabilities and Stockholders’ Equity
              
              
              46,621,844
              
              
              
              
              
              
              
              14,779,776
 
 Future
        Operations (Note 2)
 Commitments
        (Note 17)
 Contingent
        Liabilities (Note 19)
  Subsequent
        event (Note 20)
  The
        accompanying notes are an integral part of these consolidated financial
        statements
  F-2


**PATCH
      INTERNATIONAL INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


(Stated
      in U.S. Dollars)





**For
                the Year Ended May 31****2007**
            **2006**$
            $RevenueOil
                and gas
            
            
            15,581
            43,668ExpensesOil
                and gas production and royalties
            
            
            30,179
            19,476General
                and administrative
            
            
            6,621,338
            1,967,210Interest
            
            
            53,038
            -Depletion,
                depreciation, accretion and impairment of oil and gas
                property
            
            
            5,087,858
            196,646Dry
                hole costs
            
            
            5,664,773
            -Geological
                and geophysical costs
            
            
            2,468,056
            -Total
                operating expenses
            
            
            19,925,242
            2,183,332Other
                income (expenses)Interest
                and other
            
            
            206,749
            83,557Gain
                on dilution
            
            
            -
            101,664Financing
                costs (Note 10)
            
            
            (633,263)
            -Holding
                loss on exchangeable shares and special warrants (Notes 9 &
                10)
            
            
            (14,161,373)
            -Holding
                loss on marketable securities (Note 6)
            
            
            (1,045,921)
            -Gain
                on foreign exchange
            
            
            2,620,571
            42,820Gain
                on sale of marketable securities
            
            
            13,684,318
            6,962,937Total
                other income (loss)
            
            
            671,081
            7,190,978Net
                income (loss) before discontinued operations
            
            
            (19,238,580)
            5,051,314Discontinued
                operations (Note 14)
            
            
            (424,379)
            42,041Gain
                on sale of investment and oil and gas assets (Note 14)
            
            
            612,937
            -Income
                (loss) before income taxes
            
            
            (19,050,022)
            5,093,355Provision
                for income taxes (Note 15)Current
            
            
            2,785,763
            2,406,243Deferred
                (reduction)
            
            
            (3,213,573)
            -(427,810)
            2,406,243Net
                income (loss)
            
            
            (18,622,212)
            2,687,112Other
                comprehensive income (loss) (Note 16)Marketable
                securities:Reclassification
                to realized gain
            
            
            (7,240,999)
            (2,364,217)Holding
                gain (loss)
            
            
            -
            3,598,217Increase
                (decrease) in unrealized gain on marketable securities
            
            
            (7,240,999)
            1,234,000Foreign
                currency translation adjustment
            
            
            726,311
            111,560Other
                comprehensive income (loss)
            
            
            (6,514,688)
            1,345,560Comprehensive
                income (loss)
            
            
            (25,136,900)
            4,032,672Net
                income (loss) per shareBasic
            
            
            $(1.05)
            $0.19Diluted
            
            
            $(1.05)
            $0.19Weighted
                average number of common shares outstandingBasic
            
            
            17,698,000
            13,854,000Diluted
            
            
            17,698,000
            14,508,000





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


F-3


**PATCH
      INTERNATIONAL INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(Stated
      in U.S. Dollars)


**For
                the Year Ended May 31****2007**
            
            
            
            
            
            
            
            **2006**$
            
            
            
            
            
            
            
            $Operating
                ActivitiesNet
                income (loss)
            
            
            (18,622,212
            )
            
            
            
            
            
            
            2,687,112Adjustments
                for items not involving cash:Depletion,
                depreciation, accretion and impairment of oil and gas
                property
            
            
            5,087,858
            
            
            
            
            
            
            
            265,756General
                and administrative
            
            
            660,000Stock-based
                compensation
            
            
            3,136,343
            
            
            
            
            
            
            
            787,310Financing
                costs
            
            
            633,263
            
            
            
            
            
            
            
            -Holding
                loss on exchangeable shares and special warrants
            
            
            14,161,373
            
            
            
            
            
            
            
            -Gain
                on sale of marketable securities
            
            
            (13,684,318
            )
            
            
            
            
            
            
            (6,962,937
            )Holding
                loss on marketable securities
            
            
            1,045,921Gain
                on sale of investment in  oil and gas assets
            
            
            (612,937
            )
            
            
            
            
            
            
            -Gain
                on foreign exchange
            
            
            (2,620,571
            )
            
            
            
            
            
            
            -Deferred
                taxes
            
            
            (3,213,573
            )
            
            
            
            
            
            
            -Gain
                on dilution
            
            
            -
            
            
            
            
            
            
            
            (101,664
            )Non-controlling
                interest in net loss
            
            
            -
            
            
            
            
            
            
            
            (13,600
            )Increase
                in accounts receivable
            
            
            (5,087
            )
            
            
            
            
            
            
            (7,506
            )(Increase)
                decrease in prepaid expenses and other
            
            
            2,671
            
            
            
            
            
            
            
            (69,373
            )Increase
                in due to related parties
            
            
            (95,379
            )
            
            
            
            
            
            
            (255,935
            )Increase
                in accounts payable and accrued liabilities
            
            
            (10,762,151
            )
            
            
            
            
            
            
            (82,313
            )Increase
                in income taxes payable
            
            
            604,763
            
            
            
            
            
            
            
            2,181,000Net
                cash used in continuing operations
            
            
            (24,284,036
            )
            
            
            
            
            
            
            (1,572,149
            )Discontinued
                operations
            
            
            (6,888
            )
            
            
            
            
            
            
            45,953Net
                cash used in operating activities
            
            
            (24,290,924
            )
            
            
            
            
            
            
            (1,526,196
            )Investing
                ActivitiesCapital
                contribution to limited
                partnership
            
            
            (306,901
            )
            
            
            
            
            
            
            -Purchase
                of
                equipment
            
            
            (88,619
            )
            
            
            
            
            
            
            -Net
                proceeds on sale of
                subsidiary and limited partnership
            
            
            771,742
            
            
            
            
            
            
            
            -Oil
                and gas interests, net of
                dispositions
            
            
            (10,123,071
            )
            
            
            
            
            
            
            (2,436,705
            )Proceeds
                on sale of marketable
                securities
            
            
            13,684,319
            
            
            
            
            
            
            
            6,962,937Net
                cash provided by investing activities
            
            
            3,937,470
            
            
            
            
            
            
            
            4,526,232Financing
                ActivitiesThird
                party contribution to limited partnership
            
            
            -
            
            
            
            
            
            
            
            666,996Proceeds
                from special warrants
            
            
            18,759,033
            
            
            
            
            
            
            
            -Proceeds
                from common stock
            
            
            3,609,047
            
            
            
            
            
            
            
            743,750Acquisition
                of treasury stock
            
            
            (6,309
            )
            
            
            
            
            
            
            (111,077
            )Net
                cash provided by financing activities
            
            
            22,361,771
            
            
            
            
            
            
            
            1,299,669Effect
                of exchange rate changes on cash
            
            
            108,705
            
            
            
            
            
            
            
            44,867Change
                in cash and cash equivalents for the period
            
            
            2,117,022
            
            
            
            
            
            
            
            4,344,572Cash
                and cash equivalents, beginning of period
            
            
            4,473,444
            
            
            
            
            
            
            
            128,872Cash
                and cash equivalents, end of period
            
            
            6,590,466
            
            
            
            
            
            
            
            4,473,444**CASH
                AND CASH EQUIVALENTS CONSIST OF:**Cash
                in bank
            
            
            304,821
            
            
            
            
            
            
            
            1,183,931Term
                deposits
            
            
            6,285,645
            
            
            
            
            
            
            
            3,289,5136,590,466
            
            
            
            
            
            
            
            4,473,444**NON-CASH
                ITEMS**Shares
                received for sale of assets
            
            
            1,956,990
            
            
            
            
            
            
            
            -Common
                stock issued for working interest in oil sands property
            
            
            -
            
            
            
            
            
            
            
            472,500Common
                shares issued on the acquisition of Damascus Energy Inc. (Note
                9(a))
            
            
            12,442,965
            
            
            
            
            
            
            
            -**SUPPLEMENTAL
                CASH FLOW INFORMATION**Taxes
                paid
            
            
            2,256,649
            
            
            
            
            
            
            
            225,243Interest
                paid
            
            
            49,525
            
            
            
            
            
            
            
            36,560





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


F-4


**PATCH
      INTERNATIONAL INC.**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**


(Stated
      in U.S. Dollars)




**Accumulated****Additional**
            
            
            **Stock**
            
            
            **Other**
            
            
            **Retained**
            
            
            **Total****Preferred
                Stock**
            
            
            **Common
                Stock**
            
            
            **Paid-in**
            
            
            **Subscriptions**
            
            
            **Comprehensive**
            
            
            **Earnings**
            
            
            **Stockholders’****Shares**
            
            
            **Amount**
            
            
            **Shares**
            
            
            **Amount**
            
            
            **Capital**
            
            
            **Receivable**
            
            
            **Income
                (Loss)**
            
            
            **(Deficit)**
            
            
            **Equity**Balance,
                May 31, 2005
            
            
            -
            
            
            $
            -
            
            
            
            12,753,410
            
            
            $
            12,753
            
            
            $
            1,410,837
            
            
            $
            (4,000
            )
            
            $
            6,006,999
            
            
            $
            (1,660,780
            )
            
            $
            5,765,809Stock
                adjustments due to reverse and forward stock splits
            
            
            -
            
            
            
            -
            
            
            
            653
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Stock
                options exercised for cash
            
            
            -
            
            
            
            -
            
            
            
            1,832,500
            
            
            
            1,833
            
            
            
            737,917
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            739,750Common
                stock issued for working interest in oil sands property
            
            
            -
            
            
            
            -
            
            
            
            437,500
            
            
            
            438
            
            
            
            472,062
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            472,500Common
                stock issued for consulting and investor relations
                services
            
            
            -
            
            
            
            -
            
            
            
            337,799
            
            
            
            338
            
            
            
            266,162
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            266,500Stock
                options issued for consulting services
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            520,810
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            520,810Stock
                subscriptions received
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,000
            
            
            
            -
            
            
            
            -
            
            
            
            4,000Acquisition
                of treasury stock
            
            
            -
            
            
            
            -
            
            
            
            (198,750
            )
            
            
            (199
            )
            
            
            (72,408
            )
            
            
            -
            
            
            
            -
            
            
            
            (38,470
            )
            
            
            (111,077
            )Accumulated
                other comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,345,559
            
            
            
            -
            
            
            
            1,345,559Net
                income for the year
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,687,112
            
            
            
            2,687,112Balance,
                May 31, 2006
            
            
            -
            
            
            $
            -
            
            
            
            15,163,112
            
            
            $
            15,163
            
            
            $
            3,335,380
            
            
            $
            -
            
            
            $
            7,352,558
            
            
            $
            987,862
            
            
            $
            11,690,963Stock
                options exercised for cash
            
            
            -
            
            
            
            -
            
            
            
            1,590,000
            
            
            
            1,590
            
            
            
            1,144,410
            
            
            
            (38,500
            )
            
            
            -
            
            
            
            -
            
            
            
            1,107,500Common
                stock issued by private placement
            
            
            -
            
            
            
            -
            
            
            
            3,240,000
            
            
            
            3,240
            
            
            
            2,601,229
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,604,469Acquisition
                of treasury stock and cancelled
            
            
            -
            
            
            
            -
            
            
            
            (3,588
            )
            
            
            (3
            )
            
            
            (1,127
            )
            
            
            -
            
            
            
            -
            
            
            
            (3,624
            )
            
            
            (4,754
            )Acquisition
                of treasury stock
            
            
            
            
            
            
            
            
            
            
            (2,000
            )
            
            
            (2
            )
            
            
            (1,553
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,555
            )Acquisition
                of Damascus Energy Inc.
            
            
            1
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Acquisition
                of 1289307 Alberta Ltd.
            
            
            1
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Share
                issuance costs
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (102,922
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (102,922
            )Stock-based
                compensation
            
            
            -
            
            
            
            -
            
            
            
            252,250
            
            
            
            252
            
            
            
            3,136,090
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,136,342Accumulated
                other comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (6,514,688
            )
            
            
            -
            
            
            
            (6,514,688
            )Net
                loss for the year
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (18,622,212
            )
            
            
            (18,622,212
            )Balance,
                May 31, 2007
            
            
            2
            
            
            $
            -
            
            
            
            20,239,774
            
            
            $
            20,240
            
            
            $
            10,111,507
            
            
            $
            (38,500
            )
            
            $
            837,870
            
            
            $
            (17,637,974
            )
            
            $
            (6,706,857
            )




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-5





**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, which 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.




On
      February 3, 2006, the Company, through its subsidiary Energy, incorporated
      a
      wholly-owned subsidiary, Patch Oilsands Ltd. (“Oilsands”) in British Columbia,
      Canada.  On February 27, 2006, the Company formed Patch Oilsands
      Limited Partnership (the “Partnership”), a Canadian limited partnership, of
      which Energy owned a 75% interest and Oilsands was the general
      partner.  On March 8, 2007, Energy sold its interest in both Oilsands
      and Partnership as a part of a sale of assets to Great Northern Oilsands Inc.
      (Note 14).





On
      December 15, 2006, the Company acquired 100% of the issued and outstanding
      share
      capital of Damascus Energy Inc. in consideration for one share of Class A
      Preferred Voting Stock of the Company and 9,426,489 shares of Series A Preferred
      Stock of Patch Energy Inc. that are exchangeable for 9,426,489 shares of the
      Company’s common stock. Refer to Note 9(a).





On
      January 16, 2007, the Company acquired 100% of the issued and outstanding share
      capital of 1289307 Alberta Ltd. in consideration for one share of Class B
      Preferred Voting Stock of the Company and 500,000 shares of Series A Preferred
      Stock of Patch Energy Inc. that are exchangeable for 500,000 shares of the
      Company’s common stock. Refer to Note 9(b).




Effective
      June 1, 2007, both Damascus Energy Inc. and 1289307 Alberta Ltd. were merged
      with Patch Energy Inc. and ceased to exist as separate


entities.





**2.       FUTURE
      OPERATIONS**





The
      financial statements have been prepared on a going concern basis.  The
      Company incurred a net loss of $18.6 million for the year ended May 31, 2007,
      had an accumulated deficit of $17.6 million and positive working capital of
      $1.1
      million.  In addition, the Company has a $7.7 million flow-through
      share commitment, which if not met by January 2009, will require the Company
      to
      reimburse the subscribers for any tax payable as a result of its failure to
      meet
      its flow-through share commitment.  The Company currently anticipates
      spending its existing funds in the current fiscal year to maintain operations
      and additional funding will be required to meet the flow-through share
      commitment and for expenditures connected with the acquisition, exploration
      and
      appraisal of new and existing oil and gas projects.





The
      ultimate development of the Company’s oil and gas projects, if proven
      commercial, will require additional funding.  The Company’s future
      operations are dependent upon its ability to obtain additional funding and
      ultimately achieve profitable operations.  The outcome of these
      matters cannot be predicted with certainty at this time.  The
      financial statements do not include any adjustments to the amounts and
      classification of assets and liabilities that may be necessary should the
      Company be unable to secure additional funding or obtain profitable
      operations.





**3.         SIGNIFICANT
      ACCOUNTING POLICIES**





a)
            Basis
                of Presentation





These
      consolidated financial statements include the accounts of the Company and its
      subsidiaries. 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.








F-6





**3.**
            
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Continued)**





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 and cash equivalents,
      accounts receivable, marketable securities, accounts payable and accrued
      liabilities and amounts due to/from related parties, approximated fair value
      at
      May 31, 2007 and 2006.





d)
            Marketable
                Securities




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. Realized gains and losses are accounted
      for on the specific identification method.




The
      Company periodically reviews these investments for other-than-temporary declines
      in fair value based on the specific identification method and writes down
      investments to their fair value when an other-than-temporary decline has
      occurred. When determining whether a decline is other-than-temporary, the
      Company examines (i) the length of time and the extent to which the fair value
      of an investment has been lower than its carrying value: (ii) the financial
      condition and near-term prospects of the investee, including any specific events
      that may influence the operations of the investee such as changes in technology
      that may impair the earnings potential of the investee: and (iii) the Company’s
      intent and ability to retain its investment in the investee for a sufficient
      period of time to allow for any anticipated recovery in market
      value.




e)
            Property
                and Equipment





Property
      and equipment consists of office furniture and computer hardware and software
      and is recorded at cost.  Amortization is calculated at the rate of
      30% per annum using the declining balance method.




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.




F-7


**3.**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Continued)**




g)
            Flow-through
                Shares




A
                portion of the Company’s exploration activities have been financed through
                the issue of flow-through common shares and flow-through Special
                Warrants.  Under the terms of these issuances, the related
                resource expenditure deductions are renounced to the shareholder
                in
                accordance with income tax legislation in Canada.  Upon issue of
                the flow-through shares/warrants, the proceeds are allocated between
                the
                offering of shares and the sale of tax benefits to
                investors.  The allocation is made based on the difference
                between the quoted price of the Company’s shares and the amount received
                for the flow-through shares, with a liability being recognized for
                the
                difference.  The liability is reversed when tax benefits are
                renounced and a deferred tax liability is recognized at that
                time.  Income tax expense is recognized for the difference
                between the amount of the deferred tax liability recognized on
                issuance.




h)           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.




i)           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.




j)
            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 Company’s Canadian subsidiaries 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.




k)
            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, 2007 and 2006 the components of
      comprehensive income included unrealized holding gains and losses on
      available-for-sale securities and foreign currency translation
      adjustments.





l)
            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%). For the year ended May 31, 2006 this gain totalled $101,664 (May 31,
      2007
– Nil).  Non-controlling interest on the consolidated balance sheet at
      May 31, 2006 represents the 25% minority interest in the net loss and 25% of
      the
      net assets of the Partnership.  On March 8, 2007 the Company sold its
      entire interest in the Partnership, as part of the disposition of assets to
      Great Northern Oilsands Inc. (Note 14), therefore there is no minority interest
      or non-controlling interest recorded for the year ended May 31,
      2007.





m)
            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.





F-8





**3.**
            
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Continued)**





n)
            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.





o)
            Stock-Based
                Compensation





Prior
      to
      June 1, 2006, the Company accounted for stock-based awards under the recognition
      and measurement provisions of Accounting Principles Board Opinion (“APB”) No.
      25, *“Accounting for Stock Issued to Employees”* using the intrinsic
      value method of accounting. Effective June 1, 2006, the Company adopted the
      fair
      value recognition provisions of SFAS No. 123R *“Share Based Payments”*,
      using the modified prospective transition method. Under that transition method,
      compensation cost is recognized for all stock-based payments granted prior
      to,
      but not yet vested as of June 1, 2006, based on the grant date fair value
      estimated in accordance with the original provisions of SFAS No. 123, and
      compensation cost for all stock-based payments granted subsequent to June 1,
      2006, based on the grant date fair value estimated in accordance with the
      provisions of SFAS 123R. Results for prior periods have not been
      restated.





p)
            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 a net loss in the year ended May 31, 2007, the basic
      and
      diluted loss per share is the same for that year as any exercise of options
      or
      warrants would be anti-dilutive.





**4.**
            **RECENT
                PRONOUNCEMENTS**




In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      159, *“The Fair Value Option for Financial Assets and Financial
      Liabilities—Including an Amendment of FASB Statement No. 115.”*  This
      pronouncement permits entities to use the fair value method to measure certain
      financial assets and liabilities by electing an irrevocable option to use the
      fair value method at specified election dates.  After election of the
      option, subsequent changes in fair value would result in the recognition of
      unrealized gains or losses as period costs during the period the change
      occurred.  SFAS No. 159 becomes effective as of the beginning of the first
      fiscal year that begins after November 15, 2007, with early adoption permitted.
      However, entities may not retroactively apply the provisions of SFAS No. 159
      to
      fiscal years preceding the date of adoption.  The Company is currently
      evaluating the impact that SFAS No. 159 may have on the financial position,
      results of operations and cash flows of the Company.




In
      September 2006, the FASB issued SFAS No. 158, *“Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB
      Statements No. 87, 88, 106, and 132(R)”*. This statement requires employers
      to recognize the overfunded or underfunded status of a defined benefit
      postretirement plan (other than a multiemployer plan) as an asset or liability
      in its statement of financial position and to recognize changes in that funded
      status in the year in which the changes occur through comprehensive income
      of a
      business entity or changes in unrestricted net assets of a not-for-profit
      organization.  This statement also requires an employer to measure the
      funded status of a plan as of the date of its year-end statement of financial
      position, with limited exceptions. The provisions of SFAS No. 158 are effective
      for employers with publicly traded equity securities as of the end of the fiscal
      year ending after December 15, 2006. The adoption of this statement will not
      have a material effect on the Company's future reported financial position
      or
      results of operations.





F-9





**4.**
            **RECENT
                PRONOUNCEMENTS (Continued)**




In
      September 2006, the FASB issued SFAS No. 157, “*Fair Value
      Measurements*”. The objective of SFAS 157 is to increase consistency and
      comparability in fair value measurements and to expand disclosures about fair
      value measurements.  SFAS 157 defines fair value, establishes a
      framework for measuring fair value in generally accepted accounting principles,
      and expands disclosures about fair value measurements. SFAS 157 applies under
      other accounting pronouncements that require or permit fair value measurements
      and does not require any new fair value measurements. The provisions of SFAS
      No.
      157 are effective for fair value measurements made in fiscal years beginning
      after November 15, 2007. The adoption of this statement is not expected to
      have
      a material effect on the Company's future reported financial position or results
      of operations.




In
      June
      2006, the FASB issued FASB Interpretation No. 48, *“Accounting for
      Uncertainty in Income Taxes, an interpretation of FASB Statements No.
      109.”*  FIN 48 clarifies the accounting for uncertainty in income
      taxes by prescribing a two-step method of first evaluating whether a tax
      position has met a more likely than not recognition threshold and second,
      measuring that tax position to determine the amount of benefit to be recognized
      in the financial statements. FIN 48 provides guidance on the presentation of
      such positions within a classified statement of financial position as well
      as on
      derecognition, interest and penalties, accounting in interim periods,
      disclosure, and transition.  FIN 48 is effective for fiscal years
      beginning after December 15, 2006.  The adoption of this statement is
      not expected to have a material effect on our future reported financial position
      or results of operations.





In
      March
      2006, the FASB issued SFAS No. 156, “*Accounting for Servicing of Financial
      Assets, an amendment of FASB Statement No. 140, Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of
      Liabilities*.”  This statement requires all separately recognized
      servicing assets and servicing liabilities be initially measured at fair value,
      if practicable, and permits for subsequent measurement using either fair value
      measurement with changes in fair value reflected in earnings or the amortization
      and impairment requirements of Statement No. 140.  The subsequent
      measurement of separately recognized servicing assets and servicing liabilities
      at fair value eliminates the necessity for entities that manage the risks
      inherent in servicing assets and servicing liabilities with derivatives to
      qualify for hedge accounting treatment and eliminates the characterization
      of
      declines in fair value as impairments or direct write-downs.  SFAS No.
      156 is effective for an entity’s first fiscal year beginning after September 15,
      2006.  The adoption of this statement is not expected to have a
      material effect on our future reported financial position or results of
      operations.





In
      February 2006, the FASB issued SFAS No. 155, “*Accounting for Certain Hybrid
      Financial Instruments-an amendment of FASB Statements No. 133 and 140,”* to
      simplify and make more consistent the accounting for certain financial
      instruments.  SFAS No. 155 amends SFAS No. 133, “*Accounting for
      Derivative Instruments and Hedging Activities*,” to permit fair value
      re-measurement for any hybrid financial instrument with an embedded derivative
      that otherwise would require bifurcation, provided that the whole instrument
      is
      accounted for on a fair value basis.  SFAS No. 155 amends SFAS No.
      140, “*Accounting for the Impairment or Disposal of Long-Lived Assets*,”
to allow a qualifying special-purpose entity to hold a derivative
      financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument.  SFAS No. 155 applies to all financial
      instruments acquired or issued after the beginning of an entity’s first fiscal
      year that begins after September 15, 2006, with earlier application
      allowed.  The adoption of this statement is not expected to have a
      material effect on our future reported financial position or results of
      operations.





**5.         DUE
      TO/FROM RELATED PARTIES**




a)
            Related
                parties include former and current 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, 2007, $1,009,697 (May 31, 2006 - $86,878
                owing to related parties) was due from related parties, of which
                $1,005,729 is due from a current director of the
                Company.




b)
            At
                the time of acquisition of Damascus Energy Inc. the president of
                Damascus
                was also a director of Patch Energy Inc.  In conjunction with
                this acquisition (as disclosed in Note 9(a)) a director of the Company
                received $244,840 (CAD$283,019).




c)
            An
                officer and the then sole director of the Company earned a fee of
                $1,000,000 for the facilitation of the acquisition of the Firebag
                Oil
                Sands Project contained in 1289307 Alberta Ltd. (as disclosed in
                Note
                9(b)) by the Company.  These properties were previously owned by
                a company controlled by this officer who was at the time the sole
                director
                of the Company.  The timing of this  payment is
                subject to certain conditions as set out in an agreement between
                the
                parties.




d)
            During
                the year ended May 31, 2007, the Company paid $525,298 (2006 - $198,677)
                in management fees to former directors and officers of the Company,
                of
                which $415,000 related to severance pay to former directors and
                officers.




e)
            A
                finders’ fee of $114,428 (CAD$132,300) was paid to an officer and the then
                sole director of the Company in connection with the flow-through
                private
                placement as described in Note 13.
              
              The above transactions have been
                measured
                in these financial statements at the exchange amount which is the
                amount
                of consideration established and agreed to by the related
                parties.




F-10





**6.**
            **MARKETABLE
                SECURITIES**




During
      the year ended May 31, 2007, the Company sold 6,791,937 Pharmaxis Ltd.
      (“Pharmaxis”) shares, an Australian company listed on the Australian Stock
      Exchange, for gross proceeds of $13,684,319, and realized a gain of $13,684,318,
      before applicable taxes.  The Company recorded the ordinary shares of
      Pharmaxis at market value, net of tax.  At May 31, 2007, the Company
      owns no ordinary shares (May 31, 2006 – 6,791,937) of Pharmaxis.





The
      Company paid Australian taxes of $2,256,649 (AUS$2,861,657) (Note 15) on sales
      of Pharmaxis’ shares up to May 31, 2006, on December 1, 2006.  The
      Company has accrued an estimate of Australian taxes of $2,785,763
      (AUS$3,367,702) on the sale of its remaining Pharmaxis’ shares during the year
      ended May 31, 2007.





As
      a part
      of its sale of assets to Great Northern Oilsands Inc. (“GNOS”) (Note 13), the
      Company received 1,000,000 Rule 144 restricted common shares of GNOS with a
      value of $1,956,990 (CAD$2,100,000) at May 31, 2007.  Effective April
      16, 2007 GNOS announced the forward split of its common stock on a 50 to 1
      basis.  As a result, the Company holds 50,000,000 shares of GNOS at
      May 31, 2007 with a market value for the shares at May 31, 2007 of
      $850,000.  These shares are held in trust for the Company and have
      been classified as marketable securities.





Market
                ValueMay
                31, 200750,000,000
                ordinary shares – Great Northern Oilsands Inc.
            
            $    850,000





Market
                ValueMay
                31, 20066,791,937
                ordinary shares – Pharmaxis Ltd.
            
            $   7,241,000





**7.**
            **JOINT
                VENTURE RECEIVABLE**





Pursuant
      to the terms of the Farmout Agreement on the Dover (Ells) property, the Company
      has earned an 80% working interest in the joint lands by drilling 16 evaluation
      wells on the property.  Subsequent to meeting its earning requirements
      the Company drilled an additional 3 evaluation wells on the
      property.  The Company is responsible for its 80% share of the costs
      of these 3 additional evaluation wells and pursuant to the terms of the Farmout
      Agreement the Company will finance its joint venture partner for its 20% share
      of the costs of these 3 additional evaluation wells.  The joint
      venture partner’s share of the additional well costs will be repaid upon the
      earlier of the sale of the Company’s interest in the property or 10 years from
      the abandonment of these 3 additional wells.  Interest shall accrue on
      the outstanding amount at the Bank of Canada’s prime rate plus 1% until the
      amount is repaid.  At May 31, 2007 the amount owing to the Company is
      $323,394.





**8.**
            **OIL
                AND GAS INTERESTS**





May
                31,
              2007
            
            
            May
                31,
              2006OIL
                AND GAS INTERESTS – SUCCESSFUL EFFORTS METHODBalance
                beginning of the year
            
            $
            2,964,017
            
            
            $
            198,284Expenditures
                and acquisitions
            
            
            50,566,872
            
            
            
            3,029,321Dispositions
            
            
            (2,651,277
            )
            
            
            -Depletion,
                depreciation and impairment of oil and gas property
            
            
            (5,087,858
            )
            
            
            (193,888
            )Dry
                well and abandoned interests
            
            
            (5,664,773
            )
            
            
            (69,700
            )Geological
                and geophysical costs
            
            
            (2,468,056
            )
            
            
            -Balance
                end of the year
            
            $
            37,658,925
            
            
            $
            2,964,017





Effective
                December 15, 2006 the Company acquired Damascus Energy Inc. (Note
                9(a))
                for total share consideration of $12,442,965.  The Oil and Gas
                Interests acquired in this transaction were valued at $23,475,628
                with the
                majority of this value attributable to the Dover Oil Sands
                Project.  Additional drilling and seismic activity, which earned
                the Company an 80% working interest on the Dover lands during the
                period
                from December 15, 2006 to May 31, 2007 totalled approximately $11.8
                million.  Effective January 16, 2007 the Company acquired
                1289307 Alberta Ltd. (Note 9(b)).  The Oil and Gas Interests
                acquired in this transaction were valued at $5,417,197, all attributable
                to the Firebag Oil Sands Project.





F-11





**8.**
            **OIL
                AND GAS INTERESTS
                (Continued)**





Additional
                drilling and seismic activity, which earned the Company a 75% working
                interest, on the Firebag lands during the period from January 16,
                2007 to
                May 31, 2007 totalled approximately $5.5 million. The remainder of
                the
                expenditures and acquisitions during the year relate primarily to drilling
                activity on the Company’s non-core conventional asset base, of which the
                majority was disposed of in the transaction with Great Northern Oilsands
                Inc. (Note 14).  All properties are classified as unproved
                properties as no proven reserves exist.  All activity relating
                to Oil and Gas Interests by the Company is located in
                Canada.





In
                accordance with successful efforts accounting for oil and gas interests
                the Company has expensed all geological and geophysical costs
                incurred.  The drilling costs associated with the Firebag
                properties have been expensed in the year as the drilling results
                on the
                property did not support recoverability of these costs.  In
                addition, the Company has charged to earnings approximately $5.0
                million
                of the carrying value of its costs in acquiring its interests in
                the
                Firebag property.





**9.**
            **ACQUISITIONS**




a)
            The
                Company entered into a Share Exchange Agreement dated December 1,
                2006
                with Damascus Energy Inc. (“Damascus”), whereby the Company would acquire
                100% of the issued and outstanding share capital of
                Damascus.  The transaction closed on December 15, 2006, and is
                accounted for using the purchase method.  By acquiring Damascus
                the Company received the right to earn up to an 80% working interest
                in
                the Dover Oil Sands Project.  The consolidated statements of
                operations for the Company includes the operating results of Damascus
                from
                the date the transaction closed to May 31, 2007.  Under the
                terms of the Share Exchange Agreement, because the Company did not
                have
                enough authorized shares to effect the transaction, Energy acquired
                all of
                the issued and outstanding common shares of Damascus (18,852,978
                common
                shares) in consideration for one share of Class A Preferred Voting
                Stock
                of the Company and 9,426,489 shares of Series A Preferred Stock of
                Energy
                (the “Exchangeable Shares”) that are exchangeable for 9,426,489 shares of
                the Company’s common stock. Refer to Note 12.  The Exchangeable
                Shares will be exchanged when the Company has increased its authorized
                common stock, however no recourse exists should approval not be received
                by the Company allowing for the conversion of the Exchangeable Shares
                into
                the Company’s common stock.  The shares were valued at $1.32,
                based upon the market price of the Company’s common shares at the closing
                date of the transaction.  During the next fiscal year
                adjustments may be made to finalize the purchase price
                equation.  The president of Damascus, who was also a director of
                Energy prior to the acquisition, was appointed to serve as a director
                of
                the Company.  A director of Energy received $244,840
                (CAD$283,019) in connection with the
                acquisition.




The
      purchase price was allocated to the following assets and
      liabilities:





Accounts
                receivable
            
            $
            279,368Oil
                and gas
                interests
            
            
            23,475,628Accounts
                payable and accrued
                liabilities
            
            
            (7,597,054
            )Other
                current
                liabilities
            
            
            (427,871
            )Asset
                retirement
                obligation
            
            
            (73,534
            )Deferred
                income taxes
            
            
            (3,213,572
            )Paid
                by issuance of 9,426,489 shares of Series A preferred stock of Patch
                Energy Inc., and 1 share of Class A preferred voting stock of Patch
                International Inc.
            
            $
            12,442,965





Pro
      Forma Results (unaudited):





The
      pro
      forma data of the Company set forth below gives effect to the purchase
      transactions completed in fiscal 2007 as if they had occurred at the beginning
      of fiscal 2007 and at the beginning of fiscal 2006.  The unaudited pro
      forma financial information is not intended to represent or be indicative of
      the
      consolidated results of operations of the Company that would have been reported
      had the acquisition been completed as of the dates presented, and should not
      be
      taken as representative of the future consolidated results of operations of
      the
      Company.





F-12





**9.       ACQUISITIONS
      (Continued)**





June
                1, 2006 to
              May
                31,
            
            
            June
                1, 2005 to
              May
                31,2007
            
            
            2006$
            
            
            
            $Pro
                Forma Revenue
            
            
            24,644
            
            
            
            43,668Pro
                Forma Net Income (Loss)
            
            
            (19,367,854
            )
            
            
            2,679,581Pro
                Forma Net Income (Loss) Per Share – Basic and Diluted
            
            
            (1.09
            )
            
            
            0.19







b)
            The
                Company entered into a Share Exchange Agreement dated December 21,
                2006
                with 1289307 Alberta Ltd. (“1289307”), whereby the Company would acquire
                100% of the issued and outstanding share capital of
                1289307.  The transaction closed on January 16, 2007, and is
                accounted for using the purchase method.  By acquiring 1289307
                the Company received the right to earn up to a 75% working interest
                in the
                Firebag Oil Sands Project.  The consolidated statements of
                operations for the Company includes the operating results of 1289307
                from
                the date the transaction closed to May 31, 2007.  Under the
                terms of the Share Exchange Agreement, because the Company did not
                have
                enough authorized shares to effect the transaction, Energy acquired
                all of
                the issued and outstanding common shares of 1289307 (500,000 common
                shares) in consideration for one share of Class B Preferred Voting
                Stock
                of the Company and 500,000 shares of Energy that are exchangeable
                for
                500,000 shares of the Company’s common stock. Refer to Note
                12.  The Exchangeable Shares will be exchanged when the Company
                has increased its authorized common stock, however no recourse exists
                should approval not be received by the Company allowing for the conversion
                of the Exchangeable Shares into the Company’s common stock.  The
                shares were valued at $1.32, based upon the market price of the Company’s
                common shares at the closing date of the transaction.  During
                the next fiscal year adjustments may be made to finalize the purchase
                price equation.  A private Alberta company controlled by an
                officer of the Company was repaid $1,000,000 for a promissory note
                in
                connection with the acquisition.




The
      purchase price was allocated to the following assets and
      liabilities:





Accounts
                receivable
            
            $
            1Oil
                and gas
                interests
            
            
            5,417,197Other
                current
                liabilities
            
            
            (4,417,197
            )Promissory
                note payable – Note
                4(c)
            
            
            (1,000,000
            )Purchase
                price
            
            $
            1




As
      this
      acquisition was part of a series of sequential transactions which reflect the
      acquisition of 1289307 by the Company the purchase price allocation presented
      above differs from that presented at February 28, 2007 as follows:




i)
            Under
                the terms of the Firebag Oil Sands Project agreement, dated December
                21,
                2006, 1289307 assumed an obligation of $4,393,140
                (CAD$5,100,000).  At February 28, 2007 this cash payment was
                recorded by the Company as a capital expenditure subsequent to the
                acquisition of 1289307.  However, since 1289307 had an
                obligation for this payment prior to its acquisition by the Company
                the
                costs have been reclassified and included as part of the initial
                purchase
                price of 1289307.




ii)****
            At
                February 28, 2007, the 500,000 Exchangeable Shares which were issued
                by
                the Company in conjunction with the acquisition of 1289307 was included
                in
                the purchase price.  These Exchangeable Shares, with a value of
                $660,000 based upon the market price of the Company’s common stock at the
                closing date of the transaction, have now been excluded from the
                purchase
                price of 1289307.  The $660,000 has been charged to net income
                in the current year as a fee paid by the Company to two individuals
                who
                were the shareholders of 1289307 and subsequently became directors
                of the
                Company.







F-13







**9.       
      ACQUISITIONS (Continued)**




The
      holders of the Series A Preferred shares of Patch Energy Inc. do not have any
      voting or economic interest in the operations and assets of Patch


Energy
      Inc.




The
      value
      of the purchase price, represented by the Series A Preferred Stock of Energy
      which is exchangeable into common stock of the Company, as disclosed in both
      Notes 9(a) and (b) totals $20,150,772 and has been presented as a liability
      on
      the face of the balance sheet as at May 31, 2007.  In accordance with
      EITF – 00-19 “Accounting for Derivative Financial Instruments Indexed to, and
      Potentially Settled in, a Company's Own Stock”, the Company determined that, at
      the classification assessment date, share settlement was not within the control
      of the Company, as shareholder approval was required, and therefore the value
      of
      the exchangeable shares is classified as a liability and is fair valued as
      at
      May 31, 2007, using a market price of $2.03 per share.  As of
      September 11, 2007 the share price was $1.06 per share.  The balance
      will be reclassified to stockholder’s equity once the Company has increased its
      authorized number of shares (Note 20).







Issued
            Issue
                Price
            $Exchangeable
                Shares:Issued
                on acquisition of Damascus (Note 9(a))
            9,426,489
            $1.32
            12,442,965Issued
                in conjunction with the acquisition of 1289307 (Note 9(b))
            500,000
            $1.32
            660,0009,926,489
            
            13,102,965Fair
                value adjustment – Exchangeable Shares
            -
            
            7,047,8079,926,489
            
            20,150,772




**10.**
            **SPECIAL
                WARRANTS AND FLOW-THROUGH SPECIAL
                WARRANTS**





On
      February 27, 2007, the Company completed a private placement of 8,302,000
      Special Warrants at $1.50 per Special Warrant, and 4,653,750 Flow-through
      Special Warrants at $1.65 per Flow-through Special Warrant for total gross
      proceeds of $20,131,687. Net proceeds of $18,759,033 were received, after
      commissions and professional fees paid. Of the Flow-through Special Warrants,
      4,408,750 were issued on a brokered basis, and 245,000 were issued on a
      non-brokered basis.





Each
      Special Warrant entitles the holder to acquire one Unit of the Company, for
      no
      additional consideration.  Each Unit consists of one share of the
      Company’s common stock, subject to the Company increasing its authorized number
      of shares of common stock and one common share Bonus Warrant.  Each
      Bonus Warrant entitles the holder to receive, without additional consideration,
      up to 0.10 shares or 830,200 of the Company’s common stock, subject to the
      Company not completing certain filings on or before April 28, 2007 and not,
      (i)
      becoming a “reporting issuer” in any province or territory of Canada; (ii)
      having a registration statement declared effective in the United States; and
      (iii) having its common stock listed on the TSX Venture Exchange or Toronto
      Stock Exchange on or before September 25, 2007.  As at May 31, 2007,
      the Bonus Warrants can be converted into 166,040 shares of the Company’s common
      stock, without additional consideration, as the April 28, 2007 filing deadlines
      described above were not met.  Financing costs of $298,872 has been
      recorded for the year ended May 31, 2007 (May 31, 2006 – Nil) which represents
      the market value of the Company’s common stock at the date the Bonus Warrants
      became exercisable.





Each
      Flow-through Special Warrant entitles the holder to acquire, for no additional
      consideration, one share of the Company’s common stock upon the Company
      increasing its authorized number of share of the Company’s common
      stock.




The
                Company paid $1,183,646 in cash commissions to the agents and issued
                non-transferable agents’ warrants to purchase up to 762,645 shares of the
                Company’s common stock at an exercise price of $1.50 per share on the
                later of: (i) February 27, 2008; and (ii) six months from the date
                the
                securities issued under the private placement are free from trading
                restrictions in the United States and Canada, but no later than February
                27, 2009.  The fair value of the Agents’ warrants of $1,281,244
                was estimated using the Black-Scholes option pricing model using
                the
                following weighted-average assumptions: a dividend yield of 0.0%;
                expected
                volatility of 138%; risk free interest rate of 4.54%; and expected
                life of
                2 years.  For the year ended May 31, 2007, $334,391 has been
                determined to be the fair value representing the vested portion of
                the
                Agents’ warrants and has been included in financing
                costs.




The
                Company has accounted for the net proceeds received from the sale
                of the
                Special Warrants and the Flow-through Special Warrants and the value
                of
                the Bonus Warrants as a liability on the face of the balance
                sheet.  In accordance with EITF – 00-19, the Company determined
                that share settlement of the Special Warrants, Flow-through Special
                Warrants and Bonus Warrants is not within the control of the Company,
                as
                shareholder approval is required, and therefore, the value of these
                instruments is classified as a liability and is fair valued at May
                31,
                2007, using a price of $2.03 per share.  The balance will be
                reclassified to stockholder’s equity once the Company has increased it
                authorized number of shares (Note
                20).







F-14


**10.**
            **SPECIAL
                WARRANTS AND FLOW-THROUGH SPECIAL WARRANTS
                (Continued)**







Issued
            Issue
                Price
            $Special
                Warrants
            8,302,000
            $1.50
            12,453,000Flow-through
                Special Warrants
            4,653,750
            $1.65
            7,678,68720,131,687Less:
                Commissions and professional fees
            
            
            (1,372,654)Net
                proceeds
            
            
            18,759,033Agent’s
                Warrants
            762,645
            
            334,391Bonus
                warrants
            166,040
            
            298,87213,884,435
            
            19,392,296Fair
                value adjustments:Special
                Warrants and Flow-through Special Warrants
            
            
            7,113,196Agent’s
                Warrants
            
            
            (37,819)Bonus
                Warrants
            
            
            38,18913,884,435
            
            26,505,862




**11.**
            **ASSET
                RETIREMENT OBLIGATIONS**




The
      total
      future asset retirement obligation was estimated by management based on the
      Company’s net ownership in wells and facilities, estimated costs to reclaim and
      abandon wells and facilities and the estimated timing of the costs to be
      incurred in future periods.  At May 31, 2007 the total undiscounted
      value of the total asset retirement obligation is estimated to be
      $166,835.  These payments are expected to be made over the next 3
      years.  The Company’s credit adjusted risk free rate of 6.5 percent
      and an inflation rate of 3.0 percent were used to calculate the present value
      of
      the asset retirement obligation.







The
      following table reconciles the Company’s asset retirement
      obligations:




For
                the Year Ended May 312007
            2006Beginning
                asset retirement obligations
            
            $       34,379
            $                 -Liabilities
                incurred
            
            -
            32,834Liabilities
                acquired
            
            73,534
            -Revisions
            
            20,858
            -Accretion
            
            1,188
            1,545Total
                asset retirement obligations
            
            $    129,959
            $       34,379







**12.**
            **PREFERRED
                STOCK**





The
      Company authorized two classes of preferred voting stock during the year ended
      May 31, 2007 as follows: one share of Class A Preferred Voting Stock, par value
      of $0.01 per share, and 10,000 shares of Class B Preferred Voting Stock, par
      value of $0.01 per share.  Refer to Notes 9(a) and (b).




The
      Class
      A Preferred Voting Stock has no dividend, or liquidation preferences over common
      stock holders.  This Class A Preferred Voting Share entitles 1286664
      Alberta Ltd., as the trustee under the Exchange and Voting Trust Agreement
      and
      registered holder thereof, to attend and vote at all meetings of holders of
      shares of the Company’s common stock on behalf of the former shareholders of
      Damascus.  The maximum number of votes attached to this Class A
      Preferred Voting Share is that number of shares of the Company’s common stock
      into which the Exchangeable Shares issued in conjunction with the Class A
      Preferred Voting Share and at that time outstanding are then exchangeable,
      which
      is 9,426,489 as of the date of this financial statement.  The Class A
      Preferred Voting Share may be voted by proxy on all matters that may properly
      come before a meeting of the Company’s common shareholders. Prior to delivering
      a Class A Preferred Voting Share proxy, the trustee of the Class A Preferred
      Voting Share shall be obligated to determine the manner in which the holders
      of
      the then outstanding Exchangeable Shares issued in conjunction with the Class
      A
      Preferred Voting Share would vote on each matter put before the meeting of
      common shareholders.  The holder of the Class A Preferred Voting Share
      is then obligated to complete the Class A Preferred Voting Share proxy and
      record as votes in favour of the matter that number of votes equal to the number
      of common shares into which the Exchangeable Shares which voted in favour of
      the
      matter are then exchangeable and record as votes against the matter that number
      of votes equal to the number of the common shares into which the Exchangeable
      Shares which voted against the matter are then exchangeable.  The
      trustee is not entitled to cast any vote (either positive or negative) for
      which
      proxies have not been returned by the holder of the Exchangeable
      Shares.









F-15




**12.**
            **PREFERRED
                STOCK (Continued)**





The
      Company has also designated 10,000 shares of Class B Preferred Voting Stock,
      of
      which one share is issued and outstanding.  The Class B Preferred
      Voting Stock has no dividend or liquidation preferences over common stock
      holders.  This Class B Preferred Voting Share entitles 1286664 Alberta
      Ltd., as the trustee under the Exchange and Voting Trust Agreement and
      registered holder thereof, to attend and vote at all meetings of holders of
      shares of the Company’s common stock on behalf of the shareholders of 1289307
      Alberta Ltd.  The maximum number of votes attached to this Class B
      Preferred Voting Share is that number of shares of the Company’s common stock
      into which the Exchangeable Shares issued in conjunction with the Class B
      Preferred Voting Share and at that time outstanding are then exchangeable,
      which
      is 500,000 as of the date of this financial statement.  Except for the
      number of votes, the Class B Preferred Voting Stock is identical to the Class
      A
      Preferred Voting Stock.




**13.**
            **COMMON
                STOCK**




During
      the year ended May 31, 2007, the Company issued 1,590,000 shares of common
      stock
      and received $1,146,000 in cash proceeds from the exercise of stock
      options.  The Company has recorded a stock subscription receivable of
      $38,500 related to these stock option exercises.






On
      June
      23, 2006, the Company purchased 3,588 of its shares on the open market at an
      average price of $1.32 per share.




On
      July
      26, 2006, the Company issued 222,250 shares of common stock, valued at $277,813
      based on a market price of $1.25 per share, for investor


relation
      services.




On
      September 15, 2006, the Company purchased 2,000 of its shares on the open market
      at a price of $0.78 per share.  These 2,000 shares are held in
      treasury for cancellation.  The 2,000 treasury shares are not included
      in the Company’s issued and outstanding shares for financial reporting
      purposes.




On
      October 24, 2006, the Company issued 30,000 shares of common stock, valued
      at
      $23,100 based on a market price of $0.77 per share, for investor


relations
      services.




On
      November 3, 2006, the Company filed a form S-8 Registration Statement in
      connection with a 2006 Stock Option Plan allowing for the granting of options
      to
      acquire up to a total of 1,500,000 shares.




During
      the year ended May 31, 2007, the Company completed a private placement and
      issued an aggregate 3,240,000 shares at a price of CAD$1.00 per share on a
      flow-through basis for proceeds of $2,798,400 (CAD$3,240,000).  In
      connection with the private placement, the Company paid a finder’s fee of 7%
      ($193,932 (CAD$224,350)), of which $114,428 (CAD$132,300) was paid to an officer
      of the Company.  The shares were issued pursuant to Regulation S under
      the Securities Act of 1933, as the sales were made in “offshore
      transactions”.




May
                31, 2007
            
            
            
            
            
            May
                31, 2006Number
            
            
            
            
            
            
            
            
            Numberof
              Shares
            
            
            Amount
              $
            
            
            
            
            
            
            of
              Shares
            
            
            
            Amount
              $Issued
                and outstanding common shares:Balance,
                beginning of year
            
            
            15,163,112
            
            
            
            15,163
            
            
            
            
            
            
            
            12,753,410
            
            
            
            1,423,590Flow-through
                shares issued
            
            
            3,240,000
            
            
            
            2,604,469
            
            
            
            
            
            
            
            -
            
            
            
            -Private
                placement
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            437,500
            
            
            
            472,500Stock
                options exercised
            
            
            1,590,000
            
            
            
            1,184,500
            
            
            
            
            
            
            
            1,832,500
            
            
            
            739,750Shares
                issued for services
            
            
            252,250
            
            
            
            300,913
            
            
            
            
            
            
            
            337,799
            
            
            
            266,500Stock
                adjustment due to forward split
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            653
            
            
            
            -Repurchase
                of shares
            
            
            (5,588
            )
            
            
            (6,309
            )
            
            
            
            
            
            
            (198,750
            )
            
            
            (72,607
            )20,239,774
            
            
            
            4,098,736
            
            
            
            
            
            
            
            15,163,112
            
            
            
            2,829,733Less:
                Stock subscriptions receivable
            
            
            -
            
            
            
            (38,500
            )
            
            
            
            
            
            
            -
            
            
            
            -Less:
                Amount included in additional paid-in capital
            
            
            -
            
            
            
            (4,043,620
            )
            
            
            
            
            
            
            -
            
            
            
            (2,814,570
            )Add:
                Amount charged to retained earnings
            
            
            -
            
            
            
            3,624
            
            
            
            
            
            
            
            -
            
            
            
            -Balance,
                end of year
            
            
            20,239,774
            
            
            
            20,240
            
            
            
            
            
            
            
            15,163,112
            
            
            
            15,163






F-16




**13.**
            **COMMON
                STOCK (Continued)**




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




May
                31, 2007
            
            
            May
                31, 2006Number
            
            
            Weighted
              Average
            
            
            Number
            
            
            Weighted
              Averageof
            
            
            Exercise
            
            
            of
            
            
            ExerciseOptions
            
            
            Price
            
            
            Options
            
            
            PriceBalance,
                beginning of year
            
            
            2,272,500
            
            
            $
            0.75
            
            
            
            1,370,000
            
            
            $
            0.28Granted
            
            
            4,265,000
            
            
            
            1.33
            
            
            
            2,735,000
            
            
            $
            0.75Expired
            
            
            (300,000
            )
            
            
            0.39
            
            
            
            -
            
            
            
            -Forfeited
            
            
            (672,500
            )
            
            
            0.60
            
            
            
            -
            
            
            
            -Cancelled
            
            
            (750,000
            )
            
            
            1.20
            
            
            
            -
            
            
            
            -Exercised
            
            
            (1,590,000
            )
            
            
            0.72
            
            
            
            (1,832,500
            )
            
            $
            0.40Balance,
                end of year
            
            
            3,225,000
            
            
            $
            1.40
            
            
            
            2,272,500
            
            
            $
            0.75




As
                  at May 31, 2007, the weighted average remaining contractual life
                  of the
                  outstanding options is 4.7 years, and the aggregate intrinsic value
                  of the
                  options is $5,438,500.
 A
                      summary of the status of the Company's nonvested options as
                      of May 31,
                      2007, and changes during the year ended May 31, 2007, is presented
                      below:




Nonvested
                options:
            
            Number
                of Shares
              Underlying
                Options
            
            
            Weighted-Average
              Grant-Date
              Fair
                ValueNonvested
                at June 1, 2006
            
            
            485,000
            
            
            $
            0.61Granted
            
            
            4,265,000
            
            
            
            1.52Cancelled/forfeited
            
            
            (800,000
            )
            
            
            (1.17
            )Vested
            
            
            (725,000
            )
            
            
            0.65Nonvested
                at May 31, 2007
            
            
            3,225,000
            
            
            $
            1.73





Prior
      to
      June 1, 2006, the Company accounted for stock-based awards under the recognition
      and measurement provisions of Accounting Principles Board Opinion (“APB”) No.
      25, *“Accounting for Stock Issued to Employees”* using the intrinsic
      value method of accounting. Effective June 1, 2006, the Company adopted the
      fair
      value recognition provisions of SFAS No. 123R *“Share Based Payments”*,
      using the modified prospective transition method. Under that transition method,
      compensation cost is recognized for all stock-based payments granted prior
      to,
      but not yet vested as of June 1, 2006, based on the grant date fair value
      estimated in accordance with the original provisions of SFAS No. 123, and
      compensation cost for all stock-based payments granted subsequent to June 1,
      2006, based on the grant date fair value estimated in accordance with the
      provisions of SFAS No. 123R. Results for prior periods have not been
      restated.




As
      a
      result of adopting SFAS 123R on June 1, 2006, the Company’s net loss for the
      year ended May 31, 2007 is $3,136,266 higher than if it had continued to account
      for share-based compensation under APB No. 25. Basic and diluted net loss per
      share for the year ended May 31, 2007 would have been $0.08 per share higher
      than as reported.




During
      the year ended May 31, 2007, stock-based compensation amounting to $3,136,343
      was recorded. During the year ended May 31, 2007, stock options for stock-based
      compensation were issued as follows: 50,000 stock options priced at $0.90 per
      share, 190,000 stock options priced at $0.90 per share, 2,850,000 stock options
      priced at $1.20 per share and 1,175,000 stock options priced at $1.75 per
      share.  Stock-based compensation also includes amounts relating to the
      repricing of 485,000 stock options on August 30, 2006, from $1.54 to $0.90
      per
      share, which were previously granted on May 15, 2006.





The
      weighted average fair value of the options granted during the year ended May
      31,
      2007 was $1.73 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 148%; risk free interest rate of 4.59%; and expected
      life
      of 5.0 years.





F-17




**13.      COMMON
      STOCK (Continued)**






For
      the
      year ended May 31, 2006, had compensation cost been recognized on the basis
      of
      fair value, pursuant to SFAS No. 123R, net income and income per share would
      have been as follows:





Net
                income (loss) - as reported
            
            $
            2,687,112Add:
                Stock-based compensation expense included in net income - as
                reported
            
            
            787,310Deduct:
                Stock-based compensation expense determined under fair value
                method
            
            
            (1,063,128
            )Net
                income (loss) – pro forma
            
            $
            2,411,294





Basic
                net income per share – as reported
            
            $
            0.19Basic
                net income per share – pro forma
            
            $
            0.17Diluted
                net income per share – as reported
            
            $
            0.19Diluted
                net income per share – pro forma
            
            $
            0.17





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.





**14.**
            **DISCONTINUED
                OPERATIONS**




On
      March
      8, 2007, the Company completed a disposition of the majority of the Company’s
      conventional oil and gas properties in Western Canada to Great Northern Oilsands
      Inc.  The Company received cash, before transaction costs, of $778,590
      (CAD$900,000) and 1,000,000 Rule 144 restricted shares of Great Northern
      Oilsands Inc.  The shares received were valued at $1,816,710
      (CAD$2,100,000) at the date of the transaction, for total consideration of
      $2,595,300 (CAD$3,000,000).




The
      results of discontinued operations are summarized as follows:


For
                  the Year Ended May 312007
              
              
              2006$
              
              
              
              $Revenue:Oil
                  and gas
              
              
              99,722
              
              
              
              134,926Expenses
              
              
              524,101
              
              
              
              92,885Net
                  operating income (loss) from discontinued operations
              
              
              (424,379
              )
              
              
              42,041Gain
                  on sale of investment and oil and gas assets
              
              
              612,937
              
              
              
              -


**15.**
            **INCOME
                TAX**




The
      Company records 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, 2007, 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, 2007, the Company had capital gains for Australian income
      taxes purposes of $13,684,318, net operating losses for U.S. federal income
      tax
      purposes of $2,624,000, and had non-capital loss carryforwards for Canadian
      income tax purposes of $2,955,000, 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, 2007, a valuation allowance of $739,226 was provided to reduce deferred
      tax assets to nil.







F-18




**15.**      **INCOME
      TAX (Continued)**




The
      provision for income taxes consists of the following:


For
                  the Year Ended May 312007
              
              
              2006$
              
              
              
              $CurrentForeign
              
              
              2,785,763
              
              
              
              2,181,000United
                  States
              
              
              -
              
              
              
              225,243Deferred:Foreign
              
              
              (3,213,573
              )
              
              
              -United
                  States
              
              
              -
              
              
              
              -Total
                  income tax expense (reduction)
              
              
              (427,810
              )
              
              
              2,406,243
  Effective
        tax rate reconciliation:


For
                  the Year Ended May 312007
              
              
              2006$
              
              
              
              $Income
                  tax (reduction) expense at statutory rate
              
              
              (6,158,038
              )
              
              
              1,731,740Nonresident
                  capital gains tax
              
              
              2,785,763
              
              
              
              2,181,000Flow-through
                  shares
              
              
              1,053,947
              
              
              
              -Resource
                  allowance and other
              
              
              30,231
              
              
              
              -Unrealized
                  loss on exchangeable shares and special warrants
              
              
              4,814,867
              
              
              
              -Foreign
                  tax credits
              
              
              (3,760,350
              )
              
              
              (1,731,740
              )Change
                  in tax rates
              
              
              282,543
              
              
              
              -Federal
                  tax
              
              
              -
              
              
              
              225,243Total
                  income tax expense (reduction)
              
              
              (427,810
              )
              
              
              2,406,243Effective
                  tax rate
              
              
              2.2
              %
              
              
              47.2
              %


The
      deferred tax liabilities and assets were as follows:




For
                  the Year Ended May 312007
              
              
              2006$
              
              
              
              $Deferred
                  tax assets/(liabilities)-
                  Non-capital loss carryforwards
              
              
              842,184
              
              
              
              166,000-
                  Excess tax basis over book basis for oil and gas
                  properties
              
              
              (286,704
              )
              
              
              50,000-
                  Writedown of marketable securities
              
              
              157,746
              
              
              
              --
                  Share issue costs
              
              
              26,000
              
              
              
              --
                  Less valuation allowance
              
              
              (739,226
              )
              
              
              (216,000
              )Net
                  deferred tax liability
              
              
              -
              
              
              
              -




F-19




**16.**
            **OTHER
                COMPREHENSIVE
                INCOME/(LOSS)**





Components
      of other comprehensive income (loss) are as follows:




For
                the Year EndedMay
                31, 2007Before-Tax
            
            
            Tax
                (Expense)
            
            
            Net-of-TaxAmount
            
            
            Or
                Benefit
            
            
            AmountMarketable
                securities:Decrease
                in unrealized gain on marketable securities
            
            $
            (10,344,284
            )
            
            $
            3,103,285
            
            
            $
            (7,240,999
            )Foreign
                currency translation adjustment
            
            
            726,311
            
            
            
            -
            
            
            
            726,311Other
                comprehensive income (loss)
            
            $
            (9,617,973
            )
            
            $
            3,103,285
            
            
            $
            (6,514,688
            )





For
                the Year EndedMay
                31, 2006Before-Tax
            
            
            Tax
                (Expense)
            
            
            Net-of-TaxAmount
            
            
            Or
                Benefit
            
            
            AmountMarketable
                securities:Reclassification
                adjustment - realized gain
            
            $
            (3,582,147
            )
            
            $
            1,217,930
            
            
            $
            (2,364,217
            )Holding
                gain
            
            
            5,451,844
            
            
            
            (1,853,627
            )
            
            
            3,598,217Net
                gain on marketable securities recognized in other comprehensive
                income
            
            
            1,869,697
            
            
            
            (635,697
            )
            
            
            1,234,000Foreign
                currency translation adjustment
            
            
            111,560
            
            
            
            −
            
            
            
            111,560Other
                comprehensive income (loss)
            
            $
            1,981,257
            
            
            $
            (635,697
            )
            
            $
            1,345,560





**17.**
            **COMMITMENTS**





On
      February 27, 2007 the Company issued 4,653,750 Flow-through Special Warrants
      (Note 10) at $1.65 per Flow-through Special Warrant for gross proceeds of
      $7,678,688.  The Company is obligated to expend this amount on
      Canadian Exploration Expenses prior to December 31, 2008 and to renounce this
      amount, in full, to the subscribers of the Flow-through Special
      Warrants.  In the event that the Company fails to incur and renounce
      the full amount of these expenditures to the subscriber, the Company shall
      pay,
      in settlement to the subscriber, an amount equal to the amount of any tax
      payable or that may become payable by the subscriber as a consequence of such
      failure.





**18.**
            **GEOGRAPHIC
                AND SEGMENTED INFORMATION**




The
      Company has one reportable segment consisting of oil and gas operations, except
      for the Company’s investment in Great Northern Oilsands Inc., which is valued at
      $850,000 at May 31, 2007.  As at May 31, 2006 the Company held
      6,791,937 shares of Pharmaxis Ltd. (an Australian company listed on the
      Australian Stock Exchange).  The shares were valued at $7,241,000 at
      May 31, 2006.  The Company derives revenues from the sale of petroleum
      products resulting from its oil and gas operations.  The Company’s
      operations are in Canada.





**Geographic:**


Long-lived
                assets:
            May
                31,
              2007
            
            May
                31,
              2006Canada
            
            $
            38,607,841
            
            
            $
            2,937,326Australia
            
            
            -
            
            
            
            7,241,000Total
                long-lived assets
            
            $
            38,607,841
            
            
            $
            10,178,326Revenues
                from external customers:
            May
                31,
              2007
            
            May
                31,
              2006United
                States
            
            $
            -
            
            
            $
            -Canada
            
            
            15,581
            
            
            
            43,668Total
                revenues from external customers
            
            $
            15,581
            
            
            $
            43,668








F-20




**19.**
            **CONTINGENT
                LIABILITIES**





The
                8,302,000 Special Warrants (Note 10) that were issued by the Company
                in
                February 2007 entitled the holder to acquire, for no additional
                consideration one Unit of the Company.  Each Unit consists of
                one share of the Company’s common stock, subject to the Company increasing
                its authorized number of shares of common stock and one common stock
                Bonus
                Warrant.  Each Bonus Warrant entitles the holder to receive up
                to 0.10 (830,200 common shares) of the Company’s common stock, without
                additional consideration, should the Company fail to meet a number
                of
                conditions (as outlined in Note 10) prior to September 25,
                2007.  To date the Bonus Warrants can be converted into 166,040
                shares of the Company’s common stock, without additional consideration,
                with a further conversion of 664,160 Bonus Warrants into shares of
                the
                Company should the September 25, 2007 deadline not be
                met.





**20.      SUBSEQUENT
      EVENT**





Pursuant
      to the Special Meeting of Stockholders held by the Company on August 28, 2007,
      and adjourned until September 14, 2007, the shareholders have approved and
      the
      Company has filed a “Certificate of Amendment to Articles of Incorporation for
      Nevada Profit Corporations”.  Subject to regulatory approval the
      amendments include the following:





i)  
      Article II - The amount of total authorized capital stock that the Corporation
      shall have the authority to issue is 300,000,000 shares of common stock, each
      with a $0.001 par value, and 1,000,000 shares of preferred stock, each with
      a
      $0.01 par value.  To the fullest extent permitted by the laws of the
      State of Nevada (currently NRS 78.195), as the same now exists or may hereafter
      be amended or supplemented, the Board of Directors may fix and determine the
      designations, rights, preferences or other variations of each class or series
      within each class of capital stock of the Corporation.  This amendment
      is subject to regulatory approval.





ii)  Article
      XII – One third of the voting power of the issued and outstanding shares of the
      class or series that is present in person or in proxy, regardless of whether
      the
      proxy has authority to vote on all matters, constitutes a quorum for the
      transaction of business by a vote of the stockholders.  An act of the
      stockholders of each class or series, other than the election of directors,
      is
      approved if the number of votes in favour of the action exceeds the number
      of
      votes cast in opposition to the action.





**21.**
            **SCHEDULE
                OF SUPPLEMENTARY INFORMATION ON OIL AND GAS OPERATIONS
                (Unaudited)**





**RESERVE
      QUANTITY INFORMATION**




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
      Canada.





**STANDARDIZED
                MEASURE OF DISCOUNTED FUTURE**
              **NET
                CASH FLOWS RELATING TO PROVED OIL**
              **AND
                GAS RESERVES**May
                31,
              2007
              (Unaudited)
            
            
            May
                31,
              2006
              (Unaudited)Oil
              (bbls)
            
            
            Oil
              (bbls)Proved,
                developed and undeveloped reserves (Canada)Balance
                beginning of the year
            
            
            5,000
            
            
            
            11,000Discoveries
            
            
            -
            
            
            
            1,000Revision
                to estimates
            
            
            -
            
            
            
            (4,000
            )Dispositions
            
            
            (2,725
            )
            
            
            -Production
            
            
            (2,275
            )
            
            
            (3,000
            )Balance
                end of the year
            
            
            -
            
            
            
            5,000





F-21


Standardized
                Measure of Discounted Future Net Cash Flows (Canada)Future
                cash flows
            
            $
            -
            
            
            $
            353,964Future
                operating expenses
            
            
            -
            
            
            
            (199,672
            )-
            
            
            
            154,29210%
                annual discount for estimated timing of cash flows
            
            
            -
            
            
            
            (19,060
            )Standardized
                measure of discounted future net cash flows
            
            $
            -
            
            
            $
            135,232





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.





**22.**
            **QUARTERLY
                FINANCIAL DATA (Unaudited)**





**a)**
            **Acquisition
                of 1289307 Alberta Ltd. (Note
                9(b))**




As
      this
      acquisition was part of a series of sequential transactions which reflect the
      acquisition of 1289307 Alberta Ltd. (“1289307”) by the Company the purchase
      price allocation presented above differs from that presented at February 28,
      2007 as follows:




i)
            Under
                the terms of the Firebag Oil Sands Project agreement, dated December
                21,
                2006, 1289307 assumed an obligation of $4,393,140
                (CAD$5,100,000).  At February 28, 2007 this cash payment was
                recorded by the Company as a capital expenditure subsequent to the
                acquisition of 1289307.  However, since 1289307 had an
                obligation for this payment prior to its acquisition by the Company
                the
                costs have been reclassified and included as part of the initial
                purchase
                price of 1289307.




ii)
            At
                February 28, 2007, the 500,000 Exchangeable Shares which were issued
                by
                the Company in conjunction with the acquisition of 1289307 was included
                in
                the purchase price.  These Exchangeable Shares, with a value of
                $660,000 based upon the market price of the Company’s common stock at the
                closing date of the transaction, have now been excluded from the
                purchase
                price of 1289307.  The $660,000 has been charged to net income
                in the current year as a fee paid by the Company to two individuals
                who
                were the shareholders of 1289307 and subsequently became directors
                of the
                Company.







As
                Reported
            
            
            Adjustments
            
            
            RestatedConsolidated
                Balance Sheets as of February 28, 2007:Oil
                and gas interests
            
            
            42,604,389
            
            
            
            (970,588
            )
            
            
            41,633,801Deferred
                income taxes
            
            
            3,720,926
            
            
            
            (310,588
            )
            
            
            3,410,338Retained
                earnings
            
            
            6,268,273
            
            
            
            (660,000
            )
            
            
            5,608,273Consolidated
                Statements of Operations – Three Months Ended February 28,
                2007:General
                and administrative
            
            
            2,761,088
            
            
            
            660,000
            
            
            
            3,421,088Net
                income (loss)
            
            
            1,412,929
            
            
            
            (660,000
            )
            
            
            752,929Consolidated
                Statements of Operations – Nine Months Ended February 28,
                2007:General
                and administrative
            
            
            4,387,829
            
            
            
            660,000
            
            
            
            5,047,829Net
                income (loss)
            
            
            5,284,034
            
            
            
            (660,000
            )
            
            
            4,624,034








F-22




**b)**
            **Discontinued
                Operations (Note 14)**







On
                January 16, 2007, the Company entered into a letter agreement to
                dispose
                of the properties described above to Great Northern Oilsands
                Inc.  The impact on the consolidated financial statements
                presented for the nine months ended February 28, 2007 had these properties
                been classified as “Assets Held for Sale” and the revenue and expenses
                generated by these properties classified as “Discontinued Operations” is
                as follows:







As
                Reported
            
            
            Adjustments
            
            
            RestatedConsolidated
                Balance Sheets as of February 28, 2007:Oil
                and gas interests
            
            
            42,604,389
            
            
            
            (2,335,609
            )
            
            
            40,268,780Assets
                held for sale
            
            
            -
            
            
            
            2,335,609
            
            
            
            2,335,609Consolidated
                Balance Sheets as of February 28, 2006:Oil
                and gas interests
            
            
            2,964,017
            
            
            
            (813,655
            )
            
            
            2,150,362Assets
                held for sale
            
            
            -
            
            
            
            813,655
            
            
            
            813,655Consolidated
                Statements of Operations – Three Months Ended February 28,
                2007:Oil
                and gas revenue
            
            
            34,710
            
            
            
            (34,147
            )
            
            
            563Depletion,
                depreciation, impairment and accretion
            
            
            7,584
            
            
            
            (4,696
            )
            
            
            2,888Oil
                and gas production, royalties and other
            
            
            12,628
            
            
            
            (6,090
            )
            
            
            6,538Net
                income (loss) before discontinued operations
            
            
            2,002,455
            
            
            
            (23,361
            )
            
            
            1,979,094Discontinued
                operations
            
            
            -
            
            
            
            23,361
            
            
            
            23,361Consolidated
                Statements of Operations – Nine Months Ended February 28,
                2007:Oil
                and gas revenue
            
            
            100,319
            
            
            
            (91,713
            )
            
            
            8,606Depletion,
                depreciation, impairment and accretion
            
            
            48,123
            
            
            
            (19,634
            )
            
            
            28,489Oil
                and gas production, royalties and other
            
            
            41,461
            
            
            
            (30,083
            )
            
            
            11,378Net
                income (loss) before discontinued operations
            
            
            8,152,061
            
            
            
            (41,996
            )
            
            
            8,110,065Discontinued
                operations
            
            
            -
            
            
            
            41,996
            
            
            
            41,996Consolidated
                Statements of Operations – Three Months Ended February 28,
                2006:Oil
                and gas revenue
            
            
            58,345
            
            
            
            (28,746
            )
            
            
            29,599Depletion,
                depreciation, impairment and accretion
            
            
            55,640
            
            
            
            (3,972
            )
            
            
            51,668Oil
                and gas production, royalties and other
            
            
            118,663
            
            
            
            (4,707
            )
            
            
            113,956Net
                income (loss) before discontinued operations
            
            
            (432,884
            )
            
            
            (20,067
            )
            
            
            (452,951
            )Discontinued
                operations
            
            
            -
            
            
            
            20,067
            
            
            
            20,067Consolidated
                Statements of Operations – Nine Months Ended February 28,
                2006:Oil
                and gas revenue
            
            
            142,427
            
            
            
            (102,610
            )
            
            
            39,817Depletion,
                depreciation, impairment and accretion
            
            
            90,265
            
            
            
            (15,415
            )
            
            
            74,850Oil
                and gas production, royalties and other
            
            
            156,081
            
            
            
            (25,519
            )
            
            
            130,562Net
                income (loss) before discontinued operations
            
            
            4,747,819
            
            
            
            (61,676
            )
            
            
            4,686,143Discontinued
                operations
            
            
            -
            
            
            
            61,676
            
            
            
            61,676







F-23