**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **WASHINGTON,
D** **.C.
20549**
 **FORM
10-K/A**
 **(Amendment
No. 2)**
 
 [X]  ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2004.
 
 Commission
File No. 000-31170
 
 TETON
PETROLEUM COMPANY
 (Exact
name of registrant as specified in its charter)


DELAWARE
    1482290(State
      or other jurisdiction
    (I.R.S.
      Employerof
      incorporation or organization)
    Identification
      No.)


1600
Broadway, Suite 2400


Denver,
Co. 80202 - 4921


(Address
of principal executive offices)





Registrant’s
telephone number: 303.542.1878





Securities
registered pursuant to Section 12(b) of the Exchange Act: None





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




Title
      of Class
    
    Name
      of Each Exchange on Which RegisteredCommon
      Stock
    
    American
      Stock Exchange





Indicate
by a 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 [X] NO [ ]





Indicate
by a c heck mark
if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) 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. [X]





Indicate
by a check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act).


YES
[  ] NO [X]





The
issuer’s revenue for its most recent fiscal year was $0





As of
June 30, 2004, approximately 9,114,663 shares of common stock were outstanding. The
aggregate market value of the common stock held by non-affiliates of the issuer,
as of June 30, 2004, was approximately $21,060,742 based on the closing bid of
$2.45 for the issuer’s common stock as reported on the American Stock Exchange.
Shares of common stock held by each director, each officer named in Item 12, and
each person who owns 10% or more of the outstanding common stock have been
excluded from this calculation in that such persons may be deemed to be
affiliates. The determination of affiliate status is not necessarily
conclusive.





As of
Friday, May 4, 2005 the issuer had 10,022,996 shares of common stock
outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE - NONE







****


**EXPLANATORY
NOTE**





On May 9,
2005, we filed a Form 10-K/A to amend and restate Item 9A of Part II of the
Annual Report on Form 10-K for the fiscal year ended December 31, 2004, which
was filed with the Securities and Exchange Commission on March 31, 2005, by
Teton Petroleum Company. The initial amendment supplemented the disclosure
controls and procedures and provided additional detail concerning controls and
procedures that were not effective during the year ended December 31, 2004.This
Amendment No. 2 to the Annual Report on Form 10-K/A responds to certain
additional comments of the Staff of the Securities and Exchange Commission in
connection with its review of the Registrants’ Annual Report on Form 10-K/A for
the fiscal year ended December 31, 2004. This amendment supplements the
disclosure controls and procedures and provides additional detail concerning
controls and procedures that were not effective during the year ended December
31, 2004, among other things, to clarify that notwithstanding the material
weaknesses in such controls and procedures all financials statements presented
during 2004 fairly and accurately presented the Company’s financial statements
and no restatements or amended filings for these periods are necessary. All
other information included in the original on Form 10-K, as filed on March 31,
2005, or the 10-K/A, as filed on May 9, 2005, remains unchanged.











**FORM
10-K/A**


**FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2004**





**INDEX**





**PART
      I**Item
      1.
    Business
    3Item
      2.
    Properties
    9Item
      3.
    Legal
      Proceedings
    11Item
      4.
    Submission
      of Matters to a Vote of Security Holders
    12**PART
      II**Item
      5.
    Market
      for the Registrant's Common Equity and Related
      Stockholder Matters
    12Item
      6
    Selected
      Financial Data
    14Item
      7.
    Management's
      Discussion and Analysis of Financial Condition and
      Results of Operations
    14Item
      7A.
    Quantitative
      and Qualitative Disclosures about Market Risks
    18Item
      8.
    Financial
      Statements and Supplementary Data
    20Item
      9.
    Changes
      in and Disagreements with Accountants on Accounting
      and Financial Disclosure
    54Item
      9A.
    Controls
      and Procedures
    54Item
      9B
    Other
      Information
    54**PART
      III**Item
      10.
    Directors
      and Executive Officers of the Registrant
    56Item
      11.
    Executive
      Compensation
    60Item
      12.
    Security
      Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
    63Item
      13.
    Certain
      Relationships and Related Transactions
    64Item
      14.
    Principal
      Accountant Fees and Services
    64**PART
      IV**Item
      15.
    Exhibits
      and Financial Statement Schedules
    66**SIGNATURES**










**PART
I**





**Caution
Concerning Forward-Looking Statements**





We have
included in this report, statements which are intended as “forward-looking
statements” under the Private Securities Litigation Reform Act of 1995. These
include statements that are not simply a statement of historical fact but
describe what we “believe,” “anticipate,” or “expect” will occur. We caution you
not to place undue reliance on the forward-looking statements made in this
report. Although we believe these statements are reasonable, there are many
factors, which may affect our expectation of our operations. These factors
include, among other things, the following:





·
    general
      economic conditions


·
    the
      market price of, and demand for, oil and natural
gas


·
    our
      ability to service future indebtedness


·
    our
      ability to raise additional equity capital, obtain debt financing, or
      generate sufficient revenues to fund our operating and development
      plan


·
    our
      success in completing development and exploration
    activities


·
    expansion
      and other development trends of the oil and gas
industry


·
    our
      present company structure


·
    our
      accumulated deficit


·
    acquisitions
      and other business opportunities that may be presented to and pursued by
      us


·
    our
      ability to integrate our acquisitions into our company structure


·
    changes
      in laws and regulations





1





**Summary**





Until
July 16, 2004 Teton Petroleum Company (“Teton,” the “Company,” “We” or “Us”)
through a consolidated Russian subsidiary ZAO Goloil (“Goloil”), was primarily
engaged in oil and gas exploration, development, and production in Western
Siberia, Russia.





For the
first six months of 2004 Teton’s efforts were concentrated on negotiating and
finalizing the sale of Goloil.





Effective
July 1, 2004, for accounting purposes, Teton sold its interest in Goloil and
recorded a gain of $13,087,000.





Since the
sale of Goloil the Company has focused on evaluating potential acquisitions of
oil and gas properties located in the United States, Russia and the Commonwealth
of Independent States.





During
December 2004 the Company entered into a binding letter of intent and subsequent
to year-end entered into a formal contract to acquire up to 180,000 acres of oil
and gas leases in a significant block of acreage in North America, subject to
the completion of due diligence and other conditions. See subsequent events on
Page 19.





On
February 15, 2005, in a second transaction, the Company purchased 25% of the
membership interest of Piceance Gas Resources, LLC, a Limited Liability Company
whose primary asset is oil and gas rights and leasehold assets covering
approximately 6,300 acres in the Piceance Basin of Western Colorado. See
subsequent events on Page 19.








2





**Item
1. BUSINESS.**





Background




The
Company is an independent energy company engaged primarily in the development,
production and marketing of natural gas and oil in North America. We intend to
increase stockholder value by profitably growing reserves and production,
primarily through drilling operations. We seek high quality exploration and
development projects with potential for providing long-term drilling inventories
that generate high returns.




The
Company’s current operations are focused in the Rocky Mountain Region of the
United States. From its inception until 2004, the Company was primarily engaged
in oil and gas exploration, development, and production in Western Siberia,
Russia. In July 2004, the Company’s shareholders voted to sell its Russian
operations to the Company’s Russian partner. The sale, which was deemed
effective as of July 1, 2004, for accounting purposes, resulted in our reporting
a gain of
$13,087,000. The purchase price for our 35.30% interest in Goloil was $8,960,000
in cash, which was received during August 2004. Goloil also repaid advances made
by the Company to Goloil totaling $6,040,000. The advances were made to Goloil
by the Company to finance our 50% share of Goloil’s capital expenditures and
currently bore interest at the rate of 8% per annum. The gross proceeds of the
two transactions to the Company totaled $15,000,000.





Between
July 2004 and January 2005 the Company actively pursued opportunities in North
America and abroad in order to redeploy the cash generated in the sale of its
Goloil asset. In December 2004 and again in January 2005, the Company reported
the signing of a binding letter of intent and definitive purchase agreement,
respectively, for up to 180,000 acres located in North America. The Company made
an additional purchase in February 2005 of a 25% interest in Piceance Gas
Resources, LLC (“PGR”) which owns approximately 6,300 acres in the Piceance
Basin, located northwest of the Grand Valley Field in Western Colorado. The
purchase price of the 25% interest is $5.25 million cash and 450,000
unregistered shares of Teton common stock. Teton also issued PGR Partners, LLC
warrants to purchase 200,000 shares of Teton common stock at an exercise price
of $2.00 per share, exercisable for five years. Please read Subsequent Events on
Page 19.





Available
Information




The
Company’s Internet address is www.tetonpetroleum.com. Electronic copies of the
Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, and
current reports on Form 8-K, and amendments to those reports are available free
of charge by visiting the “Financials” section of www.tetonpetroleum.com. These
reports are posted as soon as reasonably practicable after they are
electronically filed with the Securities and Exchange Commission. Additional
information including the Company’s Code of Business Conduct and Ethics is also
available on our website.




Business
Strategy




The
Company’s objective is to expand its natural gas and oil reserves, production
and revenues through a strategy that includes the following key
elements:




*Initiate
drilling operations.* With the
acquisition of the Piceance acreage, the Company intends to initiate drilling
operations beginning in the second quarter of 2005. PGR’s business plan for 2005
includes drilling a minimum of eight wells. PGR is the operator of record in our
Piceance Basin Project. Teton owns a 25% interest in PGR. Teton may operate in
other areas. The Company understands that there is significant competition for
the acquisition of producing properties and therefore growing the Company
through drilling opportunities is also essential. **




3


*Acquire
producing properties.* The
Company’s acquisition efforts are focused on properties that fit well within
existing operations or in areas where the Company is establishing new operations
or where it believes that a base of existing production will produce an adequate
foundation for economies of scale necessary to grow a business within a
geography or business segment.




*Pursue
geographic expansion.* The
Company and its key executives have operated both within the United States and
internationally. The Company believes that its international experience provides
it with a significant competitive edge relative to similarly situated
organizations that tend to remain localized in their operations and focus. The
Company believes that geographic diversification provides the ultimate hedge to
being able operate an energy concern during the peaks and troughs of the energy
business cycle.


**


*Reduce
risks inherent in oil and natural gas development and marketing* . An
integral part of the Company’s strategy has been and will continue to be to
concentrate on development drilling and/or the drilling of exploratory step out
wells that are inherently less risky than drilling wild cat wells.




*Pursuit
of Selective Complementary Acquisitions.* We seek
to acquire long-lived producing properties with a high degree of operating
control, or operators that are known to be competent in the area, that contain
opportunities to profitably increase natural gas and crude oil reserves booked
by the Company.




Our 2005
strategy is to focus on a disciplined approach to investment that balances our
drilling effort between exploration opportunities and the development program,
along with complimentary acquisition opportunities.




The
preceding paragraphs, discussing our strategic pursuits and goals, contain
forward-looking information. There can be no assurance that we will be
successful in carrying out our business strategy or that our strategy will not
change as we evaluate and pursue our business strategy.




Governmental
Regulation




The
Company’s business and the natural gas industry in general are heavily
regulated. The availability of a ready market for natural gas production depends
on several factors beyond the Company’s control. These factors include
regulation of natural gas production, federal and state regulations governing
environmental quality and pollution control, the amount of natural gas available
for sale, the availability of adequate pipeline and other transportation and
processing facilities and the marketing of competitive fuels. State and federal
regulations generally are intended to prevent waste of natural gas, protect
rights to produce natural gas between owners in a common reservoir and control
contamination of the environment. Pipelines are subject to the jurisdiction of
various federal, state, and local agencies.




The
Company believes that it is in substantial compliance with such statutes, rules,
regulations and governmental orders, although there can be no assurance that
this is or will remain the case. Failure to comply with such laws and
regulations can result in substantial penalties. The regulatory burden on the
industry increases our cost of doing business and affects our profitability.
Although we believe we are in substantial compliance with all applicable laws
and regulations, such laws and regulations are frequently amended or
reinterpreted so we are unable to predict the future cost or impact of complying
with such laws and regulations.




The
following discussion of the regulation of the United States natural gas industry
is not intended to constitute a complete discussion of the various statutes,
rules, regulations and environmental orders to which the Company’s operations
may be subject.




4


Regulation
of Oil and Natural Gas Exploration and Production




The
Company’s oil and natural gas operations are subject to various types of
regulation at the federal, state and local levels. Prior to commencing drilling
activities for a well, the Company (or its operating subsidiaries, operating
entities or operating partners) must procure permits and/or approvals for the
various stages of the drilling process from the applicable state and local
agencies in the state in which the area to be drilled is located. Such permits
and approvals include those for the drilling of wells, and such regulation
includes maintaining bonding requirements in order to drill or operate wells and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties on which wells are drilled, the
plugging and abandoning of wells and the disposal of fluids used in connection
with operations. The Company’s operations are also subject to various
conservation laws and regulations. These include the regulation of the size of
drilling and spacing units or proration units and the density of wells which may
be drilled and the unitization or pooling of natural gas properties. In this
regard, some states allow the forced pooling or integration of tracts to
facilitate exploration while other states rely primarily or exclusively on
voluntary pooling of lands and leases. In areas where pooling is voluntary, it
may be more difficult to form units, and therefore, more difficult to develop a
project if the operator owns less than 100% of the leasehold. In addition, state
conservation laws may establish maximum rates of production from oil and natural
gas wells, generally prohibit the venting or flaring of natural gas and impose
certain requirements regarding the ratability of production.




The
effect of these regulations may limit the amount of oil and natural gas the
Company can produce from its wells and may limit the number of wells or the
locations at which the Company can drill. The regulatory burden on the oil and
natural gas industry increases the Company’s costs of doing business and,
consequently, affects its profitability. Inasmuch as such laws and regulations
are frequently expanded, amended and reinterpreted, the Company is unable to
predict the future cost or impact of complying with such
regulations.




Natural
Gas Marketing, Gathering, and Transportation





Federal
legislation and regulatory controls have historically affected the price of the
natural gas and the manner in which production is transported and marketed.
Under the Natural Gas Act of 1938, the Federal Energy Regulatory Commission
(“FERC”) regulates the interstate sale for resale of natural gas and the
transportation of natural gas in interstate commerce, although facilities used
in the production or gathering of natural gas in interstate commerce are
generally exempted from FERC jurisdiction. Effective January 1, 1993, the
Natural Gas Wellhead Decontrol Act deregulated natural gas prices for all “first
sales” of natural gas, which definition covers all sales of our own production.
In addition, as part of the broad industry restructuring initiatives described
below, the FERC has granted to all producers such as us a “blanket certificate
of public convenience and necessity” authorizing the sale of gas for resale
without further FERC approvals. As a result, all natural gas that we produce in
the future may now be sold at market prices, subject to the terms of any private
contracts that may be in effect.





Natural
gas sales prices nevertheless continue to be affected by intrastate and
interstate gas transportation regulation, because the prices that companies such
as ours receive for our production are affected by the cost of transporting the
gas to the consuming market. Through a series of comprehensive rulemakings,
beginning with Order No.436 in 1985 and continuing through Order No.636 in 1992
and Order No.637 in 2000, the FERC has adopted regulatory changes that have
significantly altered the transportation and marketing of natural gas. These
changes were intended by the FERC to foster competition by, among other things,
transforming the role of interstate pipeline companies from wholesale marketers
of gas to the primary role of gas transporters, and by increasing the
transparency of pricing for pipeline services. The FERC has also developed rules
governing the relationship of the pipelines with their marketing affiliates, and
implemented standards relating to the use of electronic data exchange by the
pipelines to make transportation information available on a timely basis and to
enable transactions to occur on a purely electronic basis.




5


In light
of these statutory and regulatory changes, most pipelines have divested their
gas sales functions to marketing affiliates, which operate separately from the
transporter and in direct competition with all other merchants, and most
pipelines have also implemented the large-scale divestiture of their gas
gathering facilities to affiliated or non-affiliated companies .
Interstate pipelines thus now generally provide unbundled, open and
nondiscriminatory transportation and transportation-related services to
producers, gas marketing companies, local distribution companies, industrial end
users and other customers seeking such services. Sellers and buyers of gas have
gained direct access to the particular pipeline services they need, and are
better able to conduct business with a larger number of counterparties.




Environmental
Regulations




The
Company’s operations are subject to numerous laws and regulations governing the
discharge of materials into the environment or otherwise relating to
environmental protection. Public interest in the protection of the environment
has increased dramatically in recent years. The trend of more expansive and
stricter environmental legislation and regulations could continue. To the extent
laws are enacted or other governmental action is taken that restricts drilling
or imposes environmental protection requirements that result in increased costs
to the natural gas industry in general, the business and prospects of the
Company could be adversely affected.




The
nature of the Company business operations results in the generation of wastes
that may be subject to the Federal Resource Conservation and Recovery Act
(“RCRA”) and comparable state statutes. The U.S. Environmental Protection Agency
(“EPA”) and various state agencies have limited the approved methods of disposal
for certain hazardous and nonhazardous wastes. Furthermore, certain wastes
generated by the Company’s operations that are currently exempt from treatment
as “hazardous wastes” may in the future be designated as “hazardous wastes,” and
therefore be subject to more rigorous and costly operating and disposal
requirements.





The
Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”),
also known as the “Superfund” law, imposes liability, without regard to fault or
the legality of the original conduct, on certain classes of persons who are
considered to be responsible for the release of a “hazardous substance” into the
environment. These persons include the present or past owners or operators of
the disposal site or sites where the release occurred and the companies that
transported or arranged for the disposal of the hazardous substances at the site
where the release occurred. Under CERCLA, such persons may be subject to joint
and several liabilities for the costs of cleaning up the hazardous substances
that have been released into the environment, for damages to natural resources
and for the costs of certain health studies. It is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damages allegedly caused by the release of hazardous substances or
other pollutants into the environment. Furthermore, although petroleum,
including natural gas and crude oil, is exempt from CERCLA, at least two courts
have ruled that certain wastes associated with the production of crude oil may
be classified as “hazardous substances” under CERCLA and thus such wastes may
become subject to liability and regulation under CERCLA. State initiatives to
further regulate the disposal of crude oil and natural gas wastes are also
pending in certain states, and these various initiatives could have adverse
impacts on our business.





6


Stricter
standards in environmental legislation may be imposed on the industry in the
future. For instance, legislation has been proposed in Congress from time to
time that would reclassify certain exploration and production wastes as
“hazardous wastes” and make the reclassified wastes subject to more stringent
handling, disposal and clean-up restrictions. If such legislation were to be
enacted, it could have a significant impact on our operating costs, as well as
on the industry in general. Compliance with environmental requirements generally
could have a materially adverse effect upon our capital expenditures, earnings
or competitive position.




CERCLA
and similar state laws impose liability, without regard to fault or the legality
of the original conduct, on certain classes of persons that are considered to
have contributed to the release of a “hazardous substance” into the environment.
These persons include the owner or operator of the disposal site or sites where
the release occurred and companies that disposed of or arranged for the disposal
of the hazardous substances found at the site. Persons who are or were
responsible for release of hazardous substances under CERCLA may be subject to
joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment and for damages to
natural resources, and it is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property damage allegedly
caused by the hazardous substances released into the environment.




The
Company’s operations may be subject to the Clean Air Act (“CAA”) and comparable
state and local requirements. Amendments to the CAA were adopted in 1990 and
contain provisions that may result in the gradual imposition of certain
pollution control requirements with respect to air emissions from the operations
of the Company. The EPA and states have been developing regulations to implement
these requirements. The Company may be required to incur certain capital
expenditures in the next several years for air pollution control equipment in
connection with maintaining or obtaining operating permits and approvals
addressing other air emission-related issues.




The
Federal Water Pollution Control Act (FWPCA or Clean Water Act) and resulting
regulations, which are implemented through a system of permits, also govern the
discharge of certain contaminants into waters of the United States. Sanctions
for failure to comply strictly with the Clean Water Act are generally resolved
by payment of fines and correction of any identified deficiencies. However,
regulatory agencies could require us to cease construction or operation of
certain facilities that are the source of water discharges.





Our
operations are subject to local, state and federal laws and regulations to
control emissions from sources of air pollution. Payment of fines and correction
of any identified deficiencies generally resolve penalties for failure to comply
strictly with air regulations or permits. Regulatory agencies could also require
us to cease construction or operation of certain facilities that are air
emission sources. We believe that we substantially comply with the emission
standards under local, state, and federal laws and regulations.




Operating
Hazards and Insurance




The
Company’s exploration and production operations include a variety of operating
risks, including the risk of fire, explosions, blowouts, craterings, pipe
failure, casing collapse, abnormally pressured formations, and environmental
hazards such as gas leaks, ruptures and discharges of toxic gas, the occurrence
of any of which could result in substantial losses to the Company due to injury
and loss of life, severe damage to and destruction of property, natural
resources and equipment, pollution and other environmental damage, clean-up
responsibilities, regulatory investigation and penalties and suspension of
operations. The Company’s pipeline, gathering and distribution operations are
subject to the many hazards inherent in the natural gas industry. These hazards
include damage to wells, pipelines and other related equipment, and surrounding
properties caused by hurricanes, floods, fires and other acts of God,
inadvertent damage from construction equipment, leakage of natural gas and other
hydrocarbons, fires and explosions and other hazards that could also result in
personal injury and loss of life, pollution and suspension of
operations.




7


Any
significant problems related to its facilities could adversely affect the
Company’s ability to conduct its operations. In accordance with customary
industry practice, the Company maintains insurance against some, but not all,
potential risks; however, there can be no assurance that such insurance will be
adequate to cover any losses or exposure for liability. The occurrence of a
significant event not fully insured against could materially adversely affect
the Company’s operations and financial condition. The Company cannot predict
whether insurance will continue to be available at premium levels that justify
its purchase or whether insurance will be available at all.




Competition




Competition
in our primary producing areas is intense. Price, contract terms and quality of
service, including pipeline connection times, distribution efficiencies and
reliable delivery records, affect competition. In addition, there is tremendous
competition within the United States to assemble an extensive acreage position,
existing natural gas gathering and pipeline systems and storage fields. We
actively compete against other companies with substantially larger financial and
other resources.




The
Company believes that its capabilities and the experience of its management and
professional staff generally enable it to compete effectively. The Company
encounters competition from numerous other oil and natural gas companies,
drilling and income programs and partnerships in all areas of its operations,
including drilling and marketing natural gas and obtaining desirable natural gas
leases. Many of these competitors possess larger staffs and greater financial
resources than the Company, which may enable them to identify and acquire
desirable producing properties and drilling prospects more economically. The
Company’s ability to explore for oil and natural gas prospects and to acquire
additional properties in the future depends upon its ability to conduct its
operations, to evaluate and select suitable properties and to consummate
transactions in this highly competitive environment. The Company competes with a
number of other companies, which offer interests in drilling partnerships with a
wide range of investment objectives and program structures. Competition for
investment capital for both public and private drilling programs is intense. The
Company also faces intense competition in the marketing of natural gas from
competitors including other producers as well as marketing companies. Also,
international developments and the possible improved economics of domestic
natural gas exploration may influence other companies to increase their domestic
oil and natural gas exploration. Furthermore, competition among companies for
favorable prospects can be expected to continue, and it is anticipated that the
cost of acquiring properties may increase in the future. Factors affecting
competition in the natural gas industry include price, location, availability,
quality and volume of natural gas. The Company believes that it can compete
effectively in the oil and natural gas industry on each of the foregoing
factors. Nevertheless, the Company’s business, financial condition or results of
operations could be materially adversely affected by competition.





Employees




As of
December 31, 2004, the Company had 6 employees, and 3 part-time consultants that
dedicate over 25% of their time to the Company.




The
Company’s employees are not covered by a collective bargaining agreement. The
Company considers relations with its employees to be excellent.




8





**Item
2. PROPERTIES.**





**Glossary
of Oil and Gas Terms.**





Barrel:
Equal to 42 U.S. gallons.





Barrels
of oil equivalent (BOE) - Gas volume that is expressed in terms of its energy
equivalent in barrels of oil, which is calculated as 6,000 cubic feet of gas
equals 1 barrel of oil equivalent (BOE); or 42 U.S. gallons of oil at 40 degrees
Fahrenheit.





Basin: A
depressed sediment-filled area, roughly circular or elliptical in shape,
sometimes very elongated. Regarded as a good area to explore for oil and gas.





BCF: One
billion cubic feet of natural gas, or 1,000 mcf.





Field: A
geographic region situated over one or more subsurface oil and gas reservoirs
encompassing at least the outermost boundaries of all oil and gas accumulations
known to be within those reservoirs vertically projected to the land surface.





License:
Formal or legal permission to explore for oil and gas in a specified area.





MCF: One
thousand cubic feet of natural gas. Natural gas is usually priced on an mcf
basis, adjusted for BTU content.





Productive:
Able to produce oil and/or gas.





Proved
reserves: Estimated quantities of crude oil, condensate, natural gas, and
natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be commercially recoverable in the future from known
reservoirs under existing conditions using established operating procedures and
under current governmental regulations.





Proved
undeveloped reserves: Economically recoverable reserves estimated to exist in
proved reservoirs, which will be recovered from wells, drilled in the future.





Reserves:
The estimated value of oil, gas and/or condensate, which is economically
recoverable.




The
Company has not filed reserve estimates with any federal agency.





9


Effective
July 1, 2004, for accounting purposes, Teton sold its interest in Goloil. The
chart below sets forth certain production data for the fiscal years ending
December 31, 2002 and 2003, and for the period ending June 30, 2004, prior to
such sale. Additional oil and gas disclosure can be found in Note 9 of the
Financial Statements.





**PRODUCTION
DATA**





2004
    
    2003
    
    2002Total
      gross oil production, barrels
    
    
    1,393,616
    
    
    2,528,260
    
    
    1,884,933Total
      gross gas production, MCF
    
    
    —
    
    
    —
    
    
    —Net
      oil production, barrel (1)
    
    
    348,404
    
    
    632,065
    
    
    471,233Net
      gas production, MCF
    
    
    —
    
    
    —
    
    
    —Average
      oil sales price, $/Bbl (2)
    
    $
    18.98
    
    $
    18.11
    
    $
    15.62Average
      gas sales price, S/MCF
    
    
    —
    
    
    —
    
    
    —Average
      production cost per barrel (3)
    
    $
    16.12
    
    $
    16.11
    
    $
    13.32Gross
      productive wellsOil
    
    
    24.0
    
    
    21.0
    
    
    13.0Gas
    
    
    —
    
    
    —
    
    
    —Total
    
    
    24.0
    
    
    21.0
    
    
    13.0Net
      productive wells
    
    
    12.0
    
    
    10.5
    
    
    6.5Gas
    
    
    —
    
    
    —
    
    
    —Total
    
    
    12.0
    
    
    10.5
    
    
    6.5





(1)
    Net
      production and net well count is based on Teton's effective net interest
      as of the end of each year. Prior to August 2000 and after November 2002,
      Teton owned 100% of the effective net interest in Goltech.


(2)
    Average
      oil sales price is a combination of domestic (Russian) and export
      price.


(3)
    Excludes
      production payment to EUA.


(4)
    The
      following chart sets forth the number of productive wells and dry
      exploratory and productive wells drilled and completed during the last
      three fiscal years in the Goloil license area prior to the sale of Teton’s
      interest in Goloil:





10


**NET
WELLS DRILLED**





Year
      Ended December 31,
    
    2004
    
    2003
    
    2002Gross
    
    Net
      (1)
    
    Gross
    
    Net
      (1)
    
    Gross
    
    Net
      (1)Number
      of Wells DrilledExploratory
      (Research)Productive
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Dry
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Total
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —DevelopmentProductive
    
    
    3.0
    
    
    1.5
    
    
    7.0
    
    
    3.5
    
    
    6.0
    
    
    3.0Dry
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Total
    
    
    3.0
    
    
    1.5
    
    
    7.0
    
    
    3.5
    
    
    6.0
    
    
    3.0





(1)
    Net
      well count is based on Teton's effective net interest as of the end of
      each year. Prior to August 2000, Teton owned 100% of the interest in
      Goltech. Subsequent to August 2000 our interest was reduced to 50%.
      Subsequent to November 2002, Teton’s effective net interest in Goloil
      again became 100%.





**Proved
and Producing Properties**





At
December 31, 2004 the Company did not have any proved or producing
properties.





**Developed
And Undeveloped Acreage**





At
December 31, 2004 the Company did not have any developed or undeveloped acreage.





The
following table sets forth the total gross and net developed acres and total
gross and net undeveloped acres of the Company as of March 15, 2005:





**Gross**
    **Net**Total
      Undeveloped Acres
    6,300
    1,575





Such
undeveloped acreage is concentrated in western Colorado.





Our
offices are located in Denver, Colorado. We lease our offices from an
unaffiliated third party. The term of such lease is one year, and the lease
expires in July 2005.








**Item
3. LEGAL PROCEEDINGS.**





Teton
currently is not a party to any material legal proceedings.





11
 
 ****
 **Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.**





No
matters were submitted to a vote of our security holders during the fourth
quarter of 2004.





**PART
II**





**Item
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS** **MATTERS.**





Teton's
common stock is listed and principally traded on the American Stock Exchange,
under the symbol "TPE." Our common stock is also listed for trading on the
Frankfurt Stock Exchange (Germany) under the symbol “TP9.”





Prior to
listing on the AMEX on May 6, 2003, our common stock was quoted on the OTC
Bulletin Board under the symbol "TTPT" from November 27, 2001 to April 25, 2003
and then under the symbol "TTPE" from April 28, 2003 to May 5, 2003 as a result
of a 1 for 12 reverse stock split.





The
following table sets forth, on a per share basis, the range of high and low bid
information for the common stock on the OTC Bulletin Board until
May 5, 2003, and after May 5, 2003 the high and low closing price on the
American Stock Exchange:





High
    
    Low2004
      periodFirst
      quarter
    
    $
    5.24
    
    $
    3.36Second
      quarter
    
    $
    4.00
    
    $
    1.80Third
      quarter
    
    $
    2.55
    
    $
    1.25Fourth
      quarter
    
    $
    1.85
    
    $
    1.202003
      periodFirst
      quarter
    
    $
    5.52
    *
    $
    3.36
    *Second
      quarter as of May 5, 2003
    
    $
    5.00
    *
    $
    4.10
    *Second
      quarter commencing May 6, 2003
    
    $
    5.40
    
    $
    4.10Third
      quarter
    
    $
    4.58
    
    $
    3.71Fourth
      quarter
    
    $
    5.58
    
    $
    3.80





*Represents
quotations while the Company was listed on the OTC Bulletin Board. The
quotations from the OTC Bulletin Board reflect inter—dealer prices without
retail markup, markdown, or a commission, and may not necessarily represent
actual transactions.





Holders:
As of March 10, 2005, there were approximately 197 holders of record of Teton's
common stock.





Dividends:
Teton has not paid any dividends on its common stock since inception. Teton does
not anticipate declaration or payment of any dividends at any time in the
foreseeable future.





12


**Recent
Issuances of Unregistered Securities**





During
the fourth quarter, 8,451 unregistered shares of Teton’s common stock were
issued to the members of Teton’s advisory board for services. The securities
were issued in reliance on an exemption from registration provided in Section
4(2) of the Securities Act of 1933, as amended, based on the limited number of
purchasers, their access to material information concerning the Company and
their representations that they were acquiring the securities for
investment.








**Equity
Compensation Plan Information**





The
following table sets forth information about our equity compensation plans at
December 31, 2004:





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(a)
    (b)
    (c)Equity
      compensation plans approved by security holders
    1,999,037
    $3.51
    6,963Equity
      compensation plans not approved by security holders
    994,000
    $3.60
    0Total
    2,993,037
    $3.48
    6,963





See Note
5 to the financial statements for discussion of options issued in
2004.





13





Item 6. SELECTED FINANCIAL
DATA.







The
following table sets forth selected financial data, derived from the financial
statements, regarding Teton’s financial position and results of operations as of
the dates indicated. This selected financial data should be read in conjunction
with our financial statements and notes to the financial
statements.





As
      of and for the Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Summary
      of OperationsLoss
      from continuing operations
    
    $
    (5,193,281
    )
    $
    (4,036,164
    )
    $
    (10,191,307
    )
    $
    (1,373,470
    )
    $
    (2,825,767
    )Discontinued
      operations, net of tax
    
    
    12,383,582
    
    
    (1,598,680
    )
    
    (782,616
    )
    
    (284,138
    )
    
    (240,102
    )Net
      income (loss)
    
    
    7,190,301
    
    
    (5,634,844
    )
    
    (10,973,923
    )
    
    (1,657,608
    )
    
    (3,065,869
    )Income
      (loss) per share for:Continuing
      operations
    
    $
    (.64
    )
    $
    (1.00
    )
    $
    (3.28
    )
    $
    (.05
    )
    $
    (.16
    )Discontinued
      operations
    
    
    1.37
    
    
    (.23
    )
    
    (.25
    )
    
    (.01
    )
    
    (.01
    )Net
      income
    
    
    .73
    
    
    (1.23
    )
    
    (3.53
    )
    
    (.06
    )
    
    (.17
    )Balance
      SheetTotal
      assets
    
    
    17,611,565
    
    
    20,718,375
    
    
    10,012,395
    
    
    2,211,312
    
    
    2,317,099Notes
      payable
    
    
    —
    
    
    —
    
    
    —
    
    
    844,210
    
    
    1,425,000Cash
      dividends per common share
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —








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





The
following discussion and analysis of our plan of operation should be read in
conjunction with the financial statements and the related notes.





We have
identified certain policies as critical to our business operations and the
understanding of our results of operations. The impact and any associated risks
related to these policies on our business operations is discussed throughout
Management's Discussion and Analysis of Financial Condition and Results of
Operations where such policies affect our reported and expected financial
results.





14





**Overview**





Teton
Petroleum Company is an independent oil and gas exploration and production
company which is currently focused on a drilling program in the Piceance Basin
in western Colorado of 6,300 acres and a separate acreage play of up to 180,000
acres in North America. Teton’s
primary focus, until July 16, 2004 was the Russian Federation and former
Commonwealth of Independent States (“CIS”). See “Sale of Goloil Interest” below.
The Company, through its wholly owned subsidiary, Goltech, owned a 35.30% equity
interest in Goloil. RussNeft (the Company’s partner in Goloil) owned, until the
sale, the remaining 64.70% of Goloil through two subsidiaries, McGrady and
InvestPetrol. McGrady held 35.29% and InvestPetrol held 29.41% of the equity
interests in Goloil. However, until Goltech and McGrady received the return of
100% of their capital investment in Goloil, they were each entitled to a 50% net
profit in Goloil. During our ownership of Goloil, it was managed by a seven
person management board on which we had two representatives. Pursuant to the
existing agreements among Goloil’s shareholders, Goltech and McGrady shared
equally in capital expenditures, gross revenues, costs and expenses, until they
received 100% return of their investments in Goloil. Limited Liability Company
Energosoyuz-A (“EUA”), a wholly owned subsidiary of RussNeft, is the lessor of
certain oil field facilities to Goloil pursuant to a Lease Agreement No. EST
160/000630 (the “EUA Lease Agreement”) among EUA as lessor and Goloil as lessee
dated as June 2000. EUA was also the recipient of a production payment
(“Production Payment”) consisting of 50% of Goloil’s production (or at EUA’s
option, cash in lieu of such production). Between October 2003 through the
effective date of the sale EUA took cash instead of oil under the Production
Payment in the amount of approximately $650,000 per month. In addition, Goloil
had been selling its oil at a fixed price of 2,400 rubles per ton or $11.50 per
barrel and starting May 2004, 2,700 rubles per ton or $12.74 per barrel. It is
possible that a significant portion of such sales were made to or through one or
more affiliates of RussNeft.





RussNeft,
which was founded in the fall of 2002, is one of Russia’s largest independent
oil producers. In September 2003, RussNeft acquired a 64.70% equity
interest in Goloil in a private transaction in which it purchased all of the
ownership interests in McGrady and InvestPetrol, the other shareholders of
Goloil. At that time, RussNeft also acquired EUA, the lessor of various wells
and facilities to Goloil under the EUA Lease Agreement. In acquiring such
interests, RussNeft became entitled to appoint a majority of the management
board of Goloil and succeeded to EUA’s interest in the Production
Payment.





Financial
highlights for the year ended December 31, 2004 include the
following:





·
    Teton
      sold its share in Goloil and recorded a gain of $13,086,761.




·
    Teton’s
      net loss from continuing operations for the fourth quarter ended December
      31, 2004 was $905,832 compared to $1,296,412 for the same period in 2004.
      Teton’s net loss from continuing operations for the year ended December
      31, 2004 was $5,193,281 compared to $4,036,164 for
2003.




During
2004 Teton’s activities were
focused in three areas:


·
    Negotiating
      and finalizing the sale of Goloil to RussNeft;
and


·
    Evaluating
      and negotiating potential acquisitions of other producing oil properties
      in the United States, Russia and the CIS.
  ·
    Signing
      a Letter of Intent to acquire up to 180,000 acres in a North American oil
      and gas play.
  15


**Sale
of Goloil Interest to RussNeft**




The sale
of the Company’s interest in Goloil received shareholder approval, at our annual
meeting held July 16, 2004, and the sale closed on August 3, 2004, effective
July 1, 2004 for accounting purposes. The purchase price for our 35.30% interest
in Goloil was $8,960,000 in cash , which
was received during August 2004. Goloil also repaid advances made by the Company
to Goloil totaling $6,040,000. The advances were made to Goloil by the Company
to finance our 50% share of Goloil’s capital expenditures and currently bore
interest at the rate of 8% per annum. The gross proceeds of the two transactions
to the Company totaled $15,000,000.





2005
Operational and Financial Objectives - Update





During
2004, the Company actively sought to
increase shareholder value by seeking to acquire both producing and
non-producing properties that would provide for near-term cash flow and/or the
ability to grow reserves and production, primarily through drilling operations
in the United States, Russia and the CIS, where the Company itself will have the
opportunity to jointly or fully operate the property. In particular, the Company
elected to target properties in North America with existing production in the
range of 400 to 600 barrels of oil equivalent per day and 2,000 barrels of oil
equivalent per day in the former Soviet Union with upside potential from
developmental drilling and other exploitation opportunities. Among the financial
criteria for such acquisitions was that they generate positive cash flow and be
accretive to the Company earnings within approximately one year. Over the past
two years, the Company has evaluated over 300 projects. The Company announced
the signing of a binding letter of intent in December 2004 and subsequently the
signing of a definitive purchase agreement in January 2005 regarding up to
180,000 acres in North America. It is in the process of completing the due
diligence on that acreage. In addition, the Company closed a separate
acquisition in February 2005, in which it purchase a 25% interest in 6,300 acres
in the Piceance Basin in Western Colorado. See subsequent events
below.





Prior to
August 2004 the Company emphasized acquisitions in Russia and the CIS. Recent
developments in Russia have caused the Company to redirect the focus of its
efforts, most recently, on opportunities in North America and specifically in
the Rocky Mountains.





The
Company’s plans to pursue acquisitions means that it will incur due diligence
and legal expenses, which will be capitalized if the Company successfully
completes an acquisition. If an acquisition is not successful, such costs will
be included in its general and administrative expenses. The Company is now
devoting significant internal resources to evaluating acquisitions while also
utilizing the services of outside technical, legal and accounting
consultants.





Results
of Operations2004
Compared to 2003





The
Company has a net loss from continuing operations for the year
ending December 31, 2004 of $5,193,281 compared to a loss of $4,036,164 for the
prior year, which is an increase of $1,157,117 primarily due to the increase in
general and administrative expenses from $3,920,791 for the year ending December
31, 2003 to $5,332,291 for the year ending December 31, 2004. This is due to
several reasons including:





·
    The
      Company pursued, but failed to close on, several acquisitions which
      resulted in the expensing of the various due diligence costs incurred on
      such acquisitions ($409,000).


·
    The
      Company increased its payroll during the early part of 2004 as it
      increased its staffing levels to begin its investment and acquisition
      program ($358,000).


·
    As
      part of their performance review for 2003, the Board paid out bonuses to
      senior management in the first quarter of 2004
  ($300,000).


·
    The
      Company began compensating outside Directors in cash and stock payments
      ($140,000)


·
    The
      Company incurred significant legal, investor relations, accounting and
      other expenses in selling its interest in Goloil and in preparation of the
      related proxy statement in order to obtain shareholder approval of such
      sale ($188,000).


·
    Since
      July of 2004 the Company has incurred severance and other one time costs
      as it reduces its staff, offices and other commitments
      ($218,000).


·
    The
      Company opened a representative office in Moscow in December 2003 to
      better monitor its operations, as well as to establish a higher profile in
      the Russian oil industry and facilitate greater deal flow as it pursued
      acquisition opportunities in Russia and in other FSU states. Then, due to
      the Company’s decision to exit Russia, as discussed above, such office was
      closed in December 2004 and the Company incurred closing costs which have
      been included in continuing operations at December 31, 2004
      ($70,000).




16


Other
income in 2004 includes interest income from the cash balances maintained. The
Company expects to continue to streamline its costs in the future, and, as of
March 13, 2005, the Company
has reduced its monthly overhead, exclusive of due diligence costs, to $150,000
per month, and expects further adjustments as it refocuses its effort on
projects in the U.S. Rocky Mountains.





Discontinued
Operations2004
Compared to 2003




See Note 2 to
financial statements for a summary of the income (loss) from discontinued
operations. The Company considered the sale of Goloil to be effective July 1,
2004. Accordingly, the operating activities of Goloil for the six months ended
June 30, 2004 have been included in the Company’s 2004 statement of operations
as a net loss from discontinued operations. Goloil’s operating revenues and
expenses for six months of 2004 are less than 2003 because Teton has recorded a
full year of operations for 2003. Goloil sold its production in 2004 at an
average price of $18.98 per barrel which approximates the $18.11 price for oil
sold in 2003. However, 2004 production was sold exclusively to the domestic and
near abroad markets and not the export market which during 2004 were selling oil
at a price substantially above the price received. Prior to September 30, 2003,
Goloil had sold its oil for a blended oil price which included sales to the
export market.





The
$13,086,761 gain includes the $8,960,000 proceeds from the sale of Goloil stock,
net of $997,000 in expenses plus the elimination of approximately $5.1 million
in net liabilities included in the pro rata consolidation of Goloil as of June
30, 2004





Results
of Operations2003
Compared to 2002





The
Company’s net loss from continuing operations decreased from $10,191,307 in 2002
to a net loss of $4,036,164 in 2003. This was primarily due to the fact that
general and administrative expenses decreased from $4,744,952 in 2002 to
$3,920,791 in 2003, primarily due to a decrease of $1,562,575 in fees paid to
consultants for capital raising activities offset by increases in compensation
to officers and employees ($323,951) professional fees ($109,146) travel and
entertainment ($193,773), and expenses related to marketing, advertising, and
investor relations ($167,987).





Financing
charges recorded decreased from $5,498,106 in 2002 to $132,818 in 2003. In 2002,
the Company recorded a $4,715,000 non-cash financing charge as a result of
warrants issued with debentures and in-the-money conversion features present at
issuance.





Discontinued
Operations2003
Compared to 2002





See Note
2 to the financial statements for a summary of the loss from discontinued
operations for 2003 and 2002. The loss from discontinued operations increased to
$1,598,680 for the year ending December 31, 2003 from $782,616 for the year
ended December 31, 2002. Teton’s share of Goloil’s costs of sales and expenses
increased 62.2%, which was slightly less than the increase in revenues. However,
depreciation, depletion and amortization expense recorded for 2003 rose 250.1%,
from $451,930 to $1,582,513, reflecting the capital expenditures incurred by
Goloil as it developed its license.





17


**Liquidity
and Capital Resources**





The
Company had a cash balance of $ 17,433,424
at December 31, 2004 and a working capital surplus of $17,103,015.





See
subsequent events below for a discussion of the Company’s purchase of 25% of the
membership interest in Piceance Gas Resources, LLC from PGR. In addition to the
cash purchase price of $5.25 million, the Company estimates that its cash
commitment to PGR for the year ending December 31, 2005 will total $3,500,000.
Such commitment includes the Company’s share of the cost of a road and the
drilling of eight wells. At this point in time, the Company anticipates
utilizing the working capital of the Company to meet its commitment. However,
the business plan for PGR Partners, LLC includes using commercial bank
financing, when practical.





The
Company has the working capital to complete the additional purchase of up to
180,000 acres in April 2005 (see subsequent events below) and to begin its
evaluation of the prospects on such acreage.





The
Company may require additional financing during 2006 for the anticipated capital
programs for the two acquisitions or if the Company identifies other
acquisitions that meet its investment criteria. Such additional financing may be
debt or equity or a combination of both. See sources and uses of funds below.








**Sources
and Uses of Funds**





Historically,
Teton’s primary source of liquidity has been cash provided by equity offerings.
Such offerings are
expected to continue to play an important role in financing Teton’s business for
the foreseeable future. In addition, the Company is working to establish a
borrowing facility with one or more international banks, most likely in the form
of a revolving line of credit that will be used primarily for the acquisition of
producing properties and for developmental drilling and other capital
expenditures.








**Cash
Flows and Capital Expenditures**





During
the year ended December 31, 2004 the Company used $4,420,775 in its operating
activities primarily to finance its efforts in respect of potential acquisitions
and in respect of personnel costs. This amount compares to $3,063,845 used in
operating activities in 2003.




During
2004, the Company received the reimbursement of advances totaling $6,040,000
pursuant to its agreement with RussNeft and, net of expenses and taxes,
$7,963,450 from the sale of Goloil.





During
2004, the Company received $499,998 from the sale of preferred stock. The
increase in cash flows from financing activities from discontinued operations
represents amounts advanced by RussNeft to Goloil. As discussed above, such
advances will be eliminated now that the sale of Goloil has been
completed.





18


**Income
Taxes, Net Operating Losses and Tax Credits**




While the
Company will realize a U.S. tax gain from sale of discontinued operations of
approximately $12.0 million, after utilization of NOL and current year operating
losses, Teton will not incur a tax liability. At December 31, 2004, after the
gain on sale, the Company has a remaining net operating loss for U.S. income tax
purposes of $11,800,000. Such net operating loss is subject to U.S. Internal
Revenue Code Section 382 limitations. As of November 1, 2004 utilization of the
NOL is limited to approximately $900,000 per annum.





The
Company has established a valuation allowance for deferred taxes that reduces
its net deferred tax assets as management currently believes that these losses
will not be utilized in the near term. The allowance recorded was $4.6 million
and $7.2 million for 2004 and 2003 respectively. The Company reduced the
valuation allowance in 2004 by approximately $2.6 million due to the utilization
of net operating loss carryforwards.








**Subsequent
Events**





On
January 5, 2005 the Company entered into a definitive purchase and sale
agreement for the acquisition of certain oil and gas leases covering up to
180,000 acres in North America. The closing of the transaction is subject to the
satisfactory results of a due diligence investigation and other conditions. The
transaction is currently pending and the terms are being kept confidential
subject to a request for confidential treatment previously filed with the
Securities and Exchange Commission. The Company paid a nonrefundable deposit of
$25,000 in December upon signing a letter of intent. Earnest money of $322,000
was paid in January upon signing the purchase and sale agreement. The balance
due in cash, stock and warrants will be paid at closing. The Company expects to
close the transaction on or before April 15, 2005.





On
February 15, 2005, in a second acquisition, the Company signed a membership
interest purchase agreement with PGR Partners, LLC ("PGR") whereby the Company
acquired 25% of the membership interest in Piceance Gas Resources, LLC, a
Colorado limited liability company ("Piceance LLC"). Piceance LLC owns certain
oil and gas rights and leasehold assets covering approximately 6,300 acres in
the Piceance Basin in Western Colorado. The properties owned by Piceance LLC
carry a net revenue interest of 78.75%.





The
purchase price for the membership interest in Piceance LLC was $5.25 million in
cash, the issuance of 450,000 unregistered shares of our common stock, and the
issuance of warrants to purchase 200,000 shares of our common stock, exercisable
for a period of five years at an exercise price of $2.00 per share. Pursuant to
the terms of the operating agreement, the Company is obligated to fund its share
of the construction of a road on the leased area and eight wells to be drilled
during 2005.





On
February 22, 2005, Mr. Cooper resigned as executive chairman of the Company. Mr.
Cooper will remain on the Company’s Board and will stand for reelection at the
Company’s upcoming annual meeting in May. In addition, Mr. Cooper will remain a
consultant to the Company. On February 22, 2005, our Board elected James J.
Woodcock, an outside director, as non-executive chairman of the
Company.


****


19


**Item
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS.**





Market
risk is the potential loss arising from adverse changes in market rates and
prices, such as foreign currency exchange and interest rates and commodity
prices. As of August, 2004, when the Company sold its interest in Goloil, the
Company is no longer exposed to foreign currency exchange risk.





Currently,
the Company is not involved in any hedge contracts, although we may consider
hedge agreements in the future to manage the exposure to commodity price
risk.





20







**Item
8.**  **FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

















**Consolidated
Financial Statements**


**and**


**Independent
Auditors' Report**


**December
31, 2004** **and 2003**










21


**TETON
PETROLEUM COMPANY**
   Table
      of Contents**Page**Report
      of Independent Registered Public Accounting Firm
    F -
      1Consolidated
      Financial StatementsConsolidated
      Balance Sheets
    F -
      2Consolidated
      Statements of Operations and Comprehensive Loss
    F -
      3Consolidated
      Statements of Changes in Stockholders' (Deficit) Equity
    F -
      4Consolidated
      Statements of Cash Flows
    F -
      5Notes
      to Consolidated Financial Statements
    F -
      9








**REPORT
OF** **INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM**








Board of
Directors and Stockholders


Teton
Petroleum Company


Denver,
Colorado








We have
audited the accompanying consolidated balance sheets of Teton Petroleum Company
and subsidiary as of December 31, 2004 and 2003, and the related consolidated
statements of operations and comprehensive loss, changes in stockholders'
(deficit) equity and cash flows for each of the years in the three year period
ended December 31, 2004. 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 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
consolidated 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
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Teton Petroleum Company and
subsidiary as of December 31, 2004 and 2003, and the results of their operations
and their cash flows for each of the years in the three year period ended
December 31, 2004 in conformity with accounting principles generally accepted in
the United States of America.




/s/Ehrhardt
Keefe Steiner & Hottman PC


Ehrhardt
Keefe Steiner & Hottman PC


Denver,
Colorado


March 4,
2005







**TETON
PETROLEUM COMPANY**


**Consolidated
Balance Sheet** **s**


**December
31, 2004 and 2003**




December 31,Assets
    
    
    2004
    
    
    2003Current
      assetsCash
    
    $
    17,433,424
    
    $
    7,515,994Current
      assets of discontinued operations
    
    
    —
    
    
    1,615,365Prepaid
      expenses and other assets
    
    
    100,917
    
    
    95,693Total
      current assets
    
    
    17,534,341
    
    
    9,227,052Non-current
      assetsNon-current
      assets of discontinued operations
    
    
    —
    
    
    11,473,139Deposits
    
    
    25,000
    
    
    —Fixed
      assets, net of accumulated depreciation of $12,426 and
    $1,046
    
    
    52,224
    
    
    18,184Total
      non-current assets
    
    
    77,224
    
    
    11,491,323Total
      assets
    
    $
    17,611,565
    
    $
    20,718,375Liabilities
      and Stockholders' EquityCurrent
      liabilitiesAccounts
      payable and accrued liabilities
    
    $
    411,745
    
    $
    376,429Current
      liabilities of discontinued operations
    
    
    —
    
    
    10,010,310Total
      current liabilities
    
    
    411,745
    
    
    10,386,739Non-current
      liabilitiesDiscontinued
      operations
    
    
    —
    
    
    126,500Total
      non-current liabilities
    
    
    —
    
    
    126,500Total
      liabilities
    
    
    411,745
    
    
    10,513,239CommitmentsStockholders'
      equitySeries
      A convertible preferred stock, $.001 par value, 25,000,000 shares
      authorized, 281,460 and 618,231 issued and outstanding at December 31,
      2004 and 2003. Liquidation preference at December 31, 2004 and 2003 of
      $1,248,838 and $2,689,305
    
    
    281
    
    
    618Common
      stock, $.001 par value, 250,000,000 shares authorized, 9,130,257 shares
      issued and outstanding at December 31, 2004 and 8,584,068 shares issued
      and outstanding at December 31, 2003
    
    
    9,130
    
    
    8,584Additional
      paid-in capital
    
    
    37,657,686
    
    
    37,073,366Unamortized
      preferred stock dividends
    
    
    —
    
    
    (118,610
    )Accumulated
      deficit
    
    
    (20,467,277
    )
    
    (27,657,578
    )Foreign
      currency translation adjustment
    
    
    —
    
    
    898,756Total
      stockholders' equity
    
    
    17,199,820
    
    
    10,205,136Total
      liabilities and stockholders' equity
    
    $
    17,611,565
    
    $
    20,718,375





See notes to consolidated financial
statements.





F-2


**TETON
PETROLEUM COMPANY**


**Consolidated
Statements of Operations and Comprehensive Loss**




For
      the Years EndedDecember 31,2004
    
    2003
    
    2002Costs
      and expnenses:General
      and administrative
    
    $
    5,332,991
    
    $
    3,920,791
    
    $
    4,744,952Total
      costs and expenses
    
    
    5,332,991
    
    
    3,920,791
    
    
    4,744,952Loss
      from operations
    
    
    (5,332,991
    )
    
    (3,920,791
    )
    
    (4,744,952
    )Other
      income (expense)Other
      income
    
    
    139,710
    
    
    17,445
    
    
    51,751Financing
      charges
    
    
    —
    
    
    (132,818
    )
    
    (5,498,106
    )Total
      other income (expense)
    
    
    139,710
    
    
    (115,373
    )
    
    (5,446,355
    )Loss
      from continuing operations
    
    
    (5,193,281
    )
    
    (4,036,164
    )
    
    (10,191,307
    )Discontinued
      operations, net of tax
    
    
    12,383,582
    
    
    (1,598,680
    )
    
    (782,616
    )Net
      income (loss)
    
    
    7,190,301
    
    
    (5,634,844
    )
    
    (10,973,923
    )Imputed
      preferred stock dividends for inducements and beneficial conversion
      charges
    
    
    (521,482
    )
    
    (2,780,693
    )
    
    —Preferred
      stock dividends
    
    
    (105,949
    )
    
    —
    
    
    —Net
      income (loss) applicable to common shares
    
    
    6,562,870
    
    
    (8,415,537
    )
    
    (10,973,923
    )Other
      comprehensive income (loss), net of taxeffect of exchange
      rates
    
    
    (898,756
    )
    
    168,256
    
    
    (140,773
    )Comprehensive
      (loss) income
    
    $
    5,664,114
    
    $
    (8,247,281
    )
    $
    (11,114,696
    )Basic
      and diluted weighted average common shares outstanding
    
    
    9,028,967
    
    
    6,840,303
    
    
    3,105,325Basic
      and diluted loss per common share for continuing
operations
    
    $
    (0.64
    )
    $
    (1.00
    )
    $
    (3.28
    )Basic
      and diluted weighted average income (loss) per common shares for
      discontinued operations
    
    $
    1.37
    
    $
    (0.23
    )
    $
    (0.25
    )Basic
      and diluted income (loss) per common share
    
    $
    0.73
    
    $
    (1.23
    )
    $
    (3.53
    )


See notes to consolidated financial
statements.


F-3


****
 **TETON
PETROLEUM COMPANY**





**Consolidated
Statements of Changes in Stockholders' (Deficit) Equity**





Preferred
      Stock
    
    Common
      Stock
    
    Additional
      Paid-in
    
    Unamortized
      Preferred Stock
    
    Foreign
      Currency Translation
    
    Accumulated
    
    Total
      Stockholders(Deficit) 'Shares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Dividends
    
    Adjustment
    
    Deficit
    
    EquityBalance
      - December 31,
      2001
    
    
    —
    
    $
    —
    
    
    2,374,046
    
    $
    2,374
    
    $
    9,792,722
    
    $
    —
    
    $
    871,273
    
    
    (11,048,811
    )
    $
    (382,442
    )Common
      stock issued for cash
    
    
    —
    
    
    —
    
    
    1,223,737
    
    
    1,224
    
    
    3,332,236
    
    
    —
    
    
    —
    
    
    —
    
    
    3,333,460Common
      stock subscriptions paid in 2003
    
    
    —
    
    
    —
    
    
    712,045
    
    
    712
    
    
    1,938,898
    
    
    —
    
    
    —
    
    
    —
    
    
    1,939,610Common
      stock and warrants issued for services
    
    
    —
    
    
    —
    
    
    221,198
    
    
    221
    
    
    836,905
    
    
    —
    
    
    —
    
    
    —
    
    
    837,126Common
      stock issued for conversion of convertible debentures
    
    
    —
    
    
    —
    
    
    1,758,494
    
    
    1,758
    
    
    5,353,231
    
    
    —
    
    
    —
    
    
    —
    
    
    5,354,989Warrants
      issued and in-the-money
      conversion feature on convertible debentures
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    4,557,845
    
    
    —
    
    
    —
    
    
    —
    
    
    4,557,845Warrants
      issued with notes payable
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    150,016
    
    
    —
    
    
    —
    
    
    —
    
    
    150,016Warrants
      issued in connection with extensions on notes payable
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    203,362
    
    
    —
    
    
    —
    
    
    —
    
    
    203,362Net
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (10,973,923
    )
    
    (10,973,923
    )Foreign
      currency translation adjustment
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (140,773
    )
    
    —
    
    
    (140,773
    )Balance -
      December 31, 2002
    
    
    —
    
    
    —
    
    
    6,289,520
    
    
    6,289
    
    
    26,165,215
    
    
    —
    
    
    730,500
    
    
    (22,022,734
    )
    
    4,879,270Common
      stock issued for cash - net of commissions of $98,100
    
    
    —
    
    
    —
    
    
    437,012
    
    
    437
    
    
    1,091,463
    
    
    —
    
    
    —
    
    
    —
    
    
    1,091,900Common
      stock issued for settlement of accounts payable and accrued
      liabilities
    
    
    —
    
    
    —
    
    
    79,793
    
    
    80
    
    
    219,920
    
    
    —
    
    
    —
    
    
    —
    
    
    220,000Options
      issued to advisory board and common stock issued for
    services
    
    
    —
    
    
    —
    
    
    1,035
    
    
    1
    
    
    97,901
    
    
    —
    
    
    —
    
    
    —
    
    
    97,902Warrants
      issued with notes payable
    
    
    —
    
    
    —
    
    
    —
    
    
    
    
    
    110,170
    
    
    —
    
    
    —
    
    
    —
    
    
    110,170Preferred
      stock issued for cash, net of commissions of $473,838 (cash) and $99,168
      (non-cash)
    
    
    2,226,680
    
    
    2,226
    
    
    —
    
    
    —
    
    
    9,110,830
    
    
    —
    
    
    —
    
    
    —
    
    
    9,113,056Preferred
      stock converted to common stock
    
    
    (1,645,099
    )
    
    (1,645
    )
    
    1,776,708
    
    
    1,775
    
    
    (131
    )
    
    —
    
    
    —
    
    
    —
    
    
    —Preferred
      stock issued in exchange for notes payable and accrued interest of$9,426
    
    
    36,650
    
    
    37
    
    
    —
    
    
    —
    
    
    159,389
    
    
    —
    
    
    —
    
    
    —
    
    
    159,426In-the-money
      conversion feature charges to be amortized
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    1,182,452
    
    
    (1,182,452
    )
    
    —
    
    
    —
    
    
    —Amortization
      of in-the-money conversion feature charges
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (1,063,842
    )
    
    1,063,842
    
    
    —
    
    
    —
    
    
    —Net
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (5,634,844
    )
    
    (5,634,844
    )Foreign
      currency translation adjustment
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    168,256
    
    
    —
    
    
    168,256Balance
      - December 31, 2003
    
    
    618,231
    
    $
    618
    
    
    8,584,068
    
    
    8,583
    
    
    37,073,366
    
    
    (118,610
    )
    
    898,756
    
    
    (27,657,578
    )
    
    10,205,136Common
      stock issued for settlement of accrued liabilities
    
    
    —
    
    
    —
    
    
    13,750
    
    
    14
    
    
    58,686
    
    
    —
    
    
    —
    
    
    —
    
    
    58,700Common
      stock issued for services
    
    
    —
    
    
    —
    
    
    32,175
    
    
    33
    
    
    101,297
    
    
    —
    
    
    —
    
    
    —
    
    
    101,329Warrants
      issued for services
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    149,061
    
    
    —
    
    
    —
    
    
    —
    
    
    149,061Preferred
      stock issued for cash, net of commissions of $50,000(cash) and $22,863
      (non-cash)
    
    
    126,436
    
    
    126
    
    
    —
    
    
    —
    
    
    499,872
    
    
    —
    
    
    —
    
    
    —
    
    
    499,998Preferred
      stock converted to common stock
    
    
    (463,207
    )
    
    (463
    )
    
    500,264
    
    
    500
    
    
    (37
    )
    
    —
    
    
    —
    
    
    —
    
    
    —Amortization
      of Preferred Stock dividends
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (118,610
    )
    
    118,610
    
    
    —
    
    
    —
    
    
    —Preferred
      stock dividends
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (105,949
    )
    
    —
    
    
    —
    
    
    —
    
    
    (105,949
    )Foreign
      currency translation adjustment
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (898,756
    )
    
    —
    
    
    (898,756
    )Net
      income for year
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    7,190,301
    
    
    7,190,301Balance
      - December 31, 2004
    
    
    281,460
    
    $
    281
    
    
    9,130,257
    
    $
    9,130
    
    $
    37,657,686
    
    $
    —
    
    $
    —
    
    $
    (20,467,277
    )
    $
    17,199,820





See notes to consolidated financial
statements.




F-4




****
 **TETON
PETROLEUM COMPANY**


**Consolidated
Statements of Cash Flows**




For
      the Years EndedDecember
      31,2004
    
    2003
    
    2002Cash
      flows from operating activitiesNetincome
      (loss)
    
    $
    7,190,301
    
    $
    (5,634,844
    )
    $
    (10,973,923
    )Adjustments
      to reconcile net income (loss) to net cash used in operating
      activitiesDepreciation,
      depletion, and amortization
    
    
    11,380
    
    
    1,046
    
    
    —Gain
      on sale of discontinued operations
    
    
    (13,086,761
    )
    
    —
    
    
    —Stock
      based compensation for variable plan warrants
    
    
    —
    
    
    —
    
    
    —Stock
      and stock options issued for services and interest
    
    
    —
    
    
    107,128
    
    
    —Warrants
      issued for notes payable extensions
    
    
    —
    
    
    110,170
    
    
    46,582Stock
      and warrants issued for services
    
    
    250,390
    
    
    —
    
    
    837,126Debentures
      issued for services
    
    
    —
    
    
    —
    
    
    267,500Amortization
      of debenture and note payable discounts
    
    
    —
    
    
    —
    
    
    5,331,412Changes
      in assets and liabilitiesFrom
      discontinued operations
    
    
    1,149,609
    
    
    2,045,001
    
    
    (929,969
    )Prepaid
      expenses and other assets
    
    
    (5,224
    )
    
    (4,247
    )
    
    (57,446
    )Accounts
      payable and accrued liabilities
    
    
    69,530
    
    
    311,901
    
    
    290,131(11,611,076
    )
    
    2,570,999
    
    
    5,785,336Net
      cash used in operating activities
    
    
    (4,420,775
    )
    
    (3,063,845
    )
    
    (5,188,587
    )Cash
      flows from investing activitiesProceeds
      from sale of discontinued operations
    
    
    7,963,450
    
    
    —
    
    
    —Repayments
      of loan from discontinued operating entity
    
    
    6,040,000
    
    
    —
    
    
    —Increase
      in deposits
    
    
    (25,000
    )
    
    —
    
    
    —Increase
      in fixed asset additions
    
    
    (45,420
    )
    
    (
      20,684
    )
    
    —Increase
      in non—current assets of discontinued operating entity
    
    
    (2,988,882
    )
    
    (7,072,462
    )
    
    (3,222,349
    )Net
      cash used in investing activities
    
    
    10,944,148
    
    
    (7,093,146
    )
    
    (3,222,349
    )Cash
      flows from financing activitiesFrom
      discontinued operations
    
    
    3,258,378
    
    
    4,470,984
    
    
    2,178,525Proceeds
      from stock subscription
    
    
    -
    
    
    1,939,610
    
    
    -Proceeds
      from issuance of stock, net of $50,000 and $473,838
      commissions
    
    
    499,998
    
    
    10,251,924
    
    
    3,333,460Proceeds
      from issuance of convertible debentures
    
    
    -
    
    
    -
    
    
    4,143,643Proceeds
      from notes payable
    
    
    -
    
    
    628,750
    
    
    300,000Payments
      on notes payable
    
    
    -
    
    
    (478,750
    )
    
    (894,210
    )Dividends
    
    
    (81,463
    )
    
    -
    
    
    -Net
      cash provided by financing activities
    
    
    3,676,913
    
    
    16,812,518
    
    
    9,061,418Effect
      of exchange rates
    
    
    (282,856
    )
    
    168,256
    
    
    (140,773
    )Net
      increase in cash
    
    
    9,917,430
    
    
    6,823,783
    
    
    509,709Cash
      - beginning of year
    
    
    7,515,994
    
    
    692,211
    
    
    182,502$
    17,433,424
    
    $
    7,515,994
    
    $
    692,211


(Continued
on the following page.)


See notes to consolidated financial
statements.


F-5





**TETON
PETROLEUM COMPANY**


**Consolidated
Statements of Cash Flows**








(Continued
from the previous page.)





Supplemental
disclosure of cash flow information:





Cash
      paid for:
    
    
    Interest2004
    
    $
    —2003
    
    $
    18,2022002
    
    $
    120,008








Supplemental
disclosure of non-cash activity:





During
the year
ended December 31, 2004, the Company had the following
transactions:





The
Company has issued warrants to consultants for services valued at
$149,061.





13,750
shares of common stock were issued for the settlement of accrued liabilities at
December 31, 2003 valued at $58,700.





The
Company has issued 32,175 shares of common stock for services to consultants and
outside directors valued at $101,329.





Approximately
$1,317,000 of capital expenditures for discontinued operations were included in
current liabilities of discontinued operations at June 30, 2004 and
approximately $1,786,000 of capital expenditures were in accounts payable at
December 31, 2003 for a decrease during the six months ended June 30, 2004 of
$469,000.





Conversion
of 463,207 shares of preferred stock, plus dividends of 37,057 shares converted
into 500,264 shares of common stock.





The
Company accrued dividends to preferred stockholders of $24,486 at December 31,
2004.


See notes to consolidated financial
statements.
 F-6
 
 **TETON
PETROLEUM COMPANY**
 **Consolidated
Statements of Cash Flows**
 (Continued
from the previous page.)





During
the year ended December 31, 2003, the Company had the following
transactions:





128,700
warrants issued with debt and valued at $110,170 were initially recorded as a
discount on the note payable. At December 31, 2003, the full amount of the
discount had been amortized as financing costs.





79,793
shares of common stock were issued for settlement of accounts payable and
accrued liabilities valued at $220,000.





The
Company issued 30,000 non-qualified options to advisory board members valued at
$94,702.





The
Company issued 1,035 shares of common stock for services valued at
$3,201.





The
Company has accrued a liability for $46,968 related to the obligation to issue
57,420 warrants to a consultant for capital raising services.




12,000
preferred shares were issued to consultants for services valued at $52,200
related to capital raising.





Approximately
$1,785,000 of capital expenditures for oil and gas properties were included in
current liabilities of discontinued operations at December 31,
2003.





(Continued
on the following page.)


See notes to consolidated financial
statements.
 F-7
 
 **TETON
PETROLEUM COMPANY**
 **Consolidated
Statements of Cash Flows**
 (Continued
from the previous page.)





During
2002, the Company had the following transactions:





In
exchange for the extension of principal payments on four notes payable, the
Company modified expiration dates of certain warrants previously held by the
note holders and issued an additional 10,416 such warrants. The fair value of
the modification of the warrants totaled $46,582 and has been recorded as
financing costs.





A note
payable of $250,000 was converted into a convertible debenture with 83,333
warrants also being issued under the same terms of the Company's private
placement offering of convertible debentures.





1,647,881
warrants were issued with convertible debentures valued at $811,559 were
initially recorded as a discount on the debentures. At December 31, 2002, the
full amount of the discount had been amortized as financing costs.





In-the-money
conversion features on convertible debt valued at $3,746,285 were recognized as
financing costs.





The
Company issued 143,678 warrants in connection with related party notes payable
of $450,000 and $50,000. The warrants were valued at $156,781 and recorded as
financing costs.





$267,500
of convertible debentures with 89,167 warrants valued at $14,250 for a total
amount of $281,750 were issued for consulting services.





41,667
warrants issued with a note payable valued at $150,016 were initially recorded
as a discount on the note payable. At December 31, 2002 the full discount had
been amortized and recorded as financing costs.





$4,661,143
of debentures and accrued interest of $227,075 were converted into 1,758,494
shares of stock with $466,771 being paid as a premium at conversion and recorded
as financing costs.





221,198
shares of stock were issued to consultants for services valued at
$607,790.





133,333
warrants were issued to consultants for services valued at
$215,086.





Approximately
$1,142,000 of capital expenditures for oil and gas properties were included in
current liabilities from discontinued operations at December 31, 2002.





During
the fourth quarter of 2002, the Company received $1,939,610 of stock
subscriptions receivable for 712,045 shares of stock. The cash for these
subscriptions was paid during the first quarter of 2003.







See notes to consolidated financial
statements.
 F-8
 **TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**


**Note
1 - Description of Business and Summary of Significant Accounting
Policies**





Teton
Petroleum Company (the Company) is an oil and gas exploration and production
company whose focus,
prior to July 1, 2004, was the Russian Federation through ownership of a 35.30%
interest in ZAO Goloil, a Russian closed joint-stock company (“ZAO Goloil”). The
Company sold all of it’s interest in Goloil effective July 1, 2004 (see Note 2
to financial statements). Since the sale of ZAO Goloil, the Company has focused
primarily on acquiring oil and gas prospects and properties in North America.
See Note 8, Subsequent Events.





The
exploration and development of oil and gas reserves involves significant
financial risks. The ability of the Company to meet its obligations and
commitments under the terms and conditions of its agreements
and carry out its planned exploration activities is dependent upon continued
financial support from its stockholders, the ability to develop economically
recoverable reserves, and its ability to obtain necessary financing to complete
development of the reserves.





The
United States dollar is the principal currency of the Company's business and,
accordingly, these consolidated financial statements are expressed in United
States dollars.





Discontinued
Operations and Principles
of Consolidation





See Note
2 for a summary of the income (loss) from discontinued operations. The Company
considers the sale of Goloil to be effective July 1, 2004 for accounting
purposes. Accordingly the operating activities of ZAO Goloil for the six months
ended June 30, 2004 and the years ended December 31, 2003 and 2002 have been
included in the results from discontinued operations.





The
accompanying consolidated financial statements include the accounts of Teton
Petroleum Company and through June 30, 2004, its wholly owned subsidiary,
Goltech Petroleum, LLC ("Goltech"). All intercompany accounts and transactions
have been eliminated in consolidation.





During
2002, the Company owned a 50% interest in Goltech, which had a 70.59% interest
in ZAO Goloil. Accordingly ZAO Goloil was consolidated into Goltech and the
Company reflected its 50% share of Goltech. As of December 31, 2002, the other
50% member of Goltech relinquished their ownership interest in exchange for a
35.295% direct ownership interest in ZAO Goloil. The audited financial
statements as of June 30, 2004, December 31, 2003 and 2002, as is customary in
the oil and gas industry, reflect a pro-rata consolidation of the Company's
interest in ZAO Goloil (a Russian Company) through its wholly owned subsidiary
Goltech. Due to the sale of ZAO Goloil, the pro-rata consolidated amounts have
been reclassified as assets, liabilities and included in the results from
discontinued operations.





F-9


**TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**


**Note
1 - Description of Business and Summary of Significant Accounting Policies
(continued)**





Use of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.





Cash
and Cash Equivalents





The
Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents. The Company continually
monitors its positions with, and the credit quality of, the financial
institutions it invests with. As of the balance sheet date, the Company had no
cash equivalents.





Revenue
Recognition





The
Company recognizes oil sales revenue at the point in time oil quantities have
been delivered to purchasers.





F-10


**TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**


**Note
1 - Description of Business and Summary of Significant Accounting Policies
(continued)**





Comprehensive
Income





Comprehensive
income is defined as the change in equity during a period from transactions and
other events from non-owner sources. Comprehensive income is the total of net
income or loss and other comprehensive income or loss. The effect of foreign
currency exchange rates currently is the Company’s only item, which constitutes
comprehensive income or loss.





Oil
and Gas Properties





The
Company uses the successful efforts method of accounting for oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, and
to drill and equip development wells are capitalized. Costs to drill exploratory
wells that do not find proved reserves, geological and geophysical costs, and
costs of carrying and retaining unproved properties are expensed. The Company
also evaluates costs capitalized for exploratory wells, and if proved reserves
cannot be determined within one year from drilling exploration wells, those
costs are written-off and recorded as an expense.





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. Other unproved properties are
amortized based on the Company's experience of successful drilling and average
holding period. Currently the Company holds no unproved properties.





Capitalized
costs of producing oil and gas properties, after considering estimated
dismantlement and abandonment costs and estimated salvage values, are
depreciated and depleted by the unit-of-production method. Significant
development projects are excluded from the depletion calculation prior to
assessment of the existence of proven reserves that are ready for commercial
production. Support equipment and other property and equipment are depreciated
over their estimated useful lives.





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 resulting 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 based on the amount of proceeds.





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.





F-11


**TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**


**Note
1 - Description of Business and Summary of Significant Accounting Policies
(continued)**





Oil
and Gas Properties (continued)





Prior to
July 1, 2004. all of the Company's oil and gas assets were held in one cost
center located in Siberia, Russia. The Russian Federation (RF) has performed
substantial exploration efforts on properties on which the Company has received
successful tenders for future exploration and development. As a result, those
areas accepted under tender by the RF are known to contain proved reserves and
the Company's efforts are focused on further development of such
reserves.





The net
carrying value of the Company's oil and gas properties was limited to an
estimated net recoverable amount. The net recoverable amount is based on
undiscounted future net revenues and is determined by applying factors based on
historical experience and other data such as primary lease terms of properties
and average holding periods. If it is determined that the net recoverable value
is less than the net carrying value of the oil and gas properties, any
impairment is charged to operations.





Inventories





Inventory
includes extracted oil physically in the pipeline prior to delivery for sale and
oil held by third parties valued at the cost of development. Inventory also
includes various supplies and spare parts and is valued at cost using the
weighted average method.





Property
and Equipment





Property
and equipment is stated at cost. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets, ranging
from 5 to 7
years.





Impairment
of Long-Lived Assets





The
Company evaluates its long-lived assets for impairment, in accordance with the
provisions established under Statement of SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, when events or
changes in circumstances indicate that the related carrying amount may not be
recoverable. An impairment is considered to exist if the total estimated future
cash flows on an undiscounted basis is less than the carrying amount of the
related assets. An impairment loss is measured and recorded based on the
discounted estimated future cash flows. Changes in significant assumptions
underlying future cash flow estimates or fair values of assets may have a
material effect on the Company’s financial position and results of
operations.





F-12


**TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**


**Note
1 - Description of Business and Summary of Significant Accounting Policies
(continued)**




Asset
Retirement Obligations





During
2003 the Company applied the provisions of SFAS No. 143, "Accounting for Asset
Retirement Obligations." The Company recorded $126,500 as the fair value of the
Company’s estimated liability for the retirement of its Russian oil and gas
assets along with a corresponding increase in the carrying value of the related
oil and gas properties as of December 31, 2003, as the effect of adopting SFAS
No. 143 on January 1, 2003 was not material. Had the Company adopted SFAS No.
143 on January 1, 2002 the net loss to common shareholders would have been
increased by $13,000.




Stock-Based
Compensation





In
December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation- Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of
accounting for stock-based compensation. In addition, SFAS 148 amends the
disclosure provision of SFAS 123 to require more prominent disclosure about the
effects of an entity's accounting policy decisions with respect to stock-based
employee compensation on reported results of operations. The Company has adopted
the disclosure-only provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for stock options issued to employees, officers and
directors under the stock option plan. Had compensation cost for the Company's
options issued to employees, officers and directors been determined based on the
fair value at the grant date for awards consistent with the provisions of SFAS
No. 123, as amended by SFAS No. 148, the Company's net loss and basic loss per
common share would have been changed to the pro forma amounts indicated
below:




For
      the Years Ended December 31,2004
    
    2003
    
    2002Netincome
      (loss) applicable tocommon
      shareholders - as reported
    
    $
    7,190,301
    
    $
    (8,415,537
    )
    $
    (10,973,923
    )Fair
      value of employee compensation expense
    
    
    3,512,305
    
    
    4,974,141
    
    
    972,041Net
      income (loss) applicable tocommon
      shareholders - pro forma
    
    $
    3,677,996
    
    $
    (13,389,678
    )
    $
    (11,945,964
    )Basic
      income (loss) per common share - as reported
    
    $
    .73
    
    $
    (1.23
    )
    $
    (3.53
    )Basic
      income (loss) per common share - pro forma
    
    $
    .41
    
    $
    (1.96
    )
    $
    (3.84
    )




F-13
 
 **TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**


****


**Note
1 - Description of Business and Summary of Significant Accounting Policies
(continued)**





The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used:





For
      the Years Ended December 31,2004
    
    2003
    
    2002Approximate
      risk free rate
    
    
    4.06
    %
    
    4.00
    %
    
    —Average
      expected life
    
    
    10
      years
    
    
    10
      years
    
    
    —Dividend
      yield
    
    
    —
    %
    
    —
    %
    
    —Volatility
    
    
    55.0
    %
    
    100
    %
    
    —Estimated
      fair value of total options granted
    
    $
    3,512,305
    
    $
    4,974,141
    
    
    —Estimated
      fair value per option granted
    
    $
    2.48
    
    $
    3.15
    
    
    —





As
described in Note 5, 994,000 options granted to the Board of Directors with an
estimated fair value of $2,465,120 under the Company’s 2003 Stock Option Plan
have been treated as issued and outstanding.





Foreign
Currency Translation





All
assets and liabilities of the Company's subsidiary were
translated into U.S. dollars using the prevailing exchange rates as of the
balance sheet date. Income and expenses are translated using the weighted
average exchange rates for the period. Stockholders' investments are translated
at the historical exchange rates prevailing at the time of such investments. Any
gains or losses from foreign currency translation are included as a separate
component of stockholders' equity. The prevailing exchange rates at June 30,
2004 and December 31, 2003 and 2002 were approximately 1 U.S. dollar to 29.03,
29.45 and 31.78, Russian rubles, respectively. For the six months ended June 30,
2004 and the years ended December 31, 2003 and 2002, the average exchange rate
for 1 U.S. dollar was 28.76, 30.66 and 31.39, Russian rubles,
respectively.





Basic
Loss Per Share





The
Company applies the provisions of Statement of Financial Accounting Standard No.
128, "Earnings Per Share" (FAS 128). All dilutive potential common shares have
an antidilutive effect on diluted per share amounts and therefore have been
excluded in determining net loss per share. The Company's basic and diluted loss
per share are equivalent and accordingly only basic loss per share has been
presented.





The
following table reflects the effects of dilutive securities as of December
31 :





2004
    2003
    2002Dilutive
      effects of options
    2,993,037
    1,578,037
    —Dilutive
      effects of warrants
    7,359,728
    7,389,981
    4,587,780Dilutive
      effects of convertible preferred shares
    281,460
    2,381,351
    —10,634,224
    11,349,369
    4,587,780




F-14
 
 **TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**


**Note
1 - Description of Business and Summary of Significant Accounting Policies
(continued)**





Such
securities have been excluded from the earnings per share calculation as their
effect was anti-dilutive. However, such securities could dilute future earnings,
if achieved. The 2002 and 2003 share and per share amounts have been adjusted to
reflect the 1 for 12 reverse split approved by the shareholders on March 19,
2003.





Fair
Value of Financial Instruments





The
carrying amounts of financial instruments including cash, accounts
payable and
accrued liabilities approximated fair value as of December 31, 2004 and 2003
because of the relatively short maturity of these instruments.





The
Company is exposed to foreign currency risks to the extent that transactions and
balances are denominated in currencies other than the United States dollar.





Income
Taxes





The
Company recognizes deferred tax liabilities and assets based on the differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements that will result in taxable or deductible amounts in
future years. The measurement of deferred tax assets may be reduced by a
valuation allowance based upon management’s assessment of available evidence if
it is deemed more likely than not some or all of the deferred tax assets will
not be realizable.





F-15


**TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**


**Note
1 - Description of Business and Summary of Significant Accounting Policies
(continued)**





Reclassifications





Certain
amounts in the 2002 and 2003
consolidated financial statements have been reclassified to conform to the 2004
presentation.





Recently
Issued Accounting Pronouncements





In
December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No.
123 (revised 2004), "Share-Based Payment ." SFAS
No. 123R replaced SFAS No. 123 and superseded APB 25. SFAS No. 123R will require
compensation cost related to share-based payment transactions to be recognized
in financial statements. As permitted by SFAS No. 123, the Company elected to
follow the guidance of APB 25, which allowed companies to use the intrinsic
value method of accounting to value their share-based payment transactions with
employees. Based on this method, the Company did not recognize compensation
expense in its financial statements as the stock options granted had an exercise
price equal to the fair market value of the underlying Common Stock on the date
of the grant. SFAS No. 123R requires measurement of the cost of share-based
payment transactions to employees at the fair value of the award on the grant
date and recognition of expense over the requisite service or vesting period.
SFAS No. 123R requires implementation using a modified version of prospective
application, under which compensation expense for the unvested portion of
previously granted awards and all new awards will be recognized on or after the
date of adoption. SFAS No. 123R also allows companies to adopt SFAS No. 123R by
restating previously issued financial statements, basing the amounts on the
expense previously calculated and reported in their pro forma footnote
disclosures required under SFAS No. 123. The Company has not decided which
adoption method will be used. The provisions of SFAS No. 123R will be adopted by
the Company effective July 1, 2005. The effect of the adoption of SFAS No. 123R
is expected to be comparable to that disclosed on a pro forma basis as a result
of applying the current fair value recognition provisions of SFAS No.
123.




In
December 2004, the FASB issued SFAS No. 153 “Exchanges of Non-monetary
Assets—an amendment of APB Opinion No. 29.” This Statement amended APB
Opinion No. 29 to eliminate the exception for non-monetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of non-monetary assets that do not have commercial substance. A non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The Company is
currently evaluating the impact of this new standard, but believes that it will
not have a material impact upon the Company’s financial position, results of
operations or cash flows.




F-16
 
 ****TETON
PETROLEUM COMPANY**

**Notes
to Consolidated Financial Statements**
**For
The Years Ended December 31, 2004, 2003 and 2002**
****Note
2 - Sale of Goloil**





As
described in Note 1, the Company considers the sale of Goloil to be effective
July 1, 2004. Accordingly, the operating activities of Goloil for the six months
ended June 30, 2004 and the years ended December 31, 2003 and 2002 have been
included in the results from discontinued operations, summarized as follows:





2004
    
    2003
    
    2002Sales
    
    $
    6,552,138
    
    $
    11,437,802
    
    $
    6,923,320Cost
      of sales and expenses
    
    
    7,072,272
    
    
    12,604,234
    
    
    7,319,997Loss
      from operations
    
    
    (520,134
    )
    
    (1,166,432
    )
    
    (396,677
    )Other
      income (expense)Interest
      expense
    
    
    (166,216
    )
    
    (347,740
    )
    
    (385,939
    )Net
      loss from discontinued operations, before tax
    
    
    (686,350
    )
    
    (1,514,172
    )
    
    (782,616
    )Income
      tax
    
    
    (16,829
    )
    
    (84,508
    )
    
    —Net
      loss from discontinued operations, before gain on disposal
    
    
    (703,179
    )
    
    (1,598,680
    )
    
    (782,616
    )Gain
      on sale of ZAO Goloil stock
    
    
    13,086,761
    
    
    —
    
    
    —Income
      (loss) from discontinued operations
    
    $
    12,383,582
    
    $
    (1,598,680
    )
    $
    (782,616
    )
 The
      gain on sale of Goloil stock is calculated as follows:Sale
      price for Goloil shares
    
    $
    8,960,229Less
      direct transaction expenses:Investment
      banking fee
    
    
    (750,000
    )Net
      fees and expenses
    
    
    (246,779
    )Net
      proceeds
    
    
    7,963,450Net
      deficit of investment in Goloil at date of sale
    
    
    5,123,311Gain
      on disposal of ZAO Goloil
    
    $
    13,086,761


F-17
 
 **TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**


**Note
3 - Notes Payable**





During
2003:





The
Company received proceeds of $628,750 from the issuance of promissory notes to
three shareholders. In connection with these notes, 128,700 warrants valued at
$110,170 were issued. At December 31, 2003, the full amount of the discount had
been amortized and recorded as a non-cash financing charge. The Company has
recorded the value of these warrants using the Black-Scholes option-pricing
model using the following assumptions: volatility of 73%, a risk-free rate of
3.5%, zero dividend payments, and a life of one year.





The
Company paid $478,750 of the promissory notes issued during the year. The
remaining $150,000 along with accrued interest of $9,426 w ere
exchanged for Teton’s 8% convertible preferred shares.





During
2002:





The
scheduled March 1, 2002 principal payments on two notes payable totaling
$250,000 to stockholders were extended to April 15, 2002. In exchange for this
extension, the holders were issued 10,417 stock purchase warrants, with an
exercise price of $6.00 that expired February 2004, which had been valued at
$14,469 using the Black Scholes option pricing model with assumptions of
volatility of 100%, risk free rate of 5.5% and no dividend yield. These
extensions were recorded in the first quarter of 2002 as financing costs. These
notes were fully paid off in 2002.





The
Company issued 143,678 warrants in connection with related party notes payable
of $450,000 and $50,000. The warrants were valued at $156,781 and recorded as
financing costs. Additionally, in the first quarter of 2002, the due dates of
the two notes payable totaling $500,000 were extended by the holders to April
15, 2002. As consideration for this extension the Company agreed to modify the
expiration dates of certain warrants previously held by the note holders from
October 31, 2002 to January 31, 2003. These extensions were valued based upon
the incremental fair value of the warrants on the date of modification, which
totaled approximately $32,000. The values were calculated using the Black
Scholes option-pricing model under the assumptions described in the previous
paragraph, and were recorded in the first quarter of 2002, the quarter the
modifications occurred.





During
2002, the Company paid $200,000 of a $450,000 note payable outstanding at
December 31, 2001. The remaining $250,000 was converted into a convertible
debenture with 83,333 warrants also being issued in connection with the
Company's private placement offering of convertible debentures.





The
Company also paid off a $50,000 note payable to a stockholder and the $94,210
note payable to an officer during 2002, which were outstanding at December 31,
2001.





During
2002, the Company received proceeds of $300,000 on a note payable from a
stockholder. In connection with the note, 41,667 warrants valued at $150,016
were issued and recorded as financing charges. The Company paid off this note in
November 2002. The Company has recorded the value of these warrants using the
Black Scholes option-pricing model using the following assumptions: volatility
of 138%, a risk-free rate of 4.5%, zero dividend payments, and a life of 2
years.





F-18
 
 **TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**


**Note
4****- Stockholders' Equity**





Total
expense recorded associated with the above warrant issuances and modifications
totaled $353,379 and have been recorded as non-cash financing charges during the
year ended December 31, 2002.





Changes
in Stockholders’ Equity during 2004





Private
Placements of Common Stock





During
the year ended December 31, 2004, 45,925 common shares were issued for (i) the
settlement of accrued liabilities of $58,700; and (ii) services provided by
consultants of $43,329 and (iii) services provided by the advisory board of
$58,000.





50,000
warrants were issued to settle a liability at December 31, 2003 valued at
$46,967. We also issued 100,000 warrants to a consultant valued at $102,094 for
services.





Private
Placements of Series A Convertible Preferred Stock





The
Company received the following proceeds from the issuance of privately placed
preferred stock at a price of $4.35 per share:





Proceeds
of $499,998 (net of cash costs of $50,000) from the issuance of 126,436 shares
of 8% convertible preferred stock.





The
preferred stock carries an 8% dividend, payable quarterly commencing January 1,
2004 and is convertible into common stock at a price of $4.35 per share. The
preferred stock is entitled to vote on all matters presented to the Company’s
common stockholders, with the number of votes being equal to the number of
underlying common shares. The preferred stock also contains a liquidation
preference of $4.35 per share plus accrued unpaid dividends. The preferred stock
can be redeemed by the Company after one year for $4.35 per share upon proper
notice of redemption being provided by the Company.





Changes
in Stockholders’ Equity during 2003





On March
19, 2003, the stockholders authorized an increase in the Company’s common shares
from 100,000,000 to 250,000,000 and authorized 25,000,000 shares of preferred
stock for future issuance. In addition, the stockholders approved a 1 to 12
reverse stock split.





Private
Placements of Common Stock





During
the year ended December 31, 2003 the Company received the following proceeds
from the issuance of privately placed common stock:





$1,091,900
(net of costs of $98,100) from the issuance of 437,012 shares of common stock.
In connection with the private placement, the Company also issued a warrant for
each $3.00 stock investment. The warrants have a term of two years and an
exercise price of $6.00,





F-19
 
 **TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**








**Note
4 - Stockholders' Equity (continued)**





$1,939,610
during the year ended December 31, 2003 related to outstanding stock
subscriptions receivable at December 31, 2002,




80,828
common shares valued at $317,902 were issued for (i) settlement of accounts
payable and accrued liabilities of $220,000; and (ii) services provided by the
advisory board of $97,902.





Private
Placements of Series A Convertible Preferred Stock





During
the year ended December 31, 2003 the Company received the following proceeds
from the issuance of privately placed preferred stock issued at an offering
price of $4.35 per share.





Proceeds
of $9,145,450 (net of cash costs of $473,888 and net of $46,968 related to the
obligation to issue warrants for capital raising) from the issuance of 2,266,680
shares of 8% convertible preferred stock.





$14,574
from the issuance of 40,000 preferred shares in exchange for a $150,000 note
payable outstanding and accrued interest of $9,426.





We also
issued 12,000 preferred shares to a consultant for capital raising services
valued at $52,200.





The
preferred shares carry an 8% dividend, payable quarterly commencing January 1,
2004 and are convertible into common stock at a price of $4.35 per share. The
preferred stock is entitled to vote on all matters presented to the Company’s
common stockholders, with the number of votes being equal to the number of
underlying common shares. The preferred stock also contains a liquidation
preference of $4.35 per share plus accrued unpaid dividends. The preferred
shares can be redeemed by the Company after one year for $4.35 per share, under
certain circumstances and upon proper notice of redemption being provided by the
Company.





In
connection with the preferred share private placement for Tranches 1 and 2,
certain placements were entered into when the underlying price of the common
stock to which the preferred shares are convertible into, exceeded $4.35, the
stated conversion rate. As a result of the underlying shares being in-the-money,
the Company was required to compute a beneficial conversion charge, which is
calculated as the difference between the conversion price of $4.35 and the
closing stock price on the effective date of each offering, multiplied by the
total of the related common shares to be issued upon conversion of the preferred
stock. These charges are reflected as a dividend to the preferred shareholders
and are recognized over the period in which the preferred stock first becomes
convertible. For the Tranche 1 shares the charge was immediately recognized as
the shares were immediately convertible into common. For Tranche 2 the shares
could not be converted until a shareholder vote on January 27, 2004 took place
approving the issuance of additional common shares. The calculated beneficial
conversion feature on Tranche 2 was therefore amortized from the effective date
of each issuance through January 27, 2004. This resulted in total beneficial
conversion charges of $ 1,182,452, of which $1,063,842 were recorded during the
fourth quarter of 2003, and $118,610 will be amortized and recorded as preferred
dividends in January of 2004.




F-20
 
 **TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**
 ****
 **Note
4 - Stockholders' Equity (continued)**





The
Company also sent each preferred shareholder an inducement offer to convert
their shares of preferred into common shares. If converted within 60 days of
closing, the investors were entitled to receive (i) dividends payable in common
stock equivalent to one year’s worth of dividends; and (ii) Class B Warrants to
purchase two shares of common stock for each $10 invested, exercisable at $6.00
per share.





Private
Placements of Series A Convertible Preferred Stock (continued)





In
connection with the preferred share private placement for Tranche 1,
shareholders converted 1,645,099 of 8% convertible preferred shares to common
stock at a price of $4.35 per share. Common share dividends of 8% for a full
year were paid totaling $546,173 and 1,431,237 warrants were issued valued at
$1,170,678, for a total inducement charge of $1,716,851 recognized as a
preferred dividend during the fourth quarter for those investors which accepted
the inducement offer. The warrants issued were valued using the Black-Scholes
option pricing model using the following assumptions: volatility of 55%, a
risk-free rate of 1.875%, zero dividend payments, and a life of two
years.





In
connection with the preferred share private placement for Tranche 2, a common
share dividend of 8% for a full year was paid totaling $157,601 and warrants
were issued valued at $337,805, for a total inducement charge of $495,406 which
will be recognized as a preferred dividend in the first quarter of 2004,
associated with the preferred stock inducement offer ending on March 27, 2004.
The warrants issued were valued using the Black-Scholes option pricing model
using the following assumptions: volatility of 55%, a risk-free rate of 1.875%,
zero dividend payments, and a life of two years.





Warrants
to Purchase Common Shares





During
2003, the Company issued 440,140 warrants to entities for their services
directly related to raising capital under private placements. The Company also
issued 128,700 warrants in conjunction with debt valued at
$110,170.





During
2003, the Company issued 1,019,883 warrants in connection with common stock
private placement offerings, with an exercise price of $6.00 that expire
December 30, 2004.





Changes
in Stockholders’ Equity during 2002





*Private
Placements of Common Stock*





During
the year ended December 31, 2002 the Company received the following proceeds
from the issuance of privately placed common stock:





$3,333,460
from the issuance of 1,223,737 shares of common stock. In connection with the
private placement offerings, the Company also issued a warrant for each $3.00
stock investment. The warrants have a term of two years and an exercise price of
$6.00.





$605,136
from the issuance of 221,198 common shares issued for consulting
services.





F-21
 
 **TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**
 ****
 **Note****4
- Stockholders' Equity (continued)**





$23,200
from the issuance of 7,407 common shares for services provided in 2001. The
Company accrued a liability for this amount at December 31, 2002.




Changes
in Stockholder Equity During 2002 (continued)





*Convertible
Debentures*





During
2002, the Company received proceeds of $4,163,143 from the private placement of
convertible debentures. The debentures had a term of three years from April 1,
2002 and provided for interest at 10% per annum payable annually. The debentures
provided that the holder may convert the debenture and accrued interest into
shares of common stock at a $3 conversion rate.





The
debentures also included warrants to purchase common stock and have an exercise
price of $6 and a term of two years. Each debenture holder received one warrant
for each $.25 (pre-split) of investment made in debentures.





On
September 1, 2002, the Company redeemed all debentures outstanding for shares of
its common stock. The debentures were redeemed at 110% of their face value by
issuing one share of common stock for each $3 of redemption value, which also
incorporates any accrued interest through September 1, 2002. Financing
charges were recorded for the difference between the cumulative 10% contractual
interest accrued through September 1, 2002 and the 10% premium paid upon
redemption, which totaled $466,771.





As a
result of the warrants issued with the debentures and in-the-money conversion
features present at issuance, non-cash financing charges of $4,714,625 were
expensed. While the stock to which the conversion rights and warrants apply is
restricted stock, the valuation with respect to this stock in calculating the
discount was "as if" the stock was immediately salable. The effect of this is to
make the amount of discount and its related amortization higher than it would
otherwise have been. Management believes these costs are non-recurring and will
manage future capital raising programs to minimize or eliminate these
costs.





*Warrants
to Purchase Common Shares*





During
2002, the Company issued 133,333 warrants to consultants for services valued at
$215,086. The Company also issued 616,793 to employees and directors for
services performed.





F-22


**TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**


**Note****4
- Stockholders' Equity (continued)**





Changes
in Stockholder Equity during 2002 (continued)





*Warrants
to Purchase Common Shares (continued)*





The
following table presents the activity for warrants outstanding:





WeightedAverageExerciseShares
    
    PriceOutstanding
      - December 31, 2001
    
    
    544,098
    
    $
    5.28Granted
    
    
    4,068,682
    
    
    5.52Forfeited/canceled
    
    
    (25,000
    )
    
    2.04Outstanding
      - December 31, 2002
    
    
    4,587,780
    
    
    5.52Granted
    
    
    3,210,249
    
    
    2.49Forfeited/canceled
    
    
    (408,048
    )
    
    0.30Outstanding
      - December 31, 2003
    
    
    7,389,981
    
    
    5.63Granted
    
    
    4,496,142
    
    
    6.00Forfeited/canceled
    
    
    (4,526,396
    )
    
    5.98Outstanding
      - December 31, 2004
    
    
    7,359,727
    
    $
    5.62








On May
11, 2004 the Board of Directors voted to extend by one year the expiration date
of certain warrants issued during the period from April 1, 2002 to December 15,
2003, with no change in the exercise price of $6.00. The above table includes
the extension as an expiration and grant of such warrants.





The
following table presents the composition of warrants outstanding and
exercisable:





2004Shares
      OutstandingRange
      of Exercise Prices
    
    Number
    
    Price*
    
    Life*$2.72
      - $3.48
    
    
    903,271
    
    $
    .36
    
    
    0.79$4.35
      - $6.00
    
    
    6,414,788
    
    
    5.20
    
    
    0.68$9.00
      - $12.00
    
    
    41,668
    
    
    .06
    
    
    0.01Total
      - December 31
    
    
    7,359,727
    
    $
    5.62
    
    
    1.48





*Price
and Life reflect the weighted average exercise price and weighted average
remaining contractual life, respectively.





F-23


**TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**


**Note****5
- Stock Options**





At the
annual meeting on March 19, 2003, the Company’s shareholders approved an
employee stock option plan and authorized 25,000,000 shares of Common Stock for
issuance thereunder. At the same annual meeting at which the 2003 Plan was
adopted, the Company’s shareholders also approved a 1:12 reverse split. Although
the Board of Directors believed that a reasonable interpretation of both actions
indicated that since the 2003 Plan was adopted at the same shareholders meeting
as the reverse split and further since there were no shares technically
outstanding at the time of the reverse split’s approval, that no adjustment need
be made to the plan, it nevertheless elected to take a conservative approach and
to remove any ambiguity by asking the stockholders, at the Company’s 2005 annual
meeting, to approve a total pool of 3,000,000 options available for grant under
the 2003 plan.





Under the
plan, incentive and non-qualified options may be granted. During the second
quarter of 2003, the Company issued 30,000 non-qualified options to outside
advisory board members which has been recorded as compensation expense during
the three-months ended June 30, 2003 valued at $94,701, using the Black-Scholes
option-pricing model with the following assumptions: volatility of 100%, a
risk-free rate of 4%, zero dividend payments, and a life of ten years. On April
9, 2003 the Company issued 1,448,037 incentive options to employees, officers
and directors valued at $4,571,026 using the Black-Scholes option-pricing model
under the same assumptions described above. On August 3, 2003, 100,000 options
valued at $308,414 were issued to a director under the Company Plan. On March
30, 2004 1,415,000 options valued at $3,512,305 using the same assumptions as
above were issued to employees, officers and directors. The Board issued the
options in 2004 with the understanding that they would seek clarification from
shareholders as to the ultimate number of options that can be issued.
Accordingly, 994,000 of the options representing approximately $2,500,000 of the
fair value of the total options granted could be voided if the shareholders do
not approve an increase in the number of authorized shares available for
issuance under the 2003 Employee Stock option plan.





As of
December 31, 2004, 1,478,037 options with an exercise price of $3.48, 100,000
options with an exercise price of $3.71 and 1,415,000 options with an exercise
price of $3.60 were outstanding. The weighted average fair value and contractual
life of these issues were $2.48, $3.26 and $3.71 and 10.00, 8.59 and .61 years,
respectively.




F-24
 
 **TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**
 ****


Note 5 - Stock
Options (continued)





The
following table presents the activity for stock options outstanding and
exercisable:





Shares
      OutstandingRange
      of Exercise Prices
    
    Number
    
    Price*
    
    Life*Outstanding
      - December 31, 2002
    
    
    —
    
    $
    —
    
    
    —Issued
    
    
    1,578,037
    
    
    3.49
    
    
    8.30Outstanding
      - December 31, 2003
    
    
    1,578,037
    
    $
    3.49
    
    
    8.30Issued
    
    
    1,415,000
    
    
    3.60
    
    
    9.25Outstanding
      - December 31, 2004
    
    
    2,993,037
    
    $
    3.54
    
    
    8.70








*Price
and Life reflect the weighted average exercise price and weighted average
remaining contractual life, respectively.





**Note****6
- Income and Other Taxes**





The provision
for income taxes from continuing operations consists of the following
components:





2004
    
    2003
    
    2002Current:Federal
    
    
    —
    
    
    —
    
    
    —State
    
    
    —
    
    
    —
    
    
    —Total
      current
    
    
    —
    
    
    —
    
    
    —Deferred:Federal
    
    
    —
    
    
    —
    
    
    —State
    
    
    —
    
    
    —
    
    
    —Total
      Deferred
    
    
    —
    
    
    —
    
    
    —





Total
income tax expense from continuing operations differed from the amounts computed
by applying the federal statutory income tax rate of 35% to earnings (loss)
before income taxes as a result of the following items for the years ended
December 31:





2004
    
    2003
    
    2002Federal
      statutory income tax benefitfrom
      continuing operations
    
    $
    (1,817,648
    )
    $
    (1,412,657
    )
    $
    (3,566,957
    )State
      income tax benefit,net
      of federal income taxbenefit
      from continuing operations
    
    
    (154,367
    )
    
    (116,088
    )
    
    (326,347
    )Change
      in valuation allowance
    
    
    1,955,312
    
    
    1,470,453
    
    
    4,133,733Other
    
    
    16,703
    
    
    58,292
    
    
    (240,429
    )Income
      tax expense
    
    
    —
    
    
    —
    
    
    —





F-25
 
 **TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**
 ****


**Note
6 - Income and Other Taxes (continued)**





The tax
effects of temporary differences that give rise to significant components of the
Company’s deferred tax assets and liabilities at December 31, 2004 and 2003 are
as follows:





2004
    
    2003Current
      Deferred Tax Assets (Liabilities)Other
      receivables
    
    $
    (7,441
    )
    $
    (4,574
    )Prepaid
      expenses
    
    
    (30,908
    )
    
    (36,363
    )A/P
      and accrued liabilities
    
    
    156,463
    
    
    143,043Charitable
      contributions
    
    
    —
    
    
    4,088Valuation
      allowance
    
    
    (118,114
    )
    
    (106,194
    )Net
      current deferred tax asset (liability)
    
    
    —
    
    
    —Non-Current
      Deferred Tax Assets (Liabilities)Depreciation
    
    
    (3,623
    )
    
    (3,462
    )Net
      Operating Loss
    
    
    4,478,522
    
    
    7,107,951Valuation
      allowance
    
    
    (4,474,899
    )
    
    (7,104,489
    )Net
      non-current deferred tax asset (liability)
    
    
    —
    
    
    —Net
      Deferred Tax Asset (Liability)
    
    $
    —
    
    $
    —





At
December 31, 2004, the Company had net operating loss carryforwards, for federal
income tax purposes,
of approximately $11.8 million. These net operating loss carryforwards, if not
utilized to reduce taxable income in future periods, will expire in various
amounts beginning in 2018 through 2023. Such net operating loss is subject to
U.S. Internal Revenue Code Section 382 limitations. Utilization of the NOL is
limited to approximately $900,000 per annum.





The
Company has established a valuation allowance for deferred taxes that reduces
its net deferred tax assets as management currently believes that these losses
will not be utilized in the near term. The allowance recorded was $4.6 million
and $7.2 million for 2004 and 2003 respectively. The Company reduced the
valuation allowance in 2004 by approximately $2.6 million due to the utilization
of net operating loss carryforwards.








**Note
7 - Commitments**





Mr.
Howard Cooper, Director, signed an employment contract on January 1, 2004 and
then, upon his resignation as Executive Chairman, signed a consulting agreement
with the Company dated March 1, 2005 to replace the employment contract. The
consulting agreement is for a one year term, whereby Mr. Cooper will receive
bi-monthly base payments of $8,333 each. Under the terms of the agreement, if
Mr. Cooper is terminated other than for cause, Mr. Cooper is entitled to 12
months of severance pay, payable in bi-monthly installments over 12 months, from
the date of termination. The Company may discontinue the severance payments if
Mr. Cooper violates the confidentiality, noncompetition, or nonsolicitation
provisions of his employment agreement.





F-26


**TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**
 ****
 **Note
7 - Commitments (continued)**





Mr.
Arleth, President and Chief Executive Officer, signed an employment agreement on
May 1, 2003. The agreement is for a three-year term, with an initial salary of
$10,000 per month that was increased to $15,000 per month beginning in January
2004. Under the terms of the agreement, Mr. Arleth is entitled to 24 months
severance pay in the event of a change of position or control of the
Company.








**Note
8 - Subsequent Events**





On
January 5, 2005 the Company entered into a definitive purchase and sale
agreement for the acquisition of certain oil and gas leases covering up to
180,000 acres in North America. The closing of the transaction is subject to the
satisfactory results of a due diligence investigation and delivery by the
sellers of at least 138,063 acres with acceptable title and environmental
conditions. The transaction is currently pending and the terms are being kept
confidential subject to a request for confidential treatment previously filed
with the Securities and Exchange Commission. The Company paid a nonrefundable
deposit of $25,000 in December upon signing a letter of intent. Earnest money of
$322,000 was paid in January upon signing the purchase and sale agreement. The
balance due in cash, stock and warrants will be paid at closing. The Company
expects to close the transaction on or before April 15, 2005.





On
February 15, 2005, the Company signed a membership interest purchase agreement
with PGR Partners, LLC ("PGR") whereby the Company acquired 25% of the
membership interest in Piceance Gas Resources, LLC, a Colorado limited liability
company ("Piceance LLC"). Piceance LLC owns certain oil and gas rights and
leasehold assets covering approximately 6,300 acres in the Piceance Basin in
Western Colorado. The properties owned by Piceance LLC carry a net revenue
interest of 78.75%.





The
purchase price for the membership interest in Piceance LLC was $5.25 million in
cash, the issuance of 450,000 unregistered shares of our common stock, which had
a fair market value on the date of closing of $720,000, and the issuance of
warrants to purchase 200,000 shares of our common stock, exercisable for a
period of five years at an exercise price of $2.00 per share. Pursuant to the
terms of the operating agreement, the Company is obligated to fund its share of
the construction of a road on the leased area and 8 wells to be drilled during
2005.





On
February 22, 2005, Mr. Cooper resigned as Executive Chairman of the Company. Mr.
Cooper will remain on the Company’s Board and will stand for reelection at the
Company’s upcoming annual meeting in May. In addition, Mr. Cooper will remain a
consultant to the Company. On February 22,


2005, our
Board elected James J. Woodcock, an outside director, as non-executive chairman
of the Company.




F-27
 
 **TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**
 ****


**Note****9
- Supplemental Oil and Gas Disclosures**





The
following is a summary of costs incurred in oil and gas producing
activities:





The
Company sold its oil and gas producing activities during 2004. See Notes 1 and 2
to the financial statements.





Included
below is the Company's investment and activity in oil and gas producing
activities prior to the sale, which includes a proportionate share of ZAO
Goloil's oil and gas properties, revenues, and costs.





For
      the Years EndedDecember
      31,2004
    
    2003
    
    2002Construction
      in progress
    
    $
    —
    
    $
    1,700,696
    
    $
    —Development
      costs
    
    
    2,988,882
    
    
    5,207,931
    
    
    4,150,742Total
    
    $
    2,988,882
    
    $
    6,908,627
    
    $
    4,150,742








The
following reflects the Company's capitalized costs associated with oil and gas
producing activities:





For
      the Years EndedDecember
      31,2004
    
    2003
    
    2002Property
      acquisition costs
    
    $
    —
    
    $
    595,558
    
    $
    595,558Construction
      in progress
    
    
    —
    
    
    1,700,696
    
    
    —Development
      costs
    
    
    —
    
    
    10,808,813
    
    
    4,830,421—
    
    
    13,105,067
    
    
    5,425,979Accumulated
      depreciation, depletion, amortization and valuation
    allowances
    
    
    —
    
    
    (2,064,585
    )
    
    (529,671
    )Net
      capitalized costs
    
    $
    —
    
    $
    11,040,482
    
    $
    4,896,308




F-28
 
 **TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**


**Note
9 - Supplemental Oil and Gas Disclosures (continued)**





Results
of Operations from Oil and Gas Producing Activities





Results
of operations from oil and gas producing activities (excluding general and
administrative expense, and interest expense) are presented as
follows:





For
      the Years EndedDecember
      31,2004
    
    2003
    
    2002Oil
      and gas sales
    
    $
    6,552,138
    
    $
    11,437,802
    
    $
    6,923,320Oil
      and gas production
    
    
    (1,331,273
    )
    
    (2,020,447
    )
    
    (1,218,411
    )Transportation
      and marketing
    
    
    —
    
    
    (807,266
    )
    
    (611,956
    )Export
      duties
    
    
    —
    
    
    (1,492,999
    )
    
    (910,936
    )Taxes
      other than income taxes
    
    
    (4,286,025
    )
    
    (5,864,920
    
    
    (3,537,990
    )Depletion,
      depreciation and amortization
    
    
    (747,481
    )
    
    (1,534,914
    )
    
    (451,930
    )Results
      of operations from oil and gas producing activities
    
    $
    187,359
    
    $
    (282,744
    )
    $
    192,097





Reserves
(Unaudited)





Proved
oil and gas reserves are the estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved development oil and gas
reserves are those reserves expected to be recovered through existing wells with
existing equipment and operating methods. The reserve data is based on studies
prepared by an independent engineer. All proved reserves of oil and gas are
located in Russia.





For
      the Years EndedDecember
      31,2004
    
    2003
    
    2002Proved
      reserves (bbls), beginning of period
    
    
    8,262,000
    
    
    13,264,000
    
    
    40,174,000Production
    
    
    (348,000
    )
    
    (632,000
    )
    
    (471,000
    )Extension
      of reservoir
    
    
    —
    
    
    —
    
    
    2,000,000Sale
      of reserves in place
    
    
    (7,914,000
    )Revisions
      of previous estimates
    
    
    —
    
    
    (4,370,000
    )
    
    (28,439,000
    )Proved
      reserves (bbls), end of period
    
    
    —
    
    
    8,262,000
    
    
    13,264,000Proved
      developed reserves (bbls), beginning of period
    
    
    3,816,000
    
    
    4,567,000
    
    
    5,493,000Proved
      developed reserves (bbls), end of period
    
    
    —
    
    
    3,816,000
    
    
    4,567,000





F-29
 
 **TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**


**Note****9
- Supplemental Oil and Gas Disclosures (continued)**





Standardized
Measure of Discounted Future Net Cash Flows (Unaudited)





SFAS No.
69 prescribes guidelines for computing a standardized measure of future net cash
flows and changes therein relating to estimated proved reserves. The Company has
followed these guidelines, which are briefly discussed below.





Future
cash inflows and future production and development costs are determined by
applying year-end prices and costs to the estimated quantities of oil and gas to
be produced. Estimated future income taxes are computed using current statutory
income tax rates for those countries where production occurs. The resulting
future net cash flows are reduced to present value amounts by applying a 10%
annual discount factor.





The
assumptions used to compute the standardized measure are those prescribed by the
Financial Accounting Standards Board and, as such, do not necessarily reflect
the Company's expectations for actual revenues to be derived from those reserves
nor their present worth. The limitations inherent in the reserve quantity
estimation process, as discussed previously, are equally applicable to the
standardized measure computations since these estimates are the basis for the
valuation process.





The
following summarizes the standardized measure and sets forth the Company's
future net cash flows relating to proved oil and gas reserves based on the
standardized measure prescribed in Statement of Financial Accounting Standards
No. 69.





For
      the Years EndedDecember
      31,2004
    
    2003
    
    2002Future
      cash inflows
    
    $
    —
    
    $
    114,992,000
    
    $
    230,581,000Future
      production costs
    
    
    —
    
    
    (80,812,000
    )
    
    (151,167,000
    )Future
      development costs
    
    
    —
    
    
    (14,595,000
    )
    
    (18,556,000
    )Future
      income tax expense
    
    
    —
    
    
    (7,360,000
    )
    
    (16,365,000
    )Future
      net cash flows (undiscounted)
    
    
    —
    
    
    12,225,000
    
    
    44,493,000Annual
      discount of 10% for estimated timing of cash flows
    
    
    —
    
    
    (6,232,000
    )
    
    (19,069,000
    )Standardized
      measure of future net discounted cash flows
    
    $
    —
    
    $
    5,993,000
    
    $
    25,424,000





F-30
 
 **TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**
 **Note****9
- Supplemental Oil and Gas Disclosures
(continued)**





Changes
in Standardized Measure Base Case (Unaudited)





The
following are the principal sources of change in the standardized measure of
discounted future net cash flows:


For
      the Years Ended
      December
      31,2004
    
    2003
    
    2002Standardized
      measure, beginning of period,
    
    $
    5,993,000
    
    $
    25,424,000
    
    $
    40,362,000Net
      changes in prices and production costs
    
    
    —
    
    
    (11,038,000
    )
    
    190,619,000Sales
      of oil and gas produced during period
    
    
    (935,000
    )
    
    (445,000
    )
    
    (644,000
    )Future
      development costs
    
    
    —
    
    
    (3,098,000
    )
    
    22,344,000Revisions
      of previous quantity estimates
    
    
    —
    
    
    (11,806,000
    )
    
    (274,605,000
    )Extension
      of reservoir
    
    
    —
    
    
    —
    
    
    19,867,000Accretion
      of discount
    
    
    299,950
    
    
    2,542,000
    
    
    4,036,000Sale
      of reserves in place
    
    
    (5,357,950
    )
    
    —
    
    
    —Changes
      in income taxes, net
    
    
    —
    
    
    4,414,000
    
    
    23,445,000Standardized
      measure, end of period
    
    $
    —
    
    $
    5,993,000
    
    $
    25,424,000





F-31


**TETON
PETROLEUM COMPANY**
 
 **Notes
to Consolidated Financial Statements**
 **For
The Years Ended December 31, 2004, 2003 and 2002**


**Note
1****0
- Selected Quarterly Information (Unaudited)**





The
following represents selected quarterly financial information for the years
ended December 31, 2003 and 2004. Certain amounts have been reclassified to
conform with the presentation in this Form 10-K/A.





For
      the Quarter Ended2004
    
    March
      31,
    
    June
      30,
    
    Sept
      30, (1)
    
    December
      31,Loss
      from continuing operations
    
    $
    (2,086,915
    )
    $
    (1,712,408
    )
    $
    (488,126
    )
    $
    (905,832
    )Discontinued
      operations, netof
      tax
    
    
    (435,198
    )
    
    (267,981
    )
    
    13,086,761
    
    
    —Net
      Income (Loss)
    
    
    (2,522,113
    )
    
    (1,980,389
    )
    
    12,598,635
    
    
    (905,832
    )Basic
      and diluted loss per common share for continuing
operations
    
    $
    (0.30
    )
    $
    (0.19
    )
    $
    (.07
    )
    $
    (.09
    )Basic
      and diluted income (loss) per common share for discontinued
      operations
    
    $
    (.05
    )
    $
    (.03
    )
    $
    1.45
    
    $
    .00Basic
      and diluted income (loss) per common share
    
    $
    (.35
    )
    $
    (.22
    )
    $
    1.38
    
    $
    (.10
    )2003Loss
      from continuing operations
    
    $
    (773,774
    )
    $
    (981,898
    )
    $
    (984,080
    )
    $
    (1,296,412
    )Discontinued
      operations, netof
      tax
    
    
    (7,311
    )
    
    (465,342
    )
    
    (768,087
    )
    
    (357,940
    )Net
      Income (Loss)
    
    
    (781,085
    )
    
    (1,447,240
    )
    
    (1,752,167
    )
    
    (
      1,654,352
    )Basic
      and diluted loss per common share for continuing
operations
    
    $
    (0.12
    )
    $
    (0.15
    )
    $
    (.15
    )
    $
    (.58
    )Basic
      and diluted income (loss) per common share for discontinued
      operations
    
    $
    (.00
    )
    $
    (.07
    )
    $
    (.11
    )
    $
    (.05
    )Basic
      and diluted income (loss) per common share
    
    $
    (.12
    )
    $
    (.22
    )
    $
    (0.26
    )
    $
    (.63
    )




(1) The
gain from the sale of Goloil stock included in results from discontinued
operations for the quarter ended September 30, 2004 has been adjusted by
approximately $718,000 due to an error in recording the foreign currency
translation account at the time of the sale, partially offset by an over accrual
of current income taxes due.




F-32


**TETON
PETROLEUM COMPANY**





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





None.








**ITEM
9A. CONTROLS AND PROCEDURES**





As of
December 31, 2004, an evaluation was performed by our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on that evaluation, Our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were not effective during the year ended December 31,
2004, because the Company lacked the in-house expertise to account for complex
equity transactions. During the fourth quarter of 2003 the Company hired a U.S.
Controller that was a Certified Public Accountant. During the first quarter of
2004 the Company hired a Chief Financial Officer who is also a CPA and has
significant oil and gas accounting expertise on a contract basis. Additionally,
during the first quarter of 2004, the Company was in the process of selling its
only operating assets. Between February 2004 and July 2004, the CFO focused most
of his efforts on the Company’s efforts in regard of the sale of its operating
assets. While the CFO assumed overall responsibility for the preparation of the
first and second quarter Form 10Qs, the U.S. Controller was assigned
responsibility for preparing certain accounting entries and disclosures,
including the accounting entries and disclosures relating to equity transactions
which occurred during the first quarter of 2004 and the second quarter of 2004,
respectively. The U.S. Controller discussed with its auditors who provided
general guidance on the accounting standards which should be reviewed including
FAS 84, FAS 128 and FAS 148 to ensure proper accounting and disclosure for these
transactions. The U.S. Controller’s work was not reviewed by the CFO prior to
its incorporation into the quarterly financial statements for the first and
second quarters of 2004. Consistent with SEC requirements, the Company’s policy
is to have its auditors perform a quarterly review of the financial statements
prior to their review by the Company’s audit committee and subsequent filing
with the SEC. During these reviews of each of the first and second quarter draft
10Qs, the Company’s auditors identified the U.S. Controller’s entries in respect
of the equity transactions for the first and second quarters as being materially
incorrect and advised the Company of the need to make certain adjustments in
order for the Company’s financial statements fairly to present the Company’s
financial statements at each of March 31, 2004 and June 30, 2004. The Company
agreed with these recommendations and made the appropriate adjustments. As a
result, all financials statements presented in such reports fairly and
accurately presented the Company’s financial statements and no restatements or
amended filings for these periods are necessary.





The U.S.
Controller left the Company’s employ at the end of the second quarter 2004. As a
result of the Company’s sale of its Russian assets, the Company’s management
determined that, until such time as the Company’s operations significantly
increase in scope and complexity the controller function can be incorporated
into the duties of the CFO, who is also the Company’s Principal Accounting
Officer, and who will prepare and/or review all information included in the
financial reports of the Company. Since the need for the aforementioned
adjustments was identified by our auditors and not senior management, our
auditors determined that this constituted a material weakness in our controls
and procedures. Subsequent to December 31, 2004, the CFO has obtained additional
training and has identified additional resources to assist him in the accounting
of such complex equity transactions. Furthermore, during the first quarter, the
CFO also instituted new controls and procedures designed to assure that there
was a proper degree of review of such complex entries prior to their being
incorporated into the Company’s accounting system and reported to the Company’s
auditors as part of its pre-quarterly filing review. Such procedures have been
deemed to be adequate as of March 31, 2005 and were reported as such for the
Form 10-Q for the three months ending March 31, 2005 and filed on May 16,
2005.





54
 
 **TETON
PETROLEUM COMPANY**
 **ITEM
9B. OTHER INFORMATION**





None.





55


**TETON
PETROLEUM COMPANY**
 **PART
III**





**Item
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**





**DIRECTORS
AND EXECUTIVE OFFICERS**





Directors,
executive officers, and significant employees of Teton, their respective ages
and positions with Teton are as follows:





Name
    Age
    PositionJames
      J. Woodcock
    66
    Chairman
      & DirectorKarl
      F. Arleth
    56
    President
      and CEO, DirectorJohn
      T. Connor, Jr.
    63
    DirectorThomas
      F. Conroy
    66
    DirectorH.
      Howard Cooper
    48
    DirectorPatrick
      A. Quinn
    51
    Chief
      Financial Officer





JAMES J.
WOODCOCK has been a director since 2002 and Chairman of the Company’s
Compensation Committee, since
2003 and Chairman of the Company since February 2005. Since 1981, Mr.
Woodcock has been the owner and CEO of Hy-Bon Engineering Company, based in
Midland, Texas. Hy-Bon is an engineering firm and manufacturer of vapor
recovery, gas boosters, and casing pressure reduction systems for the oil
industry. From 1997 to 2002, Mr. Woodcock was the chairman of Transrepublic
Resources, a private oil and gas exploration firm located in Midland Texas.
Since 1996, Mr. Woodcock has been a board member of Renovar Energy, a private
waste to energy firm located in Midland Texas and was its Chairman of the Board
until 2003.





KARL F.
ARLETH, has been our president and CEO since May 2003 and a director since 2002.
From 2002 to 2003, Mr. Arleth was the Chief Operating Officer and a Board Member
of Sefton Resources, an oil and gas exploration and production company. Between
1999 and 2001 he served as Chairman and CEO of Eurogas Inc. in London. Ending in
1999, Mr. Arleth spent 21 years with Amoco and BP-Amoco. In 1998 he chaired the
Board of the Azerbaijan International Operating Company (AIOC) for BP-Amoco in
Baku, Azerbaijan. Concurrently in 1997-98, he was also President of Amoco
Caspian Sea Petroleum Ltd. in Azerbaijan. In 1997, he served as Director of
Strategic Planning for Amoco Corporations Worldwide Exploration and Production
Sector in Chicago. From 1992 to 1996 Mr. Arleth was President of Amoco Poland
Ltd. in Warsaw, Poland. Between 1977 and 1992, Mr. Arleth held positions with
Amoco as an exploration and development geologist, project supervisor, manager
and executive in the Exploration and Production sector in Denver, Tulsa, Chicago
and Houston. In North America, he has significant exploration and production
experience in the Rocky Mountains, mid-continent, the western U.S. and
Alaska.




56


**TETON
PETROLEUM COMPANY**
JOHN T. CONNOR, Jr. became a director in 2003 and chairs the
Board's audit committee. He is the Founder and Portfolio Manager of the Third
Millennium Russia Fund, a US based mutual fund specializing in the equities of
Russian public companies. A former attorney at Cravath, Swaine & Moore in
New York City, he has been a partner in leading law firms in New York,
Washington and New Jersey. Mr. Connor is a member of the Council on Foreign
Relations.





THOMAS F.
CONROY, has been a director since 2002. Mr. Conroy is a Certified Public
Accountant with an MBA from the University of Chicago. Since August 2004, Mr.
Conroy has been the Chairman of Mann-Conroy-Eisenberg & Assoc. LLC, a life
insurance and reinsurance consulting firm. Since 2001, Mr. Conroy has been a
managing principal of Strategic Reinsurance Consultants International LLC, a
life reinsurance consulting and brokerage firm. Ending in 2001, Mr. Conroy,
spent 27 years with ING and its predecessor organizations, serving in various
financial positions and leading two of its strategic business units as
President. As President of ING Reinsurance, he established their international
presence, setting up facilities in The Netherlands, Bermuda, Ireland and Japan.
He also served as an Officer and Board Member of Security Life of Denver
Insurance Company and its subsidiaries. Mr. Conroy briefly served as our interim
CFO and secretary from April 2002 until April 2003.





H. HOWARD
COOPER, H. Howard Cooper was our chairman from 1996 until February 2005.
Mr. Cooper was our president and CEO from 1996 until May 2003.
Mr. Cooper founded American Tyumen in November 1996. He served as a
director and president of American Tyumen until the merger with the Company. In
1994, he was a principal with Central Asian Petroleum, an oil and gas company
with its primary operations in Kazakhstan, located in Denver, Colorado. From
1992 to 1994 Mr. Cooper served with AIG, an insurance group in New
York. Prior to founding Teton, Mr. Cooper was an independent landman, from 1981
- 1991, who developed oil and gas opportunities in the U.S. Rocky Mountain
Region.





PATRICK
A. QUINN, CPA, CVA. Mr. Quinn joined Teton in February 2004 to serve as the
Company’s Chief Financial Officer on a contract basis. For the past fifteen
years Mr. Quinn has been the CEO of Quinn & Associates, P.C.. Mr. Quinn
provides accounting, tax and auditing services primarily to the oil and gas
industry. As a result, Mr. Quinn has extensive experience in U.S. oil and gas
operations, including the Rocky Mountain, Mid-continent and Gulf Coast regions.
He has provided accounting and tax services to Teton since its inception. In
addition, Mr. Quinn has extensive experience in international oil and gas
operations including serving as the Controller of Hamilton Oil Corporation from
1978 through 1986, which was the first company to produce oil in the U.K. sector
of the North Sea.





57


**TETON
PETROLEUM COMPANY**


All
directors serve as directors for a term of one year or until his successor is
elected and qualified. All officers hold office until the first meeting of the
board of directors after the annual meeting of stockholders next following his
election or until his successor is elected and qualified. A director or officer
may also resign at any time.








**COMMITTEES
OF THE BOARD OF DIRECTORS**





The Board
of Directors has a Compensation Committee, an Audit Committee and a Governance
and Nominating Committee. The Compensation Committee and Audit Committee
currently consist of two directors John Connor, who is the Audit Committee
financial expert, and James J. Woodcock. The Nominating Committee is made up of
Mr. Woodcock and Mr. Conroy.





John
Connor, James Woodcock and Tom Conroy are the board members determined to be
independent under American Stock Exchange listing standards.





The
purpose of the Compensation Committee is to review the Company's compensation of
its executives, to make determinations relative thereto and to submit
recommendations to the Board of Directors with respect thereto in order to
ensure that such officers and directors receive adequate and fair compensation.
The Compensation Committee met three times by teleconference during the last
fiscal year.





The Audit
Committee is responsible for the general oversight of audit, legal compliance
and potential conflict of interest matters, including (a) recommending the
engagement and termination of the independent public accountants to audit the
financial statements of the Company, (b) overseeing the scope of the external
audit services, (c) reviewing adjustments recommended by the independent public
accountant and addressing disagreements between the independent public
accountants and management, (d) reviewing the adequacy of internal controls and
management's handling of identified material inadequacies and reportable
conditions in the internal controls over financial reporting and compliance with
laws and regulations, and (e) supervising the internal audit function, which may
include approving the selection, compensation and termination of internal
auditors.





For the
fiscal year ended 2004, the Audit Committee conducted discussions with
management and the independent auditor regarding the acceptability and the
quality of the accounting principles used in the reports in accordance with
Statements on Accounting Standards (SAS) No. 61. These discussions included the
clarity of the disclosures made therein, the underlying estimates and
assumptions used in the financial reporting and the reasonableness of the
significant judgments and management decisions made in developing the financial
statements. In addition, the Audit Committee discussed with the independent
auditor the matters in the written disclosures required by Independence
Standards Board Standard No. 1.





For the
fiscal year ended 2004, the Audit Committee has also discussed with management
and its independent auditors issues related to the overall scope and objectives
of the audits conducted, the internal controls used by the Company, and the
selection of the Company's independent auditor. Additional meetings were held
with the independent auditor, with financial management present, to discuss the
specific results of audit investigations and examinations and the auditor's
judgments regarding any and all of the above issues.





The Audit
Committee met four times by teleconference during 2004.





As
provided in the Governance and Nominating Committee’s charter and our Company’s
corporate governance principles, the Governance and Nominating Committee is
responsible for identifying individuals
qualified to become Directors. The Governance and Nominating Committee seeks to
identify director candidates based on input provided by a number of sources,
including (a) the Governance and Nominating Committee members, (b) our other
Directors, (c) our stockholders, (d) our Chief Executive Officer or Chairman,
and (e) third parties such as professional search firms. In evaluating potential
candidates for director, the Governance and Nominating Committee considers the
entirety of each candidate’s credentials.





58
 
 **TETON
PETROLEUM COMPANY**
 ****
 **Code
of Ethics**





The
Company has adopted its Code of Ethics and Business Conduct that applies to all
of the officers, directors and employees of the Company. The Code is posted on
our website ( www.tetonpetroleum.com ). We
will disclose on our website any waivers of, or amendments to, our
Code.





**Compliance
with Section 16(b) of the Exchange Act**





Section
16(b) of the 1934 Act requires that the Company’s Directors and certain of its
officers file reports of ownership and changes of ownership of the Company stock
with the SEC and AMEX. Based
solely on copies of such reports provided to the Company, the Company believes
that all Directors and officers filed on a timely basis all such reports
required of them with respect to stock ownership and changes in ownership during
2004 except that Messrs. Arleth, Conroy, Connor, Cooper and Woodcock were late
in reporting the grant of stock options under the 2003 Employee Stock Option
Plan.


****


59
 
 **TETON
PETROLEUM COMPANY**
 Item 11. EXECUTIVE COMPENSATION.





The
following table sets forth information concerning the compensation received by
Mr. Howard Cooper, the Chairman of Teton, and Mr. Karl Arleth who served as its
president and chief executive officer during 200 4 (Mr.
Cooper and Mr. Arleth, the “named executive officers”):





**Summary
Compensation Table**


Annual
      Compensation
    Long
      Term CompensationAwards
    PayoutsName
      & Principal Position
    Year
    Salary
      ($)
    Bonus
      ($)
    Other
      Annual
      Compen-
      sation
      ($)
    Restricted
      Stock
      awards
    Securities
      Underlying
      Options
      SARs
      (#)
    LTIP
      Payouts
      ($)
    All
      Other
      Compen-sationH.
      Howard Cooper, Chairman
      CEO
      (until
      May
      2003)
    2004
      2003
      2002
    200,000
      160,000
      160,000
    160,000*
      0
      50,000
    8,200
      0
      0
    0
      0
      0
    400,000
      603,289
      375,000
    0
      0
      0
    0
      0
      0Karl
      F. Arleth CEO
    2004
      2003
    180,000
      85,000
    80,000*
      0
    16,800
      0
    0
      0
    300,000
      410,338
    0
      0
    0
      0


*Bonus
paid for 2003 performance.




60


**TETON
PETROLEUM COMPANY**


**Stock
Options**





**Options/SARs
Grants During Last Fiscal Year**





The
following table provides information related to options granted to our named
executive officers during the fiscal year ended December 31, 2004.





Name
    
    Number
      of Securities Underlying OptionsGranted
    
    %
      of Total Options Granted in Fiscal 2004(1)
    
    Exercise
      Price PerShare
    
    ExpirationDate
    
    Grant
      Date
      Present
      Value
      (2)Howard
      Cooper
    
    
    400,000
    
    
    28.3
    %
    $
    3.60
    
    
    03/30/14
    
    $
    992,000Karl
      F. Arleth
    
    
    300,000
    
    
    21.2
    %
    $
    3.60
    
    
    03/30/14
    
    $
    744,000





(1)
    The
      exercise price of the stock options was based on the fair market value of
      the stock onthe
      day of the grant.


(2)
    Valued
      using the Black-Scholes option pricing model using the following
      assumptions:volatility
      of 55%, a risk-free rate of 4.06%, zero dividend payments, and an expected
      life often
      years.





The Board
issued the options in 2004 with the understanding that they would seek
shareholder approval as to the ultimate number of options that can be issued.
Accordingly, 994,000 of the options representing approximately $2,500,000 of the
fair value of the total options granted could be voided if the shareholders do
not approve an increase in the number of authorized shares available for
issuance under the 2003 Employee Stock option plan.





**Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value**





Number
      ofShares
    
    
    
    Securities
    
    Value
      ofAcquired
    
    
    
    Underlying
    
    UnexercisedOn
    
    Value
    
    Unexercised
    
    In-the-moneyName
    
    Exercise
    
    Realized
    
    Options
    
    OptionsHoward
      Cooper
    
    
    —
    
    
    —
    
    
    1,003,289
    
    
    —Karl
      F. Arleth
    
    
    —
    
    
    —
    
    
    710,338
    
    
    —





**Employee
Pension, Profit Sharing or Other Retirement Plans**





The
Company does not have a defined benefit, pension plan, profit sharing, or other
retirement plan.





**Compensation
of Directors**





The
Company pays its outside Directors an annual retainer of $24,000, payable
quarterly. In addition, at the Company’s sole discretion, the Company may issue
stock options or warrants to its directors. During 2004, the Company granted to
its outside directors a total of 350,000 options, with an exercise price of
$3.60 and an expiration date of March 30, 2014.





61
 
 ****TETON
PETROLEUM COMPANY**
Employment Contracts**





Mr.
Howard Cooper, Director,
signed a consulting agreement with the Company dated March 1, 2005. The
consulting agreement is for an initial term of one year and will continue for
additional one year terms unless 60 days prior to the anniversary date either
party gives notice of termination. Mr. Cooper will receive bi-monthly payments
of $8,333 each. Under the terms of the agreement, if Mr. Cooper is terminated
without cause, he is entitled to 12 months of severance pay, payable in
bi-monthly installments over 12 months, from the date of termination. The
Company may discontinue the severance payments if Mr. Cooper violates the
confidentiality, noncompetition, or nonsolicitation provisions of his employment
agreement.





Mr.
Arleth, President and Chief Executive Officer, signed an employment agreement on
May 1, 2003. The agreement is for a three-year term, with an initial salary of
$10,000 per month that was increased to $15,000 per month beginning in January
2004. Under the terms of the agreement, Mr. Arleth is entitled to 24 months
severance pay in the event of a change of position or control of the
Company.





62


**TETON
PETROLEUM COMPANY**
 **I** **tem
12.** **SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.**


The
following tables sets forth, as of March 10, 2005, the number of and percent of
our common stock beneficially owned by (a) all directors and nominees, naming
them, (b) the named executive officers, (c) our directors and executive officers
as a group, without naming them, and (d) persons or groups known by us to own
beneficially 5% or more of our common stock:





Name
      and Address of Beneficial Owner
    
    Amount
      and Nature of Beneficial Ownership
    
    Percent
      of ClassH.
      Howard Cooper
    
    
    1,607,481
    (1)
    
    14.35
    %1600
      Broadway, Suite 2400Denver,
      Colorado 80202-4921Karl
      F. Arleth1600
      Broadway, Suite 2400
    
    
    908,412
    (2)
    
    8.59
    %Denver,
      Colorado 80202-4921James
      J. Woodcock
    
    
    774,684
    (3)
    
    7.44
    %2404
      Commerce DriveMidland,
      TX 79702John
      T. Connor, Jr.
    
    
    536,896
    (4)
    
    5.32
    %1600
      Broadway, Suite 2400Denver,
      Colorado 80202-4921Thomas
      F. Conroy
    
    
    160,751
    (5)
    
    1.63
    %3825
      S. Colorado Blvd.Denver,
      CO 80110All
      executive officers and Directors as a group (7 persons)
    
    
    3,988,224
    
    
    30.26
    %








(1)
Includes (i) 145,857 shares of common stock, (ii) 458,335 shares underlying
warrants, with exercise prices ranging from $3.24 to $12.00, (iii) 603,289
shares underlying options exercisable at $3.48 per share and (iv) 400,000 shares
underlying options exercisable at $3.60 per share.





(2)
Includes (i) 75,850 shares of common stock, (ii) 122,224 shares underlying
warrants, with exercise prices ranging from $3.24 to $6.00 per share, (iii)
410,338 shares underlying options exercisable at $3.48 per share and (iv)
300,000 shares underlying options exercisable at $3.60 per share.





(3)
Includes (i) 105,279 shares of common stock, (ii) 259,257 shares underlying
warrants, with exercise prices ranging from $3.24 to $6.00 per share, (iii)
210,148 shares underlying options exercisable at $3.48 per share and (iv)
200,000 shares underlying options exercisable at $3.60 per share.





63
 
 ****
 **TETON
PETROLEUM COMPANY**


(4)
Includes (i) 183,554 shares of common stock owned indirectly, (ii) 11,675 shares
of common stock owned directly, (iii) 166,667 shares of common stock underlying
warrants, exercisable at $6.00 per share, which are owned indirectly,
(iv)100,000 shares of common stock underlying options exercisable at $3.71 per
share and (v) 75,000 shares of common stock underlying options exercisable at
$3.60 per share.





(5)
Includes (i) 27,647
shares of common stock, (ii) 29,446 shares underlying warrants, with exercise
prices ranging from $3.24 to $6.00, (iii) 28,658 shares underlying options
exercisable at $3.48 per share and (iv) 75,000 shares underlying options
exercisable at $3.60 per share.








**Item
13.**  **CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.**





Transactions
Involving Mr. Howard Cooper





Mr.
Cooper and Teton have entered into a consulting agreement. Mr. Cooper’s
consulting agreement with Teton is discussed at “EXECUTIVE COMPENSATION -
Employment Contracts.”





Transactions
Involving Mr. Arleth





Mr.
Arleth, President and Chief Executive Officer, signed an employment agreement on
May 1, 2003. The agreement is for a three-year term, with an initial salary of
$10,000 per month that was increased to $15,000 per month beginning in January
2004. Under the terms of the agreement, Mr. Arleth is entitled to 24 months
severance pay in the event of a change of position or control of the
Company.





**ITEM
1** **4.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.**





**Audit
and Non-Audit Fees**





Aggregate
fees for professional services rendered for the Company by Ehrhardt Keefe
Steiner & Hottman P.C. as of or for the two fiscal years ended December 31,
2004 and 2003 are set forth below:





**Fiscal
      Year**
      **2004**
    
    **Fiscal
      Year**
      **2003**Audit
      Fees
    
    $
    74,053
    
    $
    141,917Audit-Related
      Fees
    
    40,508
    
    51,047Tax
      Fees
    
    8,550
    
    6,500Total
    
    $
    123,111
    
    $
    199,464





64
 
 ****
 **TETON
PETROLEUM COMPANY**


***Audit
Fees*** Aggregate
fees for professional services rendered by Ehrhardt Keefe Steiner & Hottman
PC in connection with its audit of our consolidated financial statements for the
fiscal years 2004 and 2003 and the quarterly reviews of our financial statements
included in Forms 10-Q.





***Audit-Related
Fees*** These
were primarily related to SB-2 and SB-2/A filings for the registration of our
stock, assistance with the AMEX application process, review of the proxy
statement and Form 8-K, and reviews and discussions regarding accounting
treatment of debt and equity transactions.





***Tax
Fees*** These
were related to tax compliance and related tax services.





Ehrhardt
Keefe Steiner & Hottman P.C. rendered no professional services to us in
connection with the design and implementation of financial information systems
in fiscal year 2004 or 2003.








**Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors**





The Audit
Committee pre-approves all audit and non-audit services provided by the
independent auditors prior to the engagement of the independent auditors with
respect to such services.  The Chairman of the Audit Committee has been
delegated the authority by the Committee to pre-approve interim services by the
independent auditors other than the annual exam.  The Chairman must report
all such pre-approvals to the entire Audit Committee at the next committee
meeting.




65


****
 **TETON
PETROLEUM COMPANY**


**ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.**





**Exhibits** **.**




Exhibit
      No.
    Description3.1.1
    Certificate
      of Incorporation of EQ Resources Ltd incorporated by reference to Exhibit
      2.1.1 of Teton’s Form 10-SB, filed July 3, 2001.3.1.2
    Certificate
      of Domestication of EQ Resources Ltd incorporated by reference to Exhibit
      2.1.2 of Teton’s Form 10-SB, filed July 3, 2001.3.1.3
    Articles
      of Merger of EQ Resources Ltd. and American-Tyumen Exploration Company
      incorporated by reference to Exhibit 2.1.3 of Teton’s Form 10-SB, filed
      July 3, 2001.3.1.4
    Certificate
      of Amendment of Teton Petroleum Company incorporated by reference to
      Exhibit 2.1.4 of Teton’s Form 10-SB, filed July 3,
2001.3.1.5
    Certificate
      of Amendment of Teton Petroleum Company incorporated by reference to
      Exhibit 2.1.5 of Teton’s Form 10-SB, filed July 3,
2001.3.1.6
    Certificate
      of Designation for Series A Convertible Preferred Stock, incorporated by
      reference to Exhibit 3.1.6 of Teton’s Form SB-2, filed January 27,
      2004.3.2
    Bylaws,
      as amended, of Teton Petroleum Company incorporated by reference to
      Exhibit 3.2 of our Form 10-QSB, filed August 20, 2002.10.1
    Consulting
      Agreement dated March 1, 2005, between Teton Petroleum Company and H.
      Howard Cooper, filed herewith.10.1.1
    Employment
      Agreement, dated May 1, 2002, between Teton Petroleum Company and H.
      Howard Cooper, filed herewith.10.3
    Employment
      Agreement, dated May 1, 2003, between Teton Petroleum Company and Karl F.
      Arleth, filed herewith.10.4
    2003
      Employee Stock Option Plan, filed herewith.10.5
    2004
      Non-employee Stock Compensation Plan incorporated by reference to Appendix
      B to our Proxy Statement filed on June 14, 2004.10.6
    Binding
      Letter of Intent dated December 17, 2004 filed
herewith.14.1
    Code
      of Ethics and Business Conduct, filed herewith21.1
    List
      of Subsidiaries, filed herewith.
  66
 
  **TETON
PETROLEUM COMPANY**
 31.1
    Certification
      by Chief Executive Officer pursuant to Sarbanes-Oxley Section 302, filed
      herewith.31.2
    Certification
      by Chief Financial Officer pursuant to Sarbanes-Oxley Section 302, filed
      herewith.32.1
    Certification
      by Chief Executive Officer pursuant to 18 U.S. C. Section 1350, filed
      herewith.32.2
    Certification
      by Chief Financial Officer pursuant to 18 U.S. C. Section 1350, filed
      herewith.99.
      1
    Audit
      Committee Charter incorporated by reference to Exhibit 99.4 of our Form
      10-KSB/A filed on April 21, 2004.


67





**TETON
PETROLEUM COMPANY**
 ****
 **SIGNATURES**





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.








****PETROLEUM
      COMPANY**By:
    /s/ /s/ Karl F.
    ArlethKarl. F. Arleth, Chief Executive OfficerDated: May 19,
2005**




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.










S ignature  Title  Date




Signature
    
    Title
    Date/s/
      James J. Woodcock
    
    Chairman
      and Director
    May
      19, 2005James
      J. Woodcock/s/
      Karl F. Arleth
    
    President
      and CEO
    May
      19, 2005Karl
      F. Arleth
    
    (principal
      executive officer)/s/
      H. Howard Cooper
    
    Director
    May
      19, 2005H.
      Howard Cooper/s/
      Thomas F. Conroy
    
    Director
    May
      19, 2005Thomas
      F. Conroy/s/
      John Connor
    
    Director
    May
      19, 2005John
      Connor/s/
      Patrick A. Quinn
    
    Chief
      Financial Officer
    May
      19, 2005Patrick
      A. Quinn
    
    (principal
      financial officer)




68