UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K


(Mark
One)


ý  ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the
fiscal year ended May 31, 2008





 ̈  TRANSITION
REPORT PURSUANT TO 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.


(Exact
name of registrant as specified in its charter)





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





Suite
      1670-700, 2nd
      Street S.W., Calgary, Alberta, Canada
            T2P
      2W1(Address
      of principal executive offices)
            (Zip
      Code)





Registrant’s
telephone number, including area code: (403) 441-4390





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





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





Common
Stock, $.001 par value


(Title of
class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Act.  Yes  ̈  No ý





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.  Yes  ̈  No ý





Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 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 ý  No  ̈





Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K.   ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.


Large
      accelerated filer  o
            Accelerated
      filer  oNon-accelerated
      filer  o
            Smaller
      reporting company  ý





Indicate
by check mark whether the registrant is a shell company.  Yes  ̈  No ý








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
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter:  $17,789,224
as of November 30, 2007





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date:  35,775,724shares of common stock as of August
26, 2008





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 report.





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.





2


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.”





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.





ANNUAL
REPORT ON


FORM
10-K


FOR
THE FISCAL YEAR ENDED


MAY
31, 2008





INDEX








PagePART
      IItem
      1.
            Business
            5Item
      1A.
            Risk
      Factors
            10Item
      1B.
            Unresolved
      Staff Comments
            13Item
      2.
            Properties
            13Item
      3.
            Legal
      Proceedings
            15Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            16PART
      IIItem
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            16Item
      6.
            Selected
      Financial Data
            17Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            17Item
      7A.
            Quantitative
      and Qualitative Disclosure About Market Risk
            23Item
      8.
            Financial
      Statements and Supplementary Data
            23Item
      9.
            Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
            23Item
      9A.
            Controls
      and Procedures
            24Item
      9B.
            Other
      Information
            25PART
      IIIItem
      10.
            Directors,
      Executive Officers and Corporate Governance
            25Item
      11.
            Executive
      Compensation
            28Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            31Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            33Item
      14.
            Principal
      Accountant Fees and Services
            34PART
      IVItem
      15.
            Exhibits,
      Financial Statement Schedules
            34








4


PART
I.





ITEM
1.          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 our results of operations since the date
of acquisition on March 15, 2004.





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






5
 
  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.





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,
(iii) 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






6
 
  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 our 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.





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.





Continuation to
Alberta, Canada.  On August 28, 2008, we filed our Articles of
Conversion in the State of Nevada to move our jurisdiction of incorporation to
Alberta, Canada.  We also filed our Articles of Continuance in
Alberta, Canada.  We received our Certificate of Continuance from
Alberta on September 3, 2008.As a result of these
actions, we will be considered a “foreign private issuer” under the rules and
regulations of the Securities and Exchange Commission.


7


In
connection with our move to Alberta, we replaced our transfer agent with
Computershare Trust Company of Canada.  The address and contact
information for our new transfer agent is Suite 600, 530 - 8th Ave SW, Calgary
Alberta, Canada  T2P 3S8; Telephone: (800) 340-4883; Facsimile: (403)
267-6529.





Recent Financing
Activity.  We have not conducted any financing activities since
February 2007, when we sold 4,653,750 “Flow-Through Special Warrants” and
8,302,000 “Non-Flow-Through Special Warrants.”  Each Flow-Through
Special Warrant entitled the holder to acquire, for no additional consideration,
one share of our common stock.  Each Non-Flow-Through Special Warrant
entitled the holder to acquire, for no additional consideration, one
Unit.  Each Unit consisted of one share of our common stock and one
common share Bonus Warrant (the “Bonus
Warrants”).  Each Bonus Warrant entitled the holder to receive,
without additional consideration, up to 0.10 shares of our common stock, if we
did not complete certain filings on or before April 28, 2007 and we did 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.  We issued 166,040 Bonus Warrants
because we did not meet our April 28, 2007 filing deadline.  We issued
an additional 664,160 Bonus Warrants because we did not meet our September 25,
2007 filing deadline.  On September 14, 2007, the Company received
shareholder approval to increase its authorized capital stock.  As of
September 25, 2007, all Flow-Through Special Warrants, Non-Flow-Through Special
Warrants and Bonus Warrants were exercised, without consideration, into
13,785,950 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 were 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.  As of September 7, 2008, the Agents’ Warrants expired
unexercised by their terms.





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 in 2004, 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





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.





8


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 Actthat
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 Actestablishes 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.





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, 2008, we had 2 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.


9





ITEM
1A.          RISK
FACTORS





An
investment in our shares involves a high degree of risk.  In
evaluating us and our business, investors should carefully consider the
following risk factors in addition to the other information included in this
annual report.





The risks
and uncertainties described below are not the only ones we
face.  Additional risks and uncertainties not presently known to us or
that we currently deem immaterial may also harm our business.  If any
of the following risks actually occurs, our business, financial conditions or
operating results could be materially adversely affected.  In such
case, the trading price of our common stock could decline, and you may lose all
or part of your investment.





Risks
Related to Our Company





We have a limited
operating history and have generated only very limited
revenues.  We have earned limited production
revenue.  We have not yet generated any proved resources on any of our
properties.  We have accumulated a deficit of $5,769,766 as of May 31,
2008.  Our principal activities have been raising capital through the
sale of our securities and securities held for sale and identifying, evaluating
and acquiring potential oil and gas properties.





We do not have
sufficient capital to sustain operations or meet our short-term
obligations.  As of May 31, 2008, we had a working capital
deficit of $3,344,421.  We must pursue financing to meet our
short-term obligations and continue operations.  We intend to conduct
additional bridge financings to sustain our operations until we can merge with
or be acquired by a partner with sufficient capital to develop our
assets.  To this end, we have engaged CIBC World Markets Inc. as our
financial advisor.  We cannot assure you that we will be able to
complete any additional financings successfully or that we will be able to
complete a merger or acquisition with another business.  Failure to
obtain additional financing could result in the cessation of our business and
the sale of our assets on an untimely and unfavorable basis.





We have
significant future capital requirements.  If these obligations are not
met, our growth and operations could be non-functional.  Our
business plan depends on our ability to make large capital expenditures for the
exploration of the property interests we have acquired.  We intend to
finance our foreseeable capital expenditures through additional fundings for
which we have no commitments at this time.  Future cash flows and the
availability of financing will be subject to a number of variables, such
as:


·
            the
      success of the leases;


·
            success
      in locating and producing new reserves;
and


·
            prices
      of oil.





Additional
financing sources will be required in the future to fund developmental and
exploratory drilling.  Issuing equity securities to satisfy our
financing requirements could cause substantial dilution to our existing
stockholders.  Additional debt financing could lead to:


·
            a
      substantial portion of operating cash flow being dedicated to the payment
      of principal and interest;


·
            the
      Company being more vulnerable to competitive pressures and economic
      downturns; and


·
            restrictions
      on our operations.





Financing
might not be available in the future, or we might not be able to obtain
necessary financing on acceptable terms, if at all.  If sufficient
capital resources are not available, we might be forced to curtail drilling and
other activities or be forced to sell some assets on an untimely or unfavorable
basis, which would have an adverse effect our business, financial condition and
results of operations.





The lack of
production and established reserves for our properties impairs our ability to
raise capital.  As of the date of this annual report, we have
not yet established reserves on any of our oil sands properties and are still in
the exploration stage, making it more difficult to raise the amount of capital
needed to fully exploit the potential of our properties.  Therefore,
we may have to raise capital on terms less favorable than we would
desire.  This may






10
 
  result in
increased dilution to existing stockholders.





We estimate that
even if our properties are determined to contain reserves in commercial
quantities, it will be several years before production could
commence.  Our properties are located in a part of the province
of Alberta that is accessible only during the winter
months.  Accordingly, we can conduct exploration drilling activities
only during a few months of the year.  We will also need to build the
necessary facilities, either alone or with other resource companies in the area,
if we undertake development activities on these
properties.  Accordingly, as is the case with other oil sands
projects, production is several years from initial exploration.





We have decided
to focus our efforts on only a few oil sands projects.  This lack of
diversification may impair our ability to achieve successful operations and make
us more vulnerable to downturns in this specific industry.  In
March 2007, we disposed of other oil sands assets and conventional oil and gas
properties that we owned in order to focus our efforts and resources on the
Dover, Firebag and Muskwa properties.  As a result, we are subject to
the risks inherent in investing in a single asset class.  Unforeseen
events adversely affecting this particular geographic area or this specific
industry, such as weather or legislative changes, may have more pronounced
effects on us and our business plan than if we had diversified our activities
and assets across different types of resource properties.





The development
of oil and gas properties involves substantial risks that may result in a total
loss of investment.  The business of exploring for and
producing oil and gas involves a substantial risk of investment loss that even a
combination of experience, knowledge, and careful evaluation may not be able to
overcome.  Drilling oil and gas wells involves the risk that the wells
will be unproductive or that, although productive, the wells do not produce oil
and/or gas in economic quantities.  There is no way to predict in
advance of drilling and testing whether any prospect encountering oil or gas
will yield oil or gas in sufficient quantities to cover drilling or completion
costs or to be economically viable.  The seismic data, other
technologies, and the study of producing fields in the area do not enable us to
know conclusively prior to drilling that oil and gas will be present, or if
present, if it is in commercial quantities.  We cannot assure anyone
that the analogies that we draw from available data from other wells, more fully
explored prospects, or producing fields will be applicable to our drilling
prospects.





Other
hazards, such as unusual or unexpected geological formations, pressures, fires,
blowouts, loss of circulation of drilling fluids or other conditions may
substantially delay or prevent completion of any well.  Adverse
weather conditions can also hinder drilling operations.





If we are not the
operator of our wells, we will have little or no control over the
project.  If we are not the operator of the wells in which we
have an interest, we will have limited or no control over the
project.  More specifically, we will have limited or no control over
the following:


·
            the
      timing of the drilling and recompleting of
  wells;


·
            the
      timing and amounts of production;
and


·
            the
      development and operating costs.





We are subject to
environmental regulations that can adversely affect the timing and cost of our
operations.  In general, our exploration activities are subject
to certain federal, state, provincial and local laws and regulations relating to
environmental quality and pollution control.  Such laws and
regulations increase the costs of these activities and may prevent or delay the
commencement or continuation of a given operation.  Compliance with
these laws and regulations has not had a material effect on our operations or
financial condition to date.  Specifically, we are subject to
legislation regarding emissions into the environment, water discharges, and
storage and disposition of hazardous wastes.  In addition, legislation
has been enacted which requires well and facility sites to be abandoned and
reclaimed to the satisfaction of government authorities.  As of this
date, we are unable to predict the ultimate cost of compliance.





We are subject to
governmental regulations that may adversely affect the cost of our
operations.  Oil and gas exploration, development and
production are subject to various types of regulation by local, state,
provincial and federal agencies.  Legislation affecting the oil and
gas industry is under constant review for amendment and
expansion.  Also, numerous departments and agencies, at federal,
province and state levels, are authorized by statute






11
 
  to issue
and have issued rules and regulations binding on the oil and gas industry and
its individual members, some of which carry substantial penalties for failure to
comply.  The regulatory burden on the oil and gas industry increases
our cost of doing business and, consequently, affects our
profitability.  The possibility exists that laws and regulations
enacted in the future will adversely affect the oil and gas
industry.  Such new legislation or regulations could drive up the cost
of doing business to the point where our projects would not be economically
feasible.





Most
areas in which we own and operate properties have statutes, rules and
regulations governing conservation matters including the unitization or pooling
of oil and gas properties, establishment of maximum rates of production from oil
and gas wells and the spacing of such wells.





Our competitors
may have greater resources that could enable them to pay a higher price for
properties.  The oil and gas industry is intensely competitive
and we compete with other companies that have greater resources.  Many
of such companies not only explore for and produce crude oil and natural gas but
also carry on refining operations and market petroleum and other products on a
worldwide basis.  Such companies may be able to pay more for
productive oil and natural gas properties and exploratory prospects, and to
define, evaluate, bid for and purchase a greater number of properties and
prospects than our financial or human resources permit.  Our ability
to acquire additional properties and to discover reserves in the future will be
dependent upon our ability to evaluate and select suitable properties, to obtain
funding and to consummate transactions in a highly competitive
environment.  There is also competition between the oil and gas
industry and other industries with respect to the supply of energy and fuel to
industrial, commercial and individual customers.  At this stage of our
development, we cannot predict if we will be able to compete effectively against
such companies.





Our future
operating results may fluctuate and cause the price of our common stock to
decline, which could result in substantial losses for
investors.  Our limited operating history and the lack of
production or reserve reports on our properties make it difficult to predict
accurately our future operations.  We expect that our operating
results will fluctuate significantly from quarter to quarter, due to a variety
of factors, many of which are beyond our control.  If our operating
results fall below the expectations of investors or securities analysts, the
price of our common stock could decline significantly.  The factors
that could cause our operating results to fluctuate include, but are not limited
to:


·
            worldwide
      or regional demand for energy;


·
            domestic
      and foreign supply of natural gas and
oil;


·
            weather
      conditions;


·
            domestic
      and foreign governmental
regulations;


·
            political
      conditions in natural gas or oil producing
  regions;


·
            price
      and availability of alternative
fuels;


·
            availability
      and cost of drilling equipment;


·
            our
      ability to establish and maintain key relationships with lessors, drilling
      partners and drilling funds;


·
            the
      amount and timing of operating costs and capital expenditures relating to
      maintaining our business, operations, and infrastructure;
    and


·
            general
      economic conditions and economic conditions specific to the energy
      sector.





These and
other external factors have caused and may continue to cause the market price
and demand for our common stock to fluctuate substantially, which may limit or
prevent investors from readily selling their shares of common stock and may
otherwise negatively affect the liquidity of our common stock.





In the
past, securities class action litigation has often been brought against
companies following periods of volatility in the market price of their
securities.  If securities class action litigation is brought against
us it could result in substantial costs and a diversion of our management’s
attention and resources, which could hurt our business.





Our common stock
is subject to penny-stock regulation that may affect the liquidity for our
common stock.  Our common stock is subject to regulations of
the SEC relating to the market for penny stocks.  These regulations
generally require that a disclosure schedule explaining the penny stock market
and the risks associated therewith be delivered to purchasers of penny stocks
and impose various sales practice requirements on broker-






12
 
  dealers
who sell penny stocks to persons other than established customers and accredited
investors.  The regulations applicable to penny stocks may severely
affect the market liquidity for our common stock and could limit your ability to
sell your securities in the secondary market.





Trading in our
Common Stock on the Over-the-Counter Bulletin Board (the “OTCBB”) may be
limited, making it more difficult for investors to resell their shares of our
Common Stock.  Our Common Stock is quoted on the
OTCBB.  The OTCBB is not an exchange and, because trading of
securities on the OTCBB is often more sporadic than the trading of securities
listed on an exchange or NASDAQ, you may have difficulty reselling any of the
shares that you own.





Future
legislative changes pertaining to the Alberta crown royalty structure may have a
material impact on our ability to obtain financing and therefore limit our
future capital programs.  On September 18, 2007, the Alberta
Royalty Review Panel released its report providing non-binding recommendations
on modifications to the Alberta provincial royalty regime.  The report
called for significantly higher royalty rates.  On October 25, 2007,
the Alberta provincial government publicly responded to the recommendations and
provided a framework for Alberta’s new royalty regime, which is to take effect
in January 2009.  The proposed amendments result in higher royalty
rates; however, the economic impact to the oil sands sector is not expected to
be overly significant to future profitability.  The Company’s oil
sands projects are still financially attractive and management intends to
proceed with development plans.  However, it is not possible to
predict the market response over the long term in light of this new royalty
framework, or to ensure our ability to raise capital to proceed with our
projects.





ITEM
1B.         UNRESOLVED STAFF
COMMENTS





None.





ITEM
2.           
PROPERTIES





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 Technologies reservoir model were
considered in the course of completing our independent engineering appraisal
performed by McDaniel & Associates Consultants Ltd.





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
2009.  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 fund our 2008-2009 contemplated
operating and capital expenditures, which includes drilling of additional core
holes and a 2D and/or 3D seismic program.  We do not have any
commitments for additional financing as of this date.


Firebag
Oil Sands Area





In
townships 91/92 and ranges 2W4, we have 18 gross section (13.5 net) of oil sands
leases in the Firebag






13
 
  area.  Based
on the results of the 2006 – 2007 exploration program for Firebag, we expensed a
substantial portion of our investment in Firebag and we have no current plans
for further exploration.  The project will be kept in inventory at a
value of $315,394.





Muskwa
Oil Sands Area





In
townships 85/86 and ranges 24/25W4, we have 10 gross sections (9.5 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.





Leismer
Oil Sands Area





We have
21⁄2 gross sections (1.9 net) of land in Leismer area which is south of Fort
McMurray.  The property has one core hole that has been
drilled.  This property has not yet been assessed and we have no
current plans for further exploration.  The project will be kept in
inventory.





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





In the
past, we generated all of our oil production from the properties sold to Great
Northern.  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 31,2008
            2007
            2006
            2005Oil
      production (Bbl)
            103
            2,275
            3,515.5
            3,558.4Average
      sales price per Bbl
            $79.59
            $50.68
            $58.75
            $45.34Average
      production costs per Bbl
            $81.71
            $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, 2008.  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
      AcresArea
            Gross
            Net
            
            Gross
            NetAlberta
            40,000
            32,320
            
            -
            -





14


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.





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 2008-2009
drilling program.





Properties Sold
to Great Northern.  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 Leismer 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





In
January 2008, we retained CIBC World Markets Inc. as our exclusive financial
advisor to assist in exploring our alternatives, which may include the sale of
our company, merger, reorganization or such other alternatives that are
considered to be in the best interest of our stockholders.  We
continue to pursue our alternatives with CIBC World Markets Inc.





In
pursuing our alternatives, we are looking for candidates that will continue to
focus on the oil sands lease development within the Ells River area as described
above.  We intend for a candidate to 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 2009.  In addition to
the exploration, the candidate 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 are looking for a candidate 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 1670, 700 – 2nd Street
SW Avenue, Calgary, Alberta Canada T2P 2W1.  This space accommodates
all of its executive and administrative offices.





ITEM
3.          LEGAL
PROCEEDINGS





RCS Energy Inc.
(“RCS”).On April 8, 2008, RCS filed an Amended Statement of
Claim and an amended Certificate of Lis Pendens in the Court of Queen’s Bench of
Alberta Judicial District of Calgary between RCS as Plaintiff and Patch Energy
Inc., Patch International Inc., Standard Land Company Inc. and Petroland
Services (1986) Ltd. as Defendants seeking judgment for loss and damage in the
amount of $305,307.06 (Cdn.) and interest plus costs related to alleged labor,
material and oilfield services provided to Defendants with respect to the
development of certain oil sands leases.  We filed a Statement of
Defense and Counterclaim on May 16, 2008 seeking damages in the amount of
$2,400,000 (Cdn.) plus interest and costs.  RCS has also filed
liens against certain of our land interests in relation to its
claim.  The ultimate outcome of this litigation cannot presently be
determined and, accordingly, the financial statements have not been adjusted to
allow for a potential loss from the claim.  We intend to vigorously
contest the claim.


Royal Camp Services Ltd. (“Royal
Camp”).On April 16, 2008, Royal Camp field a Statement of
Claim in the Court of Queen’s Bench of Alberta Judicial District of Edmonton
against Patch Energy Inc. and Patch International Inc. seeking damages of
$1,344,615.76 (Cdn.), plus interest and costs relating to unpaid invoices with
respect






15
 
  to the
construction and demobilization of a work camp.  Royal Camp has also
filed liens against certain of our land interests in relation to its
claims.  We have filed a defense and counterclaim in relation to the
damages caused by the filing of the liens.  As this matter is in the
early stages of litigation the likelihood of success is undeterminable, the
financial statements have not been adjusted to allow for a potential loss from
the claim.  We intend to vigorously contest the
claim.





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





On May
30, 2008, we held a special meeting of the stockholders at Suite 1100, 400 –
3rd
Avenue S.W., Calgary, Alberta, Canada T2P 4H2, at 10:00 a.m. Mountain Standard
time, to consider a proposal to change the place of incorporation of our company
from Nevada to Alberta, Canada.  A majority of the stockholders
entitled to vote at the special meeting was represented at the special meeting
by proxy or in person.  At the special meeting, we received 22,881,014
votes “FOR”, 227,777 votes “AGAINST”, 13,149 votes “ABSTAIN” and no Broker
Non-Votes on the proposal to move our place of incorporation to Alberta,
Canada.





PART
II





ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER 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, 2007 and 2008 and for the first two fiscal quarters of the current
fiscal year.  These quotations reflect inter-dealer prices without
retail mark-up, markdown, or commissions and may not necessarily represent
actual transactions.





Bid
      Prices ($)High
            Low2007 Fiscal
      Year:August
      31, 2006
            $1.85
            $0.81November
      30, 2006
            $1.02
            $0.58February
      28, 2007
            $2.74
            $0.84May
      31, 2007
            $2.56
            $1.502008 Fiscal
      Year:August
      31, 2007
            $2.48
            $1.12November
      30, 2007
            $1.36
            $0.68February
      29, 2008
            $0.74
            $0.30May
      31, 2008
            $0.53
            $0.24





On August
26, 2008, the closing bid price for the common stock was $0.135.  The
number of record holders of our common stock, as of August 26, 2008, was 431
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
 
 None.


16


ITEM
6.          SELCECTED FINANCIAL
DATA





Not
applicable.





ITEM 7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





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.


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






17
 
  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





On
January 22, 2008, we announced that the board of directors has unanimously
approved a process to review strategic alternatives to maximize stockholder
value.  The board of directors has retained CIBC World Markets Inc. as
its exclusive financial advisor to assist in exploring strategic
alternatives.  These alternatives may include the sale of the company,
merger, reorganization or such other alternatives that are considered to be in
the best interest of Patch stockholders.  The Board of Directors
remains committed to maximizing stockholder value as a result of this
process.  The process has yielded a number of competitive proposals,
which are under review by the Board of Directors.  Negotiations with
potential counterparties are underway.  However, there is no assurance
that a definitive agreement will be reached.





During
the year ended May 31, 2008, we expended $1.4 million on equipment and
exploration of our properties.  We believe that significant additional
financing is required to continue to develop our properties.  We
believe that engaging in a strategic alternative, such as selling or merging our
Company with another entity, will improve our financing options and accelerate
the development of our properties.  We are reviewing several possible
candidate companies as sale or merger prospects.  There can be no
assurances that we will be able to complete a strategic alternative transaction,
such as sale or merger of our Company.





We have
received, from the TSX Venture Exchange (the “Exchange”)
conditional approval for the listing of our common shares on the
Exchange.  The listing of the shares is conditional on us fulfilling
certain requirements.





If we are
unsuccessful in completing a strategic alternative transaction, we may seek
other options to allow us to continue the development of our
properties.  We are still evaluating the options that may be available
to us to accomplish such development.  If we do develop the properties
ourselves, we intend to focus on the oil sands lease development within the Ells
River area.  Such 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.  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.  Within
the Muskwa property, exploration activities may include drilling and testing of
oil samples for viscosity and pressure transient analysis.





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






18
 
  current
events and actions the Company may undertake in the future, actual results may
differ from the estimates. Amounts recorded for oil and gas interests and asset
retirement obligations are based upon estimated future costs, cash flows and
other relevant assumptions. By their nature, these estimates are subject to
measurement uncertainty, and the impact on the financial statements of future
periods could be material.





Marketable
Securities.  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.





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.





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 depreciation, 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.





Flow-through
Shares.  A portion of our exploration activities have been
financed through the issuance of flow-through common shares and
warrants.  Under the terms of these issuances, the related resource
expenditure deductions are renounced to the stockholder in accordance with
income tax legislation in Canada.  Upon issuance 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 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 recognized on issuance.





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






19
 
  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 of May 31, 2008, comprehensive income included foreign
currency translation adjustments.  As of May 31, 2007, the components
of comprehensive income included unrealized holding gains and losses on
available-for-sale securities and foreign currency translation
adjustments.





Stock-Based
Compensation.  Effective June 1, 2006, we 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 is recognized 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.





Recently
Issued Accounting Pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141R,
“Business Combinations” and SFAS No. 160, “Non-Controlling Interests in
Consolidated Financial Statements”.  The new statements require most
identifiable assets, liabilities, non-controlling interests, and goodwill
acquired in a business combination to be recorded at “full fair value” and
require non-controlling interests to be reported as a component of equity, which
changes the accounting or transactions with non-controlling interest
holders.  Both statements are effective for periods beginning on or
after December 15, 2008.  We are in the process of reviewing the
requirements of this recent statement.





In
February 2007, the 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 the financial position, results of operations and cash flows
of the Company.


20


In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. The
objective of SFAS No. 157 is to increase consistency and comparability in fair
value measurements and to expand disclosures about fair value
measurements.  SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements.  SFAS No. 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
February 2008, the FASB issued SFAS No. 157-2, “Effective Date of FASB Statement
No. 157”.  This FASB Staff Position (FSP) delays the effective
date of FASB Statement No. 157, “Fair Value Measurements”,
for non-financial assets and non-financial liabilities, except for items that
are recognized at fair value in the financial statements on a recurring basis
(at least annually) to fiscal years beginning after November 15,
2008.  The delay is intended to allow the Board and constituents
additional time to consider the effect of various implementation issues that
have arisen, or may arise, from the application of FASB No. 157.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities - An Amendment of FASB Statement No.
133.”  This statement is intended to improve financial
reporting of derivative instruments and hedging activities by requiring enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS No.
133 and its related interpretations and (c) how derivative instruments and
related hedged items affect an entity's financial position, financial
performance and cash flows.  The provisions of SFAS No. 161 are
effective for fiscal years beginning after November 15, 2008.  SFAS
No. 161 will be effective for the Company on January 1, 2009.  We plan
to provide these additional disclosures in the first quarter of
2009.





In May
2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted
Accounting Principles”.  SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States.  SFAS No. 162 is effective sixty days following the
SEC’s approval of PCAOB amendments to AU Section 411, “The Meaning of ‘Present fairly in
conformity with generally accepted accounting principles’”.  We
are currently evaluating the potential impact, if any, of the adoption of SFAS
No. 162 on our consolidated financial statements.





Results
of Operations





We
continue to hold one minor producing property, at MacLeod, Alberta, Canada, and
during the year ended May 31, 2008, this property generated revenue of $8,199
and incurred oil and gas production and royalty expense of $61,289 for a net
operating loss of $53,090.  This compared to a net operating loss of
$14,598 during the year ended May 31, 2007.





General
and administrative costs for the year ended May 31, 2008 totaled $3,819,216
compared to $6,621,338 during the same period of 2007.  The decrease
in general and administrative costs relates to a reduction in non-cash charges
combined with our decreased activity levels.  The non-cash component,
related to stock-based compensation, included in general and administrative
costs totaled $1,349,804 for the year ended May 31, 2008 compared to $3,136,343
during the previous year.  The balance of the decrease in general and
administrative costs is attributed to reduced activity levels during the
period.





During
the year ended May 31, 2008, we recorded interest expense of $230,020 (2007 –
$53,038) which represents the accrued interest charges on the outstanding income
tax payable amount.  The income tax payable relates to the Australian
taxes payable on the prior year gain from the sale of the Pharmaxis Ltd.
shares.





Depletion,
depreciation, accretion and impairment of oil and gas interests, dry hole costs
and geological and geophysical costs totaled $3,206,986 during the year ended
May 31, 2008 compared to $13,220,687 during the year ended May 31,
2007.  Included for the year ended May 31, 2008, was a charge for
depletion, depreciation, accretion and impairment of oil and gas interests of
$2,419,860, reflecting a reduction in the market value of our undeveloped
lands.  In accordance with the






21
 
  guidelines
surrounding successful efforts method of accounting we have expensed all
geological and geophysical costs incurred and dry hole costs (primarily
associated with the Firebag Oil Sands Project).





We earned
interest and other income of $112,319 in the year ended May 31, 2008 compared to
$206,749 during 2007.  Interest income was earned primarily through
the short-term investment of available cash balances.





We
recorded financing costs of $946,853 during the year ended May 31, 2008 compared
to $633,263 during 2007.  These costs are associated with the
amortization of the Black-Scholes fair value of the Agents’ Warrants issued in
connection with the private placement of Special Warrants and Flow-through
Special Warrants.





During
2008, we recorded a holding gain of $18,178,828 resulting from the difference
between the fair market value of the Exchangeable Shares, Special Warrants,
Flow-through Special Warrants, Agents’ Warrants, and Bonus Warrants at September
14, 2007 and the recorded values at May 31, 2007.  In 2007, 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 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 Special Warrant and $2.23 per
Flow-through Special Warrants).





We
recorded a holding loss on marketable securities of $802,647 relating to the
shares that we hold in Great Northern Oilsands Inc. (as described in Note 5 of
the Consolidated Financial Statements) compared to $1,045,921 during
2007.  In 2008 and 2007, the holding loss is primarily the result of
the decrease in the market value of the Great Northern common stock we received
in the sale of our assets to Great Northern.





We
recorded a gain on foreign exchange of $3,293,143 during the year ended May 31,
2008 compared to $2,620,571 during 2007 as a result of the appreciation in the
value of the Canadian dollar in comparison to the United States
dollar.  A foreign exchange loss of $430,998 was recorded for the year
ended May 31, 2008, relating to the Australian taxes payable on the prior year
gain from the sale of the Pharmaxis Ltd. shares.





During
the year ended May 31, 2007, we recorded a gain before applicable taxes of
$13,684,318 on the sale of 6,791,937 Pharmaxis Ltd. shares.  As of May
31, 2007, we did not own any shares of Pharmaxis Ltd. and we were not involved
in any transactions during the year ended May 31, 2008 which involved Pharmaxis
Ltd. shares.





Net
income for the year ended May 31, 2008 was $11,868,208 ($0.32 per share basic
and $0.28 per share diluted) compared to a net loss of $18,622,212 ($1.05 per
share basic and diluted) for year ended May 31, 2007.  As described
above, net income for the year ended May 31, 2008 includes a one-time holding
gain of $18,178,828.





Other
comprehensive income comprised a foreign currency translation adjustment gain of
$58,598 in 2008, compared to $726,311 in 2007.  In 2007, other
comprehensive income also included a reclassification of holding gain of
$7,240,999 related to the sale of our Pharmaxis Ltd. shares.





Comprehensive
income for the year ended May 31, 2008 is $11,926,806 as compared to a
comprehensive loss of $25,136,900 during the year ended May 31,
2007.





Liquidity
and Capital Resources





For the
fiscal year ended May 31, 2008, we used cash of $4,951,401 in our operating
activities as compared to $24,290,924 used during the fiscal year ended May 31,
2007.  The decrease reflects significant reductions in general and
administrative costs, dry hole costs and geological and geophysical costs, and
related working capital changes.  Investing activities used cash of
$691,893 in 2008 as compared to $3,937,470 provided by investing activities in
2007.  We expended $654,207 on our oil and gas interests in 2008 as
compared to $10,123,071 in 2007.  In 2007, we realized gross proceeds
on the sale of available-for-sale Pharmaxis securities of
$13,684,319.





No
proceeds were received from financing activities in 2008.  During
2007, financing activities, net of expenses, provided $22,368,080 from the sale
of special warrants and common stock.  In 2007, we used $6,309 to
acquire shares of our common stock under our stock repurchase
plan.


22


On
September 14, 2007, our stockholders approved the increase in our authorized
capital stock.  As a result the Special Warrants, Flow-through Special
Warrants and Bonus Warrants were converted, for no additional consideration,
into 13,785,950 common shares.  In addition, the 9,926,489
Exchangeable Shares of the Company which were issued on the acquisition of
Damascus Energy Inc. and 1289307 Alberta Ltd. were reclassified on the balance
sheet to Stockholders’ Equity.  These shares are exchangeable into
common stock of the Company, for no additional consideration, upon direction by
the exchangeable stockholder.  As of May 31, 2008, we had a total of
35,775,724 common shares issued and outstanding.





At May
31, 2008, we had a working capital deficiency of $3,344,421 as compared to
working capital of $1,148,501 at May 31, 2007.  We no longer own any
available-for-sale securities, having sold the remainder of our Pharmaxis shares
in 2007.





Additional
financing will be required to fund future capital expenditures and to pay our
corporate obligations over the next 12 months.





Our
financial statements as at and for the year ended May 31, 2008 have been
prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business.  Presently we have a significant working capital deficiency,
virtually no production revenue, negative cash flows from operations, and at
this time all overhead expenses and exploration activities are financed through
the sale of equity securities.  Continuing operations and the recovery
of petroleum property costs is dependent up on our ability to access sufficient
funds to continue operations, identify commercial oil reserves, generate
profitable operations and complete development activities.





The
ultimate development of our oil and gas projects, if proven commercial, will
require additional funding and our existing cash balance and negative cash flow
from operating activities casts doubt on our ability satisfy our current
obligations and meet our capital investment commitments.  We are
exploring the availability of interim funding.  We are also reviewing
strategic alternative with CIBC World Markets Inc. to sell to, merge with, or
otherwise develop a relationship with a well-funded partner to assist in the
development of our properties.  The future development of our
properties and magnitude of its discretionary capital expenditure program will
be dependent on the results of efforts with CIBC World Markets
Inc.  The outcome of these matters cannot be predicted with certainty
at this time.





Contractual
Obligations





None.





Off-balance
Sheet Arrangements





None.





ITEM
7A.         QUANTITATIVE AND QUALITITIVE
DISCLOSURES ABOUT MARKET RISK





Not
Applicable.





ITEM
8.            FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA





See pages
beginning with page F-1.





ITEM 9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





On March
5, 2007, we appointed 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.


23


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
9A.          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.





As a
result of the departure of our Chief Financial Officer, the Chief Operating
Officer has also assumed the position of interim Chief Financial
Officer.  Our Chief Operating Officer and interim Chief Financial
Officer evaluated the overall design of internal control procedures during the
year ended May 31, 2008, and concluded that, because of its recent growth and
the inherent complexity of the accounting for some of its transactions, we do
not have sufficient specialized knowledge to address certain technical and
complicated accounting issues.  As a result, our consolidated
financial statements for 2008 contain recorded year-end material
adjustments.  We have, from time-to-time, augmented the consultants
used, which provide specialized financial reporting and taxation skills (who are
independent of management and our auditors) to assist us with financial
reporting of complex accounting issues and tax provision
calculations.  We have identified conditions as of May 31, 2008 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 employees engaged in the authorization,
recording, processing and reporting of transactions.  In particular,
we do not employ a full-time accounting professional.  Also, our
current processes and procedures require substantive manual intervention,
estimation and reliance on several sources of information that are not
integrated with our accounting system.  As a remedy to these
deficiencies the Chief Operating Officer and interim Chief Financial Officer
performs periodic reviews of financial information to ensure that transactions
are properly recorded.  We have taken steps to establish a stronger
control environment which will reduce the opportunity to override internal
controls.  Dual signatures are now required for all checks issued and
we have implemented a more formal process for the approval of all
disbursements.  Despite the implementation of these internal controls,
our internal control over financial reporting still has material
weaknesses.





24


Our
management has determined that, despite the material weaknesses in our internal
control, all matters to be disclosed in this report have been fully and
accurately reported.





Management’s
Annual Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting.  Internal control over financial
reporting is a process designed by, or under the supervision of, our chief
financial officer and implemented by our board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.





Our
evaluation of internal control over financial reporting includes an analysis
under the COSO framework, an integrated framework for the evaluation of internal
controls issued to identify the risks and control objectives related to the
evaluation of the control environment by the Committee of Sponsoring
Organizations of the Treadway Commission.





Based on
our evaluation described above, our management has concluded that our internal
control over financial reporting was not effective during the fiscal year ended
May 31, 2008.  Management has determined that (i) our inadequate
staffing and supervision, (ii) lack of adequate segregation of duties, and (iii)
the significant amount of manual intervention required in our accounting and
financial reporting process are material weaknesses in our internal control over
financial reporting.





This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation
requirements by our registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the company to
provide only management’s report on internal control over financial reporting in
this annual report.





Respectfully,


Jason
Dagenais, Chief Operating Officer and interim Chief Financial
Officer





ITEM
9B.         OTHER
INFORMATION





None.





PART
III





ITEM 10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





Our
executive officers and directors are as follows:





Name
            Age
            PositionJason
      G. Dagenais
            37
            Chief
      Operating Officer and interim Chief Financial OfficerDonald
      B. Edwards
            47
            Corporate
      SecretaryTerry
      R. Buchanan
            56
            Vice
      President of Exploration, Geoscience and ReservoirMark
      L. Bentsen
            48
            DirectorRoderick
      D. Maxwell
            45
            DirectorGreg
      L. Belzberg
            39
            Director





Effective
August 29, 2008, Michael S. Vandale tendered his resignation from the Board of
Directors and is no longer affiliated with the management of the
Company.





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.


25


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.





Jason G. Dagenais
- Chief Operating Officer and interim Chief Financial
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.





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.





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






26
 
 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.





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 stockholder
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 and Mark L. Bentsen, where Roderick D. Maxwell 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.





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 FiledDonald
      B. Edwards
            Form
      4 due February 5, 2008
            February
      12, 2008Greg
      L. Belzberg
            Form
      4 due February 5, 2008
            February
      12, 2008






27




Reporting
      Person
            Date
      Report Due
            Date
      Report Filed


Jason
      G. Dagenais
            Form
      4 due February 7, 2008
            February
      12, 2008Jason
      G. Dagenais
            Form
      4 due February 5, 2008
            February
      12, 2008Mark
      L. Bentsen
            Form
      4 due September 27, 2007
            October
      18, 2007Michael
      S. Vandale
            Form
      4 due February 5, 2008
            Not
      yet filedRoderick
      D. Maxwell
            Form
      4 due March 12, 2008
            March
      17, 2008Roderick
      D. Maxwell
            Form
      4 due February 5, 2008
            February
      12, 2008Terry
      R. Buchanan
            Form
      4 due February 5, 2008
            February
      12, 2008Terry
      R. Buchanan
            Form
      4 due October 2, 2007
            October
      11, 2007Thomas
      K. Rouse
            Form
      4 due February 5, 2008
            February
      12, 2008





ITEM
11.         EXECUTIVE
COMPENSATION.





Compensation
Discussion and Analysis





We
believe that the skill and dedication of our executive officers and other
management personnel are critical factors affecting our long-term success in
meeting our objectives and fostering growth and profitability.  In
support of this, compensation programs have been designed to attract and retain
a high level of talented leadership, to reward performance in accordance with
results, to provide an incentive for future performance and to align our
executives’ long-term interests with those of the stockholders.





Our
executive and key management compensation is comprised of two components: (i)
base salary adjusted annually by the Board of Directors, and (ii) stock option
grants awarded based on individual performance and the performance of our
Company.





The Board
of Directors compares all compensation components for executive officers, at
least annually, with data on similar positions at other organizations that are
similar in number of employees, level of operations, gross revenue and total
assets with which we compete for talent.  When evaluating external
competitiveness, third party survey data, as well as information from other
resources and industry contacts, are considered.  We use this data to
ensure that we are maintaining a level of compensation that is both commensurate
with our size and sufficient to retain personnel we consider
essential.  In reviewing comparative data, we do not engage in
benchmarking for the purpose of establishing compensation levels relative to any
predetermined point.  In the Board’s view, third party survey data
provides insight into external competitiveness, but is not an appropriate single
basis for establishing compensation levels.  This is primarily due to
differences in the size of comparable companies, and the lack of sufficient
appropriate matches to provide statistical relevance.  Our preference
is that performance, rather than third party survey data, drive executive
compensation.





In the
processes used by the Board to establish and adjust executive compensation
levels, third party survey data is considered, along with performance,
experience, potential and internal equity.  The Board can exercise
both positive and negative discretion in relation to the compensation awards and
its allocation between cash and non-cash awards.





The Board
analyzes compensation levels based on the components of our compensation program
set forth below.  The 2008-2009 compensation program may change in
light of our cash resources and other factors.





Base Salary – The base
salaries of the named executive officers are reviewed annually by the Board and
future salary adjustments are reviewed on an annual basis.  The Board
considers various factors, including, the position of the named executive
officer, the compensation of executive officers of comparable companies within
the oil sands industry, the performance of each executive officer, and increases
in responsibilities of each executive officer.  Salaries for the named
executive officers in fiscal 2008 are set forth in the “Summary Compensation
Table” below and were determined by the Board based on the considerations
described above.





Stock Option Awards – Stock
option awards are utilized for aligning the named executive officers’ interests
with those of the stockholders by giving ownership in our Company.  We
also believe that these awards serve as a






28
 
  retention
incentive since unvested stock options may be forfeited if the executive leaves
us.  Furthermore, vested stock options expire 30 days after an
executive leaves us.  The Board focuses on the earnings of our
Company, the return on stockholders’ equity, the growth in oil reserves and the
successful completion of specific projects to determine the level of stock
option awards, if any.





During
the fiscal year ended May 31, 2008, stock options were granted on February 1,
2008 to the named executive officers and the Board of Directors.  The
Committee considered the grants to be appropriate in order to compensate such
individuals for the responsibility and risk exposure assumed when serving in
such positions, especially in light of the current financial condition of the
Company.





The
following table sets forth information regarding the remuneration of our
executive officers during last three 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)
            2008
            $177,750
            -
            $52,000
            -
            $229,750Chief
      Operating Officer and
            2007
            $66,036
            -
            $152,252
            -
            $218,288Interim
      Chief Financial Officer
            2006
            -
            -
            -
            -
            -Terry
      R. Buchanan (3)
            2008
            $201,450
            -
            $65,000
            -
            $266,450VP
      of Exploration, Geoscience and Reservoir
            2007
            $74,841
            -
            $212,494
            -
            $287,3352006
            -
            -
            -
            -
            -Donald
      B. Edwards (4)
            2008
            -
            -
            $26,000
            -
            $26,000Secretary
            2007
            -
            -
            $212,239
            -
            $212,2392006
            -
            -
            -
            -
            -




(1)
            All
      options were valued using the Black-Scholes option pricing model using
      various assumptions as listed in the footnotes to the Grants of Plan-Based
      Awards 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.





The
following table presents information concerning each grant of an award made to
our executive officers in the last fiscal year under any plan:





GRANTS
OF PLAN-BASED AWARDS TABLE


Name
              (a)
            Grant
      Date
              (b)
            All
      Other Option Awards: Number of Securities Underlying Options (#)
      (f)
            Exercise
      or Base Price of Option Awards ($/Sh) (g)
            Grant
      Date Fair Value of Stock and Option Awards (h)Jason
      G. Dagenais
            2/1/2008
            200,000
            $0.35
            $52,000
      (1)Terry
      R. Buchanan
            2/1/2008
            250,000
            $0.35
            $65,000
      (1)Donald
      B. Edwards
            2/1/2008
            100,000
            $0.35
            $26,000
      (1)




(1)
            These
      options were valued using the Black-Scholes option pricing model with the
      following assumptions: expected option life: 5 years; risk-free interest
      rate: 4.02%; annual rate of quarterly dividends: 0.00%; and volatility:
      124%.





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:





29


OUTSTANDING
EQUITY AWARDS AT 2008 FISCAL YEAR-END TABLE


Option
      AwardsName
            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 DateJason
      G. Dagenais
            -
            200,000
      (1)
            -
            $0.35
            2/1/201366,666
            133,334
      (2)
            -
            $1.75
            5/17/201283,333
            166,667
      (3)
            -
            $1.20
            12/15/2011Terry
      R. Buchanan
            -
            250,000
      (1)
            -
            $0.35
            2/1/201383,333
            166,667
      (2)
            -
            $1.75
            5/17/2012116,666
            233,334
      (3)
            -
            $1.20
            12/15/2011Donald
      B. Edwards
            -
            100,000
      (1)
            -
            $0.35
            2/1/201366,666
            133,334
      (3)
            -
            $1.20
            12/15/2011




(1)
            On
      February 1, 2008, we granted options to our officers and directors which
      are exercisable at $0.35 per share over 5 years and vest equally over 3
      years on the anniversary date.  The options were valued using
      the following assumptions: expected option life: 5 years; risk-free
      interest rate: 4.02%; annual rate of quarterly dividends: 0.00%; and
      volatility: 124%.


(2)
            On
      May 17, 2007, we granted options to our officers and directors options
      which are exercisable at $1.75 per share over 5 years and vest equally
      over 3 years on the anniversary date.  These options were valued
      using the Black-Scholes option pricing model with 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%.


(3)
            On
      December 15, 2006, we granted options to our officers and directors
      options which are exercisable at $1.20 per share over 5 years and which
      were subsequently amended to vest equally over 3 years on the anniversary
      date.  These options were valued using the Black-Scholes option
      pricing model with 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%.





As at May
31, 2008, there were no formal employment agreements with the current executive
officers.





Director
Compensation





During
fiscal 2008, each director who was not a full-time employee or consultant was
entitled to reimbursement for reasonable travel expenses incurred in connection
with such director’s attendance at Board of Directors and Committee
meetings.  We granted the directors options under our Stock Option
Plan.  The options vest one-third on each anniversary of the date of
grant.  The following table sets forth information regarding the
remuneration of our directors during the last completed fiscal
year:





DIRECTOR
COMPENSATION TABLE


Name
            Fees
      Earned or Paid in Cash
              ($)
            Stock
      Awards
              ($)
            Option
      Awards
              ($)
      (1)
            All
      Other Compensation
              ($)
            Total
              ($)Michael
      S. Vandale (2)
            -
            -
            $52,000
            -
            $52,000Mark
      L. Bentsen
            -
            -
            $52,000
            -
            $52,000Roderick
      D. Maxwell
            -
            -
            $52,000
            -
            $52,000Greg
      L. Belzberg
            -
            -
            $52,000
            -
            $52,000




(1)
            We
      granted 200,000 options to each of Michael Vandale, Mark Bentsen, Roderick
      Maxwell, and Greg Belzberg on February 1, 2008 which vest equally over 3
      years on the anniversary date. The options were valued using the following
      assumptions: expected option life: 5 years; risk-free interest rate:
      4.02%; annual rate of quarterly dividends: 0.00%; and volatility:
      124%.






30




(2)
            Michael
      Vandale was a director during the fiscal year ended May 31,
      2008.  Mr. Vandale resigned from our Board of Directors
      effective August 29, 2008.





ITEM 12.
            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
of the Exchangeable Shares.





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)
            10.9%Investors
      Group Trust Co.
              447
      Portage Avenue
              Winnipeg,
      Manitoba, Canada  R3C 3B6
            4,125,000
      (3)
            9.4%Citadel
      Equity Fund Ltd
              131
      S. Dearborn Street
              Chicago
      Illinois,  60603
            3,667,400
            8.3%Michael
      S. Vandale
              Suite
      300, 441 – 5th
      Avenue S.W.
              Calgary,
      Alberta, Canada  T2P 2V1
            2,341,667
      (4)
            5.3%Mark
      L. Bentsen
              Suite
      300, 441 – 5th
      Avenue S.W.
              Calgary,
      Alberta, Canada  T2P 2V1
            896,966
      (5)
            2.0%Greg
      Belzberg
              Suite
      300, 441 – 5th
      Avenue S.W.
              Calgary,
      Alberta, Canada  T2P 2V1
            666,666
      (6)
            1.5%Roderick
      D. Maxwell
              Suite
      300, 441 – 5th
      Avenue S.W.
              Calgary,
      Alberta, Canada  T2P 2V1
            513,666
      (7)
            1.2%Terry
      Buchanan
              Suite
      300, 441 – 5th
      Avenue S.W.
              Calgary,
      Alberta, Canada  T2P 2V1
            386,699
      (8)
            0.9%Jason
      G. Dagenais
              Suite
      300, 441 – 5th
      Avenue S.W.
              Calgary,
      Alberta, Canada  T2P 2V1
            251,199
      (9)
            0.6%Donald
      B. Edwards
              Suite
      300, 441 – 5th
      Avenue S.W.
              Calgary,
      Alberta, Canada  T2P 2V1
            236,666
      (10)
            0.5%Officers
      and directors as a group (7 persons)
            2,951,862
      (11)
            6.7%




(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 26, 2008, 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 43,952,213 shares of common
      stock that may be outstanding after conversion or exercise, without
      further consideration, of the Exchangeable
  Shares.


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


(3)
            Includes
      common stock 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.






31




(4)
            Michael
      Vandale was a director during the fiscal year ended May 31,
      2008.  Mr. Vandale resigned from our Board of Directors
      effective August 29, 2008.  Includes 2,075,000 Exchangeable
      Shares and 166,666 vested Stock
Options.


(5)
            Includes
      250,000 Exchangeable Shares, 116,666 vested Stock Options, and 330,300
      common shares owned by Teresa
Bentsen.


(6)
            Includes
      250,000 Exchangeable Shares, 116,666 vested Stock Options, and 200,000
      common shares owned by Bel Cal Holdings
Ltd.


(7)
            Includes
      250,000 Exchangeable Shares, 116,666 vested Stock Options, and 50,000
      common shares owned by 707106 Alberta
Ltd.


(8)
            Includes
      199,999 vested Stock Options.


(9)
            Includes
      149,999 vested Stock Options.


(10)
            Includes
      150,000 Exchangeable Shares and 66,666 vested Stock
    Options.


(11)
            Includes
      900,000 Exchangeable Shares and 766,662 vested Stock
      Options.  Excludes shares beneficially owned by Mr. Vandale
      because he resigned from our Board of Directors effective August 29,
      2008.





Equity
Compensation Plan Information





The
following table sets forth information as of the end of May 31,
2008:


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 issuance under equity
      compensation plansEquity
      compensation plans approved by security holders
            4,250,000
            $1.01
            145,221Equity
      compensation plans not approved by security holders
            -0-
            -0-
            -0-Total
            4,250,000
            $1.01
            145,221





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.





Changes
in Control
  None.


32





ITEM 13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE





Michael
Vandale





Effective
August 29, 2008, Michael Vandale tendered his resignation from the Board of
Directors and is no longer affiliated with the management of the
Company.  However, Michael Vandale was a director during the fiscal
year ended May 31, 2008, and the following disclosure relates to the related
party transactions entered into with 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.





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 $7,679, which
includes the promissory note payable to Mr. Vandale of $1,000,000 and a
receivable from Mr. Vandale of $1,000,000.





During
the year ended May 31, 2008, the Company advanced $66,726 on behalf of Cold
Creek Energy with respect to rent on office space.  Michael Vandale,
who was a then director of the Company, is also a director of Cold Creek
Energy.  As at May 31, 2008, the full amount remained outstanding and
the Company has made a full provision against the amount as a result of the
uncertainty of collectability.





David
Stadnyk





David
Stadnyk was formerly one of our officers and directors.  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 owed 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 NASDAQ Stock Market Rules.





ITEM
14.          PRINCIPAL ACCOUNTING
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,






33
 
  we
appointed 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, 2008 and 2007, the principal accountants for the
Company billed $227,500 and $253,700, respectively, for the audit of the annual
financial statements and review of financial statements included in the Form
10-Q filings of the Company and in connection with statutory and regulatory
filings for the fiscal years then ended.




Audit-Related
Fees





None.





Tax
Fees





For the
fiscal years ended May 31, 2008 and 2007, the principal accountants for the
Company billed $80,800 and $14,300, respectively, for tax compliance, tax
advice, and tax planning work for fiscal years 2007 and 2006.





All
Other Fees


None.
 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.





PART
IV





ITEM
15.          EXHIBITS


Regulation
              S-B
      Number
            Exhibit2.1
            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 stockholders 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 stockholders of 1289307 Alberta Ltd., Patch
      Energy Inc., Patch International Inc., and 1289307 Alberta Ltd. dated
      January 16, 2007 (4)3.1
            Articles
      of Incorporation, as amended (5)






34




Regulation
              S-B
      Number
            Exhibit


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)3.6
            Articles
      of Conversion filed with the Nevada Secretary of State
  (9)3.7
            Articles
      of Continuance filed with the Alberta Division of Corporations
      (9)3.8
            Certificate
      of Continuance from the Alberta Division of Corporations
    (9)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 (10)4.4
            Form
      of Flow-Through Special Warrant Certificate (10)4.5
            Form
      of Bonus Warrant Certificate (10)4.6
            Form
      of Agent Warrant Certificate (10)10.1
            2007
      Stock option Plan (11)10.2
            Exchange
      and Voting Trust Agreement among Patch International Inc., Patch Energy
      Inc., 1286664 Alberta Ltd., and the stockholders of Damascus Energy Inc.
      dated December 15, 2006 (3)10.3
            Support
      Agreement among Patch International Inc., Patch Energy Inc., and 1286664
      Alberta Ltd. dated December 15, 2006 (3)10.4
            Farmout
      Agreement Between Damascus Energy Inc. and Bounty Developments Ltd. dated
      November 30, 2006 (13)10.5
            Exchange
      and Voting Trust Agreement among Patch International Inc., Patch Energy
      Inc., 1286664 Alberta Ltd., and the stockholders of 1289307 Alberta Ltd.
      dated January 16, 2007 (4)10.6
            Support
      Agreement among Patch International Inc., Patch Energy Inc., and 1286664
      Alberta Ltd. dated January 16, 2007 (4)10.7
            Farmout
      Agreement dated December 12, 2006 (4)10.8
            Conveyance
      Agreement among 1289307 Alberta Ltd and 1286664 Alberta Ltd. dated
      December 21, 2006 (4)10.9
            Demand
      Promissory Note issued by 1289307 Alberta Ltd to 1286664 Alberta Ltd.
      dated December 21, 2006 (4)10.10
            Amending
      Agreement between Bounty Developments Ltd., 1286664 Alberta Ltd., and
      Damascus Energy Inc. dated January 22, 2007 (4)10.11
            Agency
      Agreement among Patch International Inc., Canaccord Capital Corporation
      and Wellington West Capital Markets Inc. dated February 27, 2007
      (10)10.12
            Amending
      Agreement between Bounty Developments Ltd., 1286664 Alberta Ltd., and
      Damascus Energy Inc. dated February 20, 2007 (13)10.13
            Amending
      Agreement between Bounty Developments Ltd. and 1286664 Alberta Ltd., dated
      April 16, 2007 (13)10.14
            Confirmation
      of Earning between Damascus Energy Inc. and Bounty Developments Ltd. dated
      April 16, 2007 (13)16
            Letter
      from Morgan & Company dated March 8, 2007 (14)21
            Subsidiaries
      of the registrant31.1
            Certification
      of Principal Executive and Financial Officer pursuant to Section 302 of
      Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”).32.1
            Certification
      of Principal Executive and 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.






35




(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 exhibit filed with the registrant’s current report on
      Form 8-K dated August 28, 2008, filed September 4,
  2008.


(10)
            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.


(11)
            Incorporated
      by reference to the exhibits filed with the registrant’s current report on
      Form 8-K dated Septeber 14, 2007, filed November 15,
  2007.


(12)
            Incorporated
      by reference to the exhibits filed with the registrant’s current report on
      Form 8-K/A dated September 14, 2007, filed November 28,
    2007.


(13)
            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.


(14)
            Incorporated
      by reference to the exhibits filed with the registrant’s current report on
      Form 8-K dated March 5, 2007, filed March 9,
  2007.





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
      11, 2008
            /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 and interim Chief Financial Officer
            September
      11, 2008Jason
      G. Dagenais
            (Principal
      Executive Officer and Financial Officer)/s/
      Mark L. Bentsen
            Director
            September
      11, 2008Mark
      L. Bentsen/s/
      Roderick D. Maxwell
            Director
            September
      11, 2008Roderick
      D. Maxwell/s/
      Greg L. Belzberg
            Director
            September
      11, 2008Greg
      L. Belzberg





36


























PATCH
INTERNATIONAL INC.














CONSOLIDATED
FINANCIAL STATEMENTS








MAY 31,
2008


(Stated
in U.S. Dollars)


F-1





Patch
      International Inc.May
      31, 2008IndexConsolidated
      Balance Sheets
            F-4Consolidated
      Statements of Operations
            F-5Consolidated
      Statements of Cash Flows
            F-6Consolidated
      Statements of Stockholders’ Equity (Deficit)
            F-7Notes
      to the Consolidated Financial Statements
            F-8











F-2





Independent Auditors’
Report





The Board
of Directors and Shareholders


Patch
International Inc.:





We have
audited the accompanying consolidated balance sheets of Patch International Inc.
as of May 31, 2008 and 2007 and the related consolidated statements of
operations, stockholders’ equity (deficit) and cash flows for the years 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 audits.





We
conducted our audits 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, 2008 and 2007, and the results of its operations and its cash flows
for the yearsthen
ended in conformity with U.S. generally accepted accounting
principles.





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.








/s/ KPMG
LLP





Calgary,
Canada


September
11, 2008












Patch
International Inc.


Consolidated
Balance Sheets


May
      31,
            
            
            May
      31,(U.S.
      Dollars)
            
            2008
            
            
            2007ASSETSCurrent
      AssetsCash
      and cash equivalents
            
            $
            1,020,464
            
            
            $
            6,590,466Accounts
      receivable
            
            
            394,489
            
            
            
            18,966Due
      from related parties (Note 5)
            
            
            1,007,679
            
            
            
            1,009,697Prepaid
      expenses and other
            
            
            259,200
            
            
            
            71,480Total
      Current Assets
            
            
            2,681,832
            
            
            
            7,690,609Marketable
      securities (Note 6)
            
            
            100,122
            
            
            
            850,000Joint
      venture receivable (Note 7)
            
            
            339,388
            
            
            
            323,394Property
      and equipment
            
            
            113,331
            
            
            
            98,916Oil
      and gas interests (successful efforts method) (Note 8)
            
            
            39,197,000
            
            
            
            37,658,925Total
      Assets
            
            $
            42,431,673
            
            
            $
            46,621,844LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      payable and accrued liabilities
            
            $
            1,579,473
            
            
            $
            2,756,345Income
      tax payable
            
            
            3,446,780
            
            
            
            2,785,763Due
      to related parties (Note 5)
            
            
            1,000,000
            
            
            
            1,000,000Total
      Current Liabilities
            
            
            6,026,253
            
            
            
            6,542,108Exchangeable
      shares (Note 9)
            
            
            -
            
            
            
            20,150,772Special
      warrants (Note 10)
            
            
            -
            
            
            
            26,505,862Asset
      retirement obligations (Note 11)
            
            
            148,134
            
            
            
            129,959Deferred
      income taxes (Note 15)
            
            
            924,335
            
            
            
            -Total
      Liabilities
            
            
            7,098,722
            
            
            
            53,328,701STOCKHOLDERS'
      EQUITYClass
      A Preferred Voting Stock (Note 12)
            
            
            -
            
            
            
            -1
      share authorized with par value of $0.01 per share;1
      share issued and outstandingClass
      B Preferred Voting Stock (Note 12)
            
            
            -
            
            
            
            -10,000
      shares authorized with par value of $0.01 per share;1
      share issued and outstandingCommon
      Stock (Note 13)300,000,000
      common shares authorized with par value of $0.001 per
share35,775,724
      shares issued and outstanding (May 31, 2007 - 20,239,774
      shares)
            
            
            35,776
            
            
            
            20,240Exchangeable
      shares (Note 9)
            
            
            10,302,376
            
            
            
            -Additional
      paid-in capital
            
            
            29,868,097
            
            
            
            10,111,507Stock
      subscriptions receivable
            
            
            -
            
            
            
            (38,500
            )Accumulated
      other comprehensive income
            
            
            896,468
            
            
            
            837,870Retained
      earnings (deficit)
            
            
            (5,769,766
            )
            
            
            (17,637,974
            )Total
      Stockholders' Equity
            
            
            35,332,951
            
            
            
            (6,706,857
            )Total
      Liabilities and Shareholders' Equity
            
            $
            42,431,673
            
            
            $
            46,621,844Future
      operations (Note 2)Contingencies
      (Note 18)The
      accompanying notes are an integral part of these consolidated financial
      statements




F-4


Patch
International Inc.


Consolidated
Statements of Operations


For
      the year ended May 31,(U.S.
      Dollars)
            
            2008
            
            
            2007RevenueOil
      and gas
            
            $
            8,199
            
            
            $
            15,581ExpensesOil
      and gas production and royalties (exclusive of depletion,depreciation
      and amortization which is shown below)
            
            
            61,289
            
            
            
            30,179General
      and administrative
            
            
            3,819,216
            
            
            
            6,621,338Interest
            
            
            230,020
            
            
            
            53,038Depletion,
      depreciation, accretion and impairment of oil and gas
    property
            
            
            2,419,860
            
            
            
            5,087,858Dry
      hole costs
            
            
            684,563
            
            
            
            5,664,773Geological
      and geophysical costs
            
            
            102,563
            
            
            
            2,468,056Total
      operating expenses
            
            
            7,317,511
            
            
            
            19,925,242Other
      income (expenses)Interest
      and other
            
            
            112,319
            
            
            
            206,749Financing
      costs (Note 10)
            
            
            (946,853
            )
            
            
            (633,263
            )Holding
      gain on exchangeable shares and special warrants (Notes 9 and
      10)
            
            
            18,178,828
            
            
            
            (14,161,373
            )Holding
      loss on marketable securities (Note 6)
            
            
            (802,647
            )
            
            
            (1,045,921
            )Gain
      on foreign exchange
            
            
            3,293,143
            
            
            
            2,620,571Loss
      on foreign exchange relating to current income taxes
    payable
            
            
            (430,998
            )
            
            
            -Gain
      on sale of marketable securities
            
            
            -
            
            
            
            13,684,318Gain
      on sale of investment in oil and gas assets
            
            
            -
            
            
            
            612,937Total
      other income
            
            
            19,403,792
            
            
            
            1,284,018Income
      (loss) before income taxes and discontinued operations
            
            
            12,094,480
            
            
            
            (18,625,643
            )Provision
      for income taxesCurrent
            
            
            -
            
            
            
            2,785,763Deferred(reduction)
            
            
            226,272
            
            
            
            (3,213,573
            )226,272
            
            
            
            (427,810
            )Income
      (loss) before discontinued operations
            
            
            11,868,208
            
            
            
            (18,197,833
            )Discontinued
      operations (Note 14)
            
            
            -
            
            
            
            (424,379
            )Net
      income (loss)
            
            
            11,868,208
            
            
            
            (18,622,212
            )Other
      comprehensive income (loss) (Note 16)Marketable
      securities:Reclassification
      to realized gain
            
            
            -
            
            
            
            (7,240,999
            )Holding
      gain
            
            
            -
            
            
            
            -Increase(decrease)
      in unrealized gain on marketable securities
            
            
            -
            
            
            
            (7,240,999
            )Foreign
      currency translation adjustment
            
            
            58,598
            
            
            
            726,311Other
      comprehensive income (loss) (Note 16)
            
            
            58,598
            
            
            
            (6,514,688
            )Comprehensive
      income (loss)
            
            $
            11,926,806
            
            
            $
            (25,136,900
            )Net
      income (loss) per shareBasic
            
            $
            0.32
            
            
            $
            (1.05
            )Diluted
            
            $
            0.28
            
            
            $
            (1.05
            )Weighted
      average number of common shares outstandingBasic
            
            
            37,129,504
            
            
            
            17,698,000Diluted
            
            
            42,146,571
            
            
            
            17,698,000The
      accompanying notes are an integral part of these consolidated financial
      statements




F-5


Patch
International Inc.


Consolidated
Statements of Cash Flows


For
      the year ended May 31,(U.S.
      Dollars)
            
            2008
            
            
            2007Operating
      ActivitiesNet
      income (loss)
            
            $
            11,868,208
            
            
            $
            (18,622,212
            )Adjustment
      of items not involving cashDepletion,
      depreciation, accretion and impairment of oil and gas
    property
            
            
            2,419,860
            
            
            
            5,087,858General
      and administrative
            
            
            -
            
            
            
            660,000Stock-based
      compensation
            
            
            1,349,804
            
            
            
            3,136,343Financing
      costs
            
            
            946,853
            
            
            
            633,263Holding
      gain on exchangeable shares and special warrants
            
            
            (18,178,828
            )
            
            
            14,161,373Gain
      on sale of marketable securities
            
            
            -
            
            
            
            (13,684,318
            )Holding
      loss on marketable securities
            
            
            802,647
            
            
            
            1,045,921Gain
      on sale of investment in oil and gas assets
            
            
            -
            
            
            
            (612,937
            )Gain
      on foreign exchange
            
            
            (3,293,143
            )
            
            
            (2,620,571
            )Deferred
      (reduction) income taxes
            
            
            226,272
            
            
            
            (3,213,573
            )(Increase)
      decrease in accounts receivable
            
            
            (391,517
            )
            
            
            (5,087
            )(Increase)
      decrease in prepaid expenses and other
            
            
            (187,720
            )
            
            
            2,671Decrease
      in due from related parties
            
            
            2,018
            
            
            
            (95,379
            )Decrease
      in accounts payable and accrued liabilities
            
            
            (1,176,872
            )
            
            
            (10,762,151
            )Increase
      (decrease) in income taxes payable
            
            
            661,017
            
            
            
            604,763Net
      cash used in continuing operations
            
            
            (4,951,401
            )
            
            
            (24,284,036
            )Discontinued
      operations
            
            
            -
            
            
            
            (6,888
            )Net
      cash used in operating activities
            
            
            (4,951,401
            )
            
            
            (24,290,924
            )Investing
      ActivitiesThird
      party contribution to limited partnership
            
            
            -
            
            
            
            (306,901
            )Deposit
            
            
            -
            
            
            
            -Purchase
      of equipment
            
            
            (37,686
            )
            
            
            (88,619
            )Net
      proceeds on sale of subsidiary and limited partnership
            
            
            -
            
            
            
            771,742Oil
      and gas interests
            
            
            (654,207
            )
            
            
            (10,123,071
            )Proceeds
      on sale of marketable securities
            
            
            -
            
            
            
            13,684,319Net
      cash used in investing activities
            
            
            (691,893
            )
            
            
            3,937,470Financing
      ActivitiesProceeds
      from special warrants
            
            
            -
            
            
            
            18,759,033Proceeds
      from common stock
            
            
            -
            
            
            
            3,609,047Acquisition
      of treasury stock
            
            
            -
            
            
            
            (6,309
            )Net
      cash provided by financing activities
            
            
            -
            
            
            
            22,361,771Effect
      of exchange rate changes on cash
            
            
            73,292
            
            
            
            108,705Change
      in cash and cash equivalents for the year
            
            
            (5,570,002
            )
            
            
            2,117,022Cash
      and cash equivalents, beginning of year
            
            
            6,590,466
            
            
            
            4,473,444Cash
      and cash equivalents, end of year
            
            $
            1,020,464
            
            
            $
            6,590,466CASH
      AND CASH EQUIVALENTS CONSISTS OF:Cash
      in bank
            
            
            226,971
            
            
            
            304,821Term
      deposits
            
            
            793,493
            
            
            
            6,285,645$
            1,020,464
            
            
            $
            6,590,466SUPPLEMENTAL
      CASH FLOW INFORMATIONTaxes
      paid
            
            $
            -
            
            
            $
            2,256,649Interest
      paid
            
            $
            -
            
            
            $
            49,525The
      accompanying notes are an integral part of these consolidated financial
      statements




F-6


Patch
International Inc.


Consolidated
Statements of Stockholders' Equity (Deficit)


AccumulatedAdditional
            
            
            Stock
            
            
            Other
            
            
            Retained
            
            
            TotalPreferred
      Stock
            
            
            Common
      Stock
            
            
            Exchangeable
            
            
            Paid-in
            
            
            Subscriptions
            
            
            Comprehensive
            
            
            Earnings
            
            
            Stockholders'Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Capital
            
            
            Receivable
            
            
            Income
      (Loss)
            
            
            (Deficit)
            
            
            EquityBalance,
      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 common stock, subsequently cancelled
            
            
            -
            
            
            $
            -
            
            
            
            (3,588
            )
            
            $
            (3
            )
            
            $
            -
            
            
            $
            (1,127
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            (3,624
            )
            
            $
            (4,754
            )Acquisition
      of common stock
            
            
            -
            
            
            $
            -
            
            
            
            (2,000
            )
            
            $
            (2
            )
            
            $
            -
            
            
            $
            (1,553
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            (1,555
            )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
            
            
            -
            
            
            $
            -
            
            
            
            20,239,774
            
            
            $
            20,240
            
            
            $
            -
            
            
            $
            10,111,507
            
            
            $
            (38,500
            )
            
            $
            837,870
            
            
            $
            (17,637,974
            )
            
            $
            (6,706,857
            )Conversion
      of special warrants and flow-through shares
            
            
            -
            
            
            $
            -
            
            
            
            12,955,750
            
            
            $
            13,122
            
            
            $
            -
            
            
            $
            15,629,382
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            15,642,504Conversion
      of bonus warrants
            
            
            -
            
            
            $
            -
            
            
            
            166,040
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Conversion
      of bonus warrants
            
            
            -
            
            
            $
            -
            
            
            
            664,160
            
            
            $
            664
            
            
            $
            -
            
            
            $
            (664
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Reclassify
      exchangeable shares to equity (note 9)
            
            
            -
            
            
            $
            -
            
            
            
            -
            
            
            $
            -
            
            
            $
            12,507,376
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            12,507,376Recovery
      of stock subscriptions receivable
            
            
            -
            
            
            $
            -
            
            
            
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            38,500
            
            
            $
            -
            
            
            $
            -
            
            
            $
            38,500Share
      issuance costs
            
            
            -
            
            
            $
            -
            
            
            
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            (1,898
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            (1,898
            )Stock-based
      compensation
            
            
            -
            
            
            $
            -
            
            
            
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,926,520
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,926,520Conversion
      of exchangeable shares
            
            
            -
            
            
            $
            -
            
            
            
            1,750,000
            
            
            $
            1,750
            
            
            $
            (2,205,000
            )
            
            $
            2,203,250
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Other
      comprehensive income
            
            
            -
            
            
            $
            -
            
            
            
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            58,598
            
            
            $
            -
            
            
            $
            58,598Net
      loss for the year
            
            
            -
            
            
            $
            -
            
            
            
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            11,868,208
            
            
            $
            11,868,208Balance,
      May 31, 2008
            
            
            -
            
            
            $
            -
            
            
            
            35,775,724
            
            
            $
            35,776
            
            
            $
            10,302,376
            
            
            $
            29,868,097
            
            
            $
            -
            
            
            $
            896,468
            
            
            $
            (5,769,766
            )
            
            $
            35,332,951


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





F-7
 Patch
International Inc.
 Notes to
the Consolidated Financial Statements
 May 31,
2008


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.





On May
30, 2008, the stockholders of the Company adopted a resolution to change its
jurisdiction of incorporation from the state of Nevada to the province of
Alberta, Canada at a special meeting called for the purpose of considering the
matter.  The Company must file documents with the state of Nevada and
the province of Alberta and await approval before the action will become
effective.





2.           FUTURE
OPERATIONS/GOING CONCERN





The
Company’s financial statements as at and for the year ended May 31, 2008 have
been prepared on a going concern basis, which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business.





Presently
the Company has a significant working capital deficiency, no significant
production revenue, has incurred negative cash flows from operations, and at
this time all overhead expenses and exploration activities are financed by way
of equity. Continuing operations and the recovery of petroleum property costs is
dependent on the Company’s ability to access sufficient funds to continue
operations, identify commercial oil reserves, generate profitable operations and
complete development activities. The Company intends to conduct additional
bridge financings to sustain its operations until it can merge with or be
acquired by a partner with sufficient capital to develop its
assets.  To this end, the Company has engaged CIBC World Markets Inc.
as its financial advisor.





The
Company’s ability to continue as a going concern is dependent upon obtaining the
necessary financing to conduct operations and complete development activities
and generate profitable operations from its oil interests in the future. The
Company used $5.0 million of cash flow in its operating activities for the year
ended May 31, 2008, had a working capital deficiency of $3.3 million (including
taxes payable of $3.4 million) and had an accumulated deficit of $5.8 million as
at May 31, 2008. The ultimate development of the Company’s oil and gas projects,
if


F-8
 Patch
International Inc.
 Notes to
the Consolidated Financial Statements
 May 31,
2008


proven
commercial, will require additional funding and the Company’s existing cash
balance and cash flow from operating activities may not be sufficient to satisfy
its current obligations and meet its capital investment commitments. The Company
intends to explore the availability of obtaining additional funding and the
magnitude of its discretionary capital expenditure program will be dependent on
such funding.  The outcome of these matters cannot be predicted with
certainty at this time.





Should
the going concern assumption not be appropriate and the Company is not able to
realize its assets and settle its liabilities and commitments in the normal
course of operations, these consolidated financial statements would require
adjustments to the amounts and classifications of assets and liabilities, and
these adjustments could be significant.





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.





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. Amounts recorded for oil and gas
interests and asset retirement obligations are based upon estimated future
costs, cash flows and other relevant assumptions. By their nature, these
estimates are subject to measurement uncertainty, and the impact on the
financial statements of future periods could be material.





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, 2008 and 2007.





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.





F-9
 Patch
International Inc.
 Notes to
the Consolidated Financial Statements
 May 31,
2008


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)          
O  il and
Gas Interests





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





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





g)           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. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset and depleted
and depreciated using a unit-of-production method over the estimated gross
proved reserves. Subsequent to the initial measurement of the asset retirement
obligations, the obligations are adjusted at the end of each year to reflect the
passage of time and changes in the estimated future cash flows underlying the
obligation.





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


F-10
 Patch
International Inc.
 Notes to
the Consolidated Financial Statements
 May 31,
2008


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, 2008, comprehensive income included foreign currency translation
adjustments. At May 31, 2007, the components of comprehensive income also
included unrealized holding gains and losses on available-for-sale securities
and foreign currency translation adjustments.





l)           Revenue
Recognition





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





m)           Income
Taxes





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





In June
2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (FIN 48), which clarifies the accounting for uncertainty in income
taxes recognized in a company’s financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes.”
The interpretation prescribes a recognition threshold and measurement attribute
criteria for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The interpretation also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.


The
Company adopted the provisions of FIN 48 on June 1, 2007. The adoption of
FIN 48 did not impact the consolidated financial condition, results of
operations or cash flows.





The
Company is currently open to audit under the statute of limitations by the
Internal Revenue Service for all tax periods from June 1, 1999 to May 31, 2008.
The Company’s Canadian subsidiary is currently open to audit under the statute
of limitations by the Canada Revenue Agency for all tax periods from February 1,
2002 to May 31, 2008. Two former Canadian subsidiary companies (subsequently
amalgamated with the surviving Canadian subsidiary) are currently open to audit
under the statute of limitations by the Canada Revenue Agency for all tax
periods from December 1, 2005 to May 31, 2007.





The
Company and its subsidiaries may from time to time be assessed interest or
penalties by major tax jurisdictions. In the event an assessment for interest
and/or penalties is received, it is classified in the financial statements as
general and administrative expense.


F-11
 Patch
International Inc.
 Notes to
the Consolidated Financial Statements
 May 31,
2008


n)           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.





o)           Basic
and Diluted Income (Loss) Per Share





The
Company computes income (loss) per share in accordance with SFAS No. 128 –
“Earnings Per
Share”.  Under the provisions of SFAS No. 128, basic income
(loss) per share is computed using the weighted average number of common stock
outstanding during the periods.  Diluted income (loss) per share is
computed using the weighted average number of common and potentially dilutive
common stock outstanding during the period.  Diluted per share amounts
reflect the potential dilution that could occur if securities or other contracts
to issue common shares were exercised or converted to common shares.
Anti-dilutive options and warrants are excluded from the
calculation.





4.           RECENT
PRONOUNCEMENTS





In
December 2007, the FASB issued SFAS 141R, "Business Combinations" and
SFAS 160, "Non-Controlling
Interests in Consolidated Financial Statements". The new statements
require most identifiable assets, liabilities, non-controlling interests, and
goodwill acquired in a business combination to be recorded at "full fair value"
and require non-controlling interests to be reported as a component of equity,
which changes the accounting or transactions with non-controlling interest
holders. Both statements are effective for periods beginning on or after
December 15, 2008. Management is in the process of reviewing the requirements of
this recent statement.





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. 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
February 2008, the FASB issued SFAS No. 157-2, “Effective Date of FASB Statement
No. 157”.  This FASB Staff Position (FSP) delays the effective
date of FASB Statement No. 157, “Fair Value Measurements”, for non-financial
assets and non-financial liabilities, except for items that are recognized at
fair value in the financial statements on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008.  The delay is
intended to allow the Board and constituents additional time to consider the
effect of various implementation issues that have arisen, or may arise, from the
application of FASB Statement No. 157.





F-12
 Patch
International Inc.
 Notes to
the Consolidated Financial Statements
 May 31,
2008


FASB
Statement No. 161, which amends FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, requires companies with derivative
instruments to disclose information about how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FASB Statement No. 133, and how derivative instruments and related
hedged items affect a company’s financial position, financial performance and
cash flows.  The required disclosures include the fair value of
derivative instruments and their gains or losses in tabular format, information
about credit-risk-related contingent features in derivative agreements,
counterparty credit risk, and the company’s strategies and objectives for using
derivative instruments.  The Statement expands the current disclosure
framework in Statement 133.  Statement 161 is effective prospectively
for periods beginning on or after November 15, 2008.  The Company
plans to provide these additional disclosures in the first quarter of
2009.





In May
2008, the FASB issued FAS No. 162 “The Hierarchy of Generally Accepted
Accounting Principles” (“FAS 162”).  FAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles in the United States.  FAS 162 is effective sixty days
following the SEC’s approval of PCAOB amendments to AU Section 411, “The Meaning of ‘Present fairly in
conformity with generally accepted accounting
principles’”.  The Company is currently evaluating the
potential impact, if any, of the adoption of FAS 162 on its consolidated
financial statements.





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 amounts
      are unsecured with no fixed terms of interest.  At, $1,007,679
      (May 31, 2007 - $1,009,697) was due from a former director of the
      Company.





b)
            During
      the year ended May 31, 2008, the Company advanced $66,726 on behalf of
      another company with respect to rent on office space. A former director of
      the Company is also a director of the other company. As at May 31, 2008,
      the full amount remained outstanding and the Company has made a full
      provision against the amount as a result of the uncertainty of
      collectability.





c)
            During
      the year ended May 31, 2007, a then 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 owned by in 1289307 Alberta
      Ltd. (as disclosed in Note 9(b)) by the Company.  These
      properties were previously owned by a company controlled by this former
      officer who was at the time the sole director of the Company. The timing
      of payment is based on the completion of certain
    conditions.





d)
            During
      the year ended May 31, 2007, a then director of Energy received $244,840
      (CAD$283,019) in connection with the acquisition of Damascus Energy Inc.
      (see Note 9a)





e)
            During
      the year ended May 31, 2007, in connection with a private placement
      private placement completed, the Company, the Company paid a finder’s fee
      of 7% ($193,932 (CAD$224,350)), of which $114,428 (CAD$132,300) was paid
      to a then officer of the Company.  (see Note
  13a)





See also
note 19 – Subsequent event.





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.





6.           MARKETABLE
SECURITIES





As a part
of its sale of assets to Great Northern Oilsands Inc. (“GNOS”) (Note 14), the
Company received 1,000,000 Rule 144 restricted common shares of GNOS with a
value of $1,956,990 (CAD$2,100,000).  Effective April 16, 2007, GNOS
announced the consolidation of its common stock on a 50 to 1
basis.  On March 26, 2008, GNOS announced a reverse split of its
common stock on a 1000 for 1 basis and a name change to New Asia Gold
Corporation.  As a result, the Company holds 50,000 shares of New Asia
Gold Corporation at May 31, 2008 with a market value for the shares at May 31,
2008 of $100,122 (May 31, 2007 - $850,000).  The holding loss for the
year


F-13
 Patch
International Inc.
 Notes to
the Consolidated Financial Statements
 May 31,
2008


ended May
31, 2008 is $802,647.  These shares are held in trust for the Company
and have been classified as marketable securities.





Market
      ValueMay
      31, 2008
            
            
            May
      31, 200750,000
      ordinary shares -- New Asia Gold Corporation
            
            $
            100,122
            
            
            $
            850,000





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, 2008, the amount owing to the Company is
$339,388 (May 31, 2007 - $323,394).





8.           OIL
AND GAS INTERESTS





OIL
      AND GAS INTERESTS -- SUCCESSFUL EFFORTS METHODMay
      31,
            
            
            May
      31,2008
            
            
            2007Balance
      beginning of the year
            
            $
            37,658,925
            
            
            $
            2,964,017Expenditures
      and acquisitions
            
            
            1,441,333
            
            
            
            48,457,902Foreign
      currency translation adjustment
            
            
            3,303,728
            
            
            
            2,108,970Dispositions
            
            
            -
            
            
            
            (2,651,277
            )Depletion,
      depreciation and impairment of oil and gas property
            
            
            (2,419,860
            )
            
            
            (5,087,858
            )Dry
      well and abandoned interests
            
            
            (684,563
            )
            
            
            (5,664,773
            )Geological
      and geophysical costs
            
            
            (102,563
            )
            
            
            (2,468,056
            )Balance
      end of the year
            
            $
            39,197,000
            
            
            $
            37,658,925





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 (Ells) Oil Sands
Project.  Through additional drilling and seismic activity, the
Company has earned an 80% working interest on the Dover (Ells)
lands.





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.  Additional drilling and seismic activity has earned the
Company a 75% working interest on the Firebag lands.





During
the year ended May 31, 2007, the Company disposed of the majority of its
non-core conventional oil and gas asset base in the transaction with Great
Northern Oilsands Inc. (Note 14).  All properties retained by the
Company 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 and the
drilling costs associated with the Firebag properties as the drilling results on
the property did not support recoverability of these costs. The carrying value
of the Firebag properties at May 31, 2008 was $315,394.





F-14
 Patch
International Inc.
 Notes to
the Consolidated Financial Statements
 May 31,
2008


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.  Under the terms of the Share
      Exchange Agreement, because the Company did not have enough authorized
      shares to effect the transaction, Patch Energy Inc. (“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.  The Exchangeable Shares
      may 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 per
      share based upon the market price of the Company’s common shares at the
      closing date of the transaction.  During the current 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.  During the year ended May 31, 2007, 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 obligations
            
            
            (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





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.  Under the terms of the Share
      Exchange Agreement, since 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.  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 per
      share, based upon the market price of the Company’s common shares at the
      closing date of the transaction.





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(b)
            
            
            (1,000,000
            )Purchase
      price
            
            $
            1





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.


F-15
 Patch
International Inc.
 Notes to
the Consolidated Financial Statements
 May 31,
2008


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 $12,507,376 (May 31, 2007 - $20,150,772) and is based on the
market price of $1.26 per share on September 14, 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 share
settlement was not within the control of the Company prior to September 14, 2007
as shareholder approval was required.  As a result of receiving
shareholder approval to increase the authorized capital stock of the Company, at
the Special Meeting of Stockholders held on September 14, 2007, the balance at
this date has been reclassified to exchangeable shares, a component of
stockholder's equity.





Exchangeable
      shares:
            
            Issued
            
            
            Issue
      Price
            
            
            
            $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
            
            
            -
            
            
            
            
            
            
            
            7,047,807Balance,
      May 31, 2007
            
            
            9,926,489
            
            
            
            
            
            
            
            20,150,772Fair
      value adjustment (to September 14, 2007)
            
            
            -
            
            
            
            
            
            
            
            (7,643,396
            )Conversion
      to common shares
            
            
            (1,750,000
            )
            
            
            
            
            
            
            (2,205,000
            )Balance,
      end of year
            
            
            8,176,489
            
            
            
            
            
            
            
            10,302,376





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 entitled 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.  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 issued to
satisfy the exercise of the Bonus Warrants 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 shares of the Company’s common
stock.





On
September 14, 2007, the Company received shareholder approval to increase its
authorized capital stock and the Special Warrants, Flow-through Special Warrants
and the 166,040 Bonus Warrants which were issuable as the result of the Company
not meeting its April 28, 2007 filing deadlines, as described above, were issued
and converted into 13,121,790 common shares of the Company, without additional
consideration.  An additional 664,160 Bonus Warrants were converted
into 664,160 shares of the Company’s common stock, without additional
consideration, as the September 25, 2007 filing deadlines were also not met by
the Company. The fair value of the bonus warrants has been
expensed.





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


F-16
 Patch
International Inc.
 Notes to
the Consolidated Financial Statements
 May 31,
2008


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, 2008, $946,853
has been determined to be the fair value representing the vested portion of the
Agents’ Warrants and has been included in financing costs.





Prior to
September 14, 2007, the Company had 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 was fair valued at September 14, 2007, using the market price of
$1.26 per share.  Upon receipt of the required approvals, this amount
was reclassified to additional paid in capital ($15,629,382) and common stock
($13,122), each a component of stockholder’s equity.





Issued
            
            
            Issue
      Price
            
            
            
            $Special
      Warrants
            
            
            8,302,000
            
            
            $
            1.50
            
            
            
            12,453,000Flow-through
      Special Warrants
            
            
            4,653,750
            
            
            $
            1.65
            
            
            
            7,678,68712,955,750
            
            
            
            
            
            
            
            20,131,687Less:  Commissions
      and professional fees
            
            
            -
            
            
            
            
            
            
            
            (1,372,654
            )Net
      proceeds
            
            
            
            
            
            
            
            
            
            
            18,759,033Agents'
      Warrants
            
            
            762,645
            
            
            
            
            
            
            
            334,391Bonus
      warrants
            
            
            166,040
            
            
            
            
            
            
            
            298,87213,884,435
            
            
            
            
            
            
            
            19,392,296Fair
      value adjustments:Special
      Warrants and Flow-through Special Warrants
            
            
            -
            
            
            
            
            
            
            
            7,113,196Agents'
      Warrants
            
            
            -
            
            
            
            
            
            
            
            (37,819
            )Bonus
      Warrants
            
            
            -
            
            
            
            
            
            
            
            38,189Balance,
      May 31, 2007
            
            
            13,884,435
            
            
            
            
            
            
            
            26,505,862Agents'
      Warrants
            
            
            -
            
            
            
            
            
            
            
            370,137Fair
      value adjustments:Special
      Warrants and Flow-through Special Warrants
            
            
            -
            
            
            
            
            
            
            
            (10,920,639
            )Agents'
      Warrants
            
            
            -
            
            
            
            
            
            
            
            (127,850
            )Bonus
      Warrants
            
            
            -
            
            
            
            
            
            
            
            (185,006
            )Balance,
      September 14, 2007
            
            
            13,884,435
            
            
            
            
            
            
            
            15,642,504





As of May
31, 2008, there were 762,645 Agents' Warrants outstanding. The fair value of the
Agents' Warrants was $168,722 and is included in additional paid-in capital at
May 31, 2008. As of September 7, 2008, the Agents' Warrants expired
unexercised.





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, 2008, the total undiscounted
value of the total asset retirement obligation is estimated to be
$160,354.  These payments are expected to be made over the next 2
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 31,2008
            
            
            2007Beginning
      Asset Retirement Obligations
            
            $
            129,959
            
            
            $
            34,379Liabilities
      acquired
            
            
            -
            
            
            
            73,534Revisions
            
            
            10,794
            
            
            
            20,858Accretion
            
            
            7,381
            
            
            
            1,188Total
      Asset Retirement Obligations
            
            $
            148,134
            
            
            $
            129,959


F-17
 Patch
International Inc.
 Notes to
the Consolidated Financial Statements
 May 31,
2008




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 8,176,489 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.





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





Issued
      and outstanding common shares:
            
            May
      31, 2008
            
            
            May
      31, 2007Number
            
            
            Amount
            
            
            Number
            
            
            Amountof
      Shares
            
            
            
            $
            
            
            of
      Shares
            
            
            
            $Balance,
      beginning of year
            
            
            20,239,774
            
            
            
            20,240
            
            
            
            15,163,112
            
            
            
            15,163Conversion
      of special and flow-through warrants (Note 10)
            
            
            12,955,750
            
            
            
            13,122
            
            
            
            -
            
            
            
            -Conversion
      of bonus warrants (Note 10)
            
            
            166,040
            
            
            
            -
            
            
            
            -
            
            
            
            -Conversion
      of bonus warrants (Note 10)
            
            
            664,160
            
            
            
            664
            
            
            
            -
            
            
            
            -Conversion
      of exchangeable shares (Note 9)
            
            
            1,750,000
            
            
            
            1,750
            
            
            
            -
            
            
            
            -Flow-through
      shares issued (note a)
            
            
            -
            
            
            
            -
            
            
            
            3,240,000
            
            
            
            2,604,469Stock
      options exercised
            
            
            -
            
            
            
            -
            
            
            
            1,590,000
            
            
            
            1,184,500Shares
      issued for services (note b)
            
            
            -
            
            
            
            -
            
            
            
            252,250
            
            
            
            300,913Repurchase
      of shares (note c)
            
            
            -
            
            
            
            -
            
            
            
            (5,588
            )
            
            
            (6,309
            )35,775,724
            
            
            
            35,776
            
            
            
            20,239,774
            
            
            
            4,098,736Less:
      Stock subscriptions receivable
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (38,500
            )Less:
      Amount included in additional paid in capital
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,043,620
            )Add:
      Amount charged to retained earnings
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,624Balance,
      end of year
            
            
            35,775,724
            
            
            
            35,776
            
            
            
            20,239,774
            
            
            
            20,240





F-18
 Patch
International Inc.
 Notes to
the Consolidated Financial Statements
 May 31,
2008


(a)
            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”.





(b)
            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
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.





(c)
            On
      September 15, 2006, the Company purchased 2,000 of its shares on the open
      market at a price of $0.78 per
share.





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.





Stock
Options





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


May
      31, 2008
            
            
            May
      31, 2007Stock
      Options
            
            Number
      of Options
            
            
            Weighted
      Average Exercise Price
            
            
            Number
      of Options
            
            
            Weighted
      Average Exercise PriceBalance,
      beginning of year
            
            
            3,225,000
            
            
            $
            1.40
            
            
            
            2,272,500
            
            
            $
            0.75Granted
            
            
            1,510,000
            
            
            
            0.40
            
            
            
            4,265,000
            
            
            
            1.33Expired
            
            
            -
            
            
            
            -
            
            
            
            (300,000
            )
            
            
            0.39Forfeited
            
            
            (485,000
            )
            
            
            1.74
            
            
            
            (672,500
            )
            
            
            0.60Cancelled
            
            
            -
            
            
            
            -
            
            
            
            (750,000
            )
            
            
            1.20Exercised
            
            
            -
            
            
            
            -
            
            
            
            (1,590,000
            )
            
            
            0.72Balance,
      end of year
            
            
            4,250,000
            
            
            $
            1.01
            
            
            
            3,225,000
            
            
            $
            1.40Exerciseable,
      end of year
            
            
            933,333
            
            
            $
            1.35
            
            
            
            -
            
            
            $
            -





As at May
31, 2008, the weighted average remaining contractual life of the outstanding
options is 4.03 years. No options were exercised during 2008. The intrinsic
value of options exercised during the year ended May 31, 2008 was nil (2007 -
$1,715,867).





A summary
of the status of the Company’s nonvested options as of May 31, 2008, and changes
during the year ended May 31, 2008, is presented below:


Nonvested
      options:
            
            Number
      of Options
            
            
            Weighted
      Average Exercise priceNonvested
      at June 1, 2007
            
            
            3,225,000
            
            
            $
            1.40Granted
            
            
            1,510,000
            
            
            
            0.40Expired
            
            
            -
            
            
            
            -Forfeited
            
            
            (485,000
            )
            
            
            1.74Cancelled
            
            
            -
            
            
            
            -Vested
            
            
            (933,333
            )
            
            
            1.35Nonvested
      at May 31, 2008
            
            
            3,316,667
            
            
            $
            0.91





F-19
 Patch
International Inc.
 Notes to
the Consolidated Financial Statements
 May 31,
2008


The
following table summarizes information about the stock options as at May 31,
2008:


Exercise
      Price (US$)
            Number
      outstanding, May 31, 2008
            Weighted
      average remaining contractual life (years)
            Weighted
      average exercise price (US$)
            Aggregate
      Intrinsic Value
            Number
      exercisable, May 31, 2008
            Weighted
      average remaining contractual life (years)
            Weighted
      average exercise price (US$)
            Aggregate
      Intrinsic Value$1.20
            2,050,000
            3.6
            1.20
            -
            683,333
            3.6
            1.20
            -$0.35
            1,450,000
            4.7
            0.35
            $87,000
            -
            4.7
            0.35
            -$1.75
            750,000
            4.0
            1.75
            -
            250,000
            4.0
            1.75
            -4,250,000
            4.0
            1.01
            $87,000
            933,333
            4.0
            1.35
            -





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, 2008, stock-based compensation amounting to $1,349,804
(2007 - $3,136,343) was recorded and expensed. During the year ended May 31,
2008, stock options for stock-based compensation were issued as follows: 40,000
stock options priced at $2.32 per share and 1,450,000 stock options priced at
$0.35 per share.





As of May
31, 2008, there was $2,406,992 of total unrecognized compensation cost related
to non-vested share-based compensation arrangements granted under the
Plan.  That cost is expected to be recognized over a weighted-average
period of 1.98 years.





The
weighted average fair value of the options granted during the year ended May 31,
2008 was $0.31 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 124%; risk free interest rate of 4.02%; and expected life
of 5.0 years. 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.





Per
Share Amounts





Basic per
share amounts are calculated using the weighted average number of common shares
outstanding during the period. Diluted per share amounts are calculated based in
accordance with SFAS No. 128, which assumes that any proceeds obtained on
exercise of options would be used to purchase common shares at the average price
during the period. The weighted average number of shares outstanding is then
adjusted by this amount. In computing diluted net earnings per share for the
year ended May 31, 2008, a total of 4,250,000 (2007 – 3,225,000) options were
excluded from the diluted calculations as they were not dilutive.





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).


F-20
 Patch
International Inc.
 Notes to
the Consolidated Financial Statements
 May 31,
2008




The
results of discontinued operations are summarized as follows:





For
      the year ended May 31,2008
            
            
            2007Revenue:Oil
      and Gas
            
            $
            -
            
            
            $
            99,722Expenses
            
            
            -
            
            
            
            524,101Net
      operating loss from discontinued operations
            
            
            -
            
            
            
            (424,379
            )Gain
      on sale of investment in 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. The potential benefit of a net U.S. foreign
tax credit carryforward 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 carryforward in future years. At
May 31, 2008, the Company had net operating losses for U.S. federal income tax
purposes of $1.4 million and had non-capital loss carryforwards for Canadian
income tax purposes of $5.4 million, which begin expiring in fiscal 2011. 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, 2008, a valuation allowance
of $466,827 was provided to offset deferred tax assets arising from US net
operating losses.
 
 The
provision for income taxes consists of the following:
 For
      the year ended May 31,2008
              
              
              2007$
              
              
              
              $Current:Foreign
              
              
              -
              
              
              
              2,785,763United
      States
              
              
              -
              
              
              
              -Deferred:Foreign
              
              
              226,272
              
              
              
              (3,213,573
              )United
      Sates
              
              
              -
              
              
              
              -Total
      income tax expense (reduction)
              
              
              226,272
              
              
              
              (427,810
              )
 Effective
tax rate reconciliation:
 For
      the year ended May 31,2008
                
                
                2007$
                
                
                
                $Expected
      income tax (reduction) expense at statutory rate
                
                
                4,199,329
                
                
                
                (6,158,038
                )Non-resident
      capital gains tax
                
                
                -
                
                
                
                2,785,763Flow-through
      shares
                
                
                1,514,195
                
                
                
                1,053,947Non
      deductible items
                
                
                914,713
                
                
                
                1,096,588Unrealized
      (gain) loss on exchangeable shares and special warrants
                
                
                (6,364,402
                )
                
                
                4,814,867Foreign
      tax credits
                
                
                -
                
                
                
                (4,826,707
                )Change
      in tax rates
                
                
                272,655
                
                
                
                282,543Change
      in valuation allowance
                
                
                (310,218
                )
                
                
                523,227Total
      income tax expense (reduction)
                
                
                226,272
                
                
                
                (427,810
                )Effective
      tax rate
                
                
                1.9
                %
                
                
                2.2
                %


F-21
 Patch
International Inc.
 Notes to
the Consolidated Financial Statements
 May 31,
2008


The
deferred tax liabilities and assets were as follows:
 For
      the year ended May 31,2008
              
              
              2007$
              
              
              
              $Deferred
      tax assets/(liabilities)Non
      capital loss carryforwards
              
              
              1,836,393
              
              
              
              842,184Excess
      tax basis over book basis for oil and gas properties
              
              
              (1,730,068
              )
              
              
              (286,704
              )Unrealized
      foreign exchange gain
              
              
              (840,543
              )
              
              
              -Writedown
      of marketable securities
              
              
              252,035
              
              
              
              157,746Share
      issue costs
              
              
              24,675
              
              
              
              26,000Less
      valuation allowance
              
              
              (466,827
              )
              
              
              (739,226
              )Net
      deferred tax liability
              
              
              (924,335
              )
              
              
              -


16.           OTHER
COMPREHENSIVE INCOME / (LOSS)





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


For
      the year endedMay
      31, 2008Before
      Tax Amount
            
            
            Tax
      (Expense) or Benefit
            
            
            Net-of-Tax
      AmountForeign
      currency translation adjustment
            
            $
            58,598
            
            
            $
            -
            
            
            $
            58,598Other
      comprehensive income
            
            $
            58,598
            
            
            $
            -
            
            
            $
            58,598For
      the year endedMay
      31, 2007Before
      Tax Amount
            
            
            Tax
      (Expense) or Benefit
            
            
            Net-of-Tax
      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
            )





17.           GEOGRAPHIC
AND SEGMENTED INFORMATION





The
Company has one reportable segment consisting of oil and gas operations except
for the Company’s investment in New Asia Gold Corporation, which is valued at
$100,122 at May 31, 2008.  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:May
      31,
            
            
            May
      31,2008
            
            
            2007Long-lived
      assets:Canada
            
            $
            39,310,331
            
            
            $
            38,607,841Total
      long-lived assets
            
            $
            39,310,331
            
            
            $
            38,607,841May31,
            
            
            May31,2008
            
            
            2007Revenues
      from external customers:United
      States
            
            $
            -
            
            
            $
            -Canada
            
            
            8,199
            
            
            
            15,581Total
      revenues from external customers
            
            $
            8,199
            
            
            $
            15,581





F-22
 Patch
International Inc.
 Notes to
the Consolidated Financial Statements
 May 31,
2008


18.           CONTINGENCIES





The
Company has received three claims relating to work performed with respect to its
2007/2008 winter drilling program.  These claims total $1.8
million.  As these activities were not authorized by the Company, it
is management’s view that the claims are without merit.  Amounts paid,
if any, by the Company to settle this dispute will be recorded when the amounts
become known.





19.           SUBSEQUENT
EVENT





On August
29, 2008, a director resigned from the Company.  As a result, unless
exercised, 500,000 stock options will be cancelled on September 28,
2008.





20.
            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 in
Canada.





Future
      cash flows are computed by applying
            
            May
      31,
            
            
            May
      31,NET
      CASH FLOWS RELATING TO PROVED OIL
            
            2008
            
            
            2007AND
      GAS RESERVES
            
            (Unaudited)
            
            
            (Unaudited)Oil
            
            
            Oil(bbls)
            
            
            (bbls)Proved,
      developed and undeveloped reserves (Canada)Balance
      beginning of the year
            
            
            -
            
            
            
            5,000Discoveries
            
            
            -
            
            
            
            -Revision
      to estimates
            
            
            
            
            
            
            -Dispositions
            
            
            -
            
            
            
            (2,725
            )Production
            
            
            
            
            
            
            (2,275
            )Balance
      end of year
            
            
            -
            
            
            
            -Standardized
      Measure of Discounted Future Net Cash Flows (Canada)Future
      cash flows
            
            $
            -
            
            
            $
            -Future
      operating expenses
            
            
            -
            
            
            
            --
            
            
            
            -10%
      annual discount for estimated timing of cash flows
            
            
            -
            
            
            
            -Standardized
      measure of discounted future net cash flows
            
            $
            -
            
            
            $
            -





Future
cash flows are computed by applying fiscal period end prices of oil and natural
gas to period end quantities of proved oil and natural gas
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 oil
and natural gas reserves at the end of the period, based on period end costs and
assuming continuation of existing economic conditions.





F-23
 Patch
International Inc.
 Notes to
the Consolidated Financial Statements
 May 31,
2008


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 oil and natural gas
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 oil and natural gas producing operations.